Since March, lower-quality small-cap stocks have outperformed higher-quality large-cap stocks by a larger percentage than at any time since 1933. That's what the New York Times said last weekend.
Ford Equity Research, an independent research firm based in San Diego, rates stocks based on financial quality. Since March, the bottom fifth of quality has risen 152%, versus the top fifth, which has risen just 66%. That spread is wider than at any time since the bull run that began in February 1933, during which small caps beat large caps by an incredible 196 points.
I've been talking about the cheap valuations prevalent among World Dominating businesses ever since I recommended Wal-Mart at 11 times pretax earnings in the October 2006 issue of Extreme Value. Since then, gurus and famous investors from Joel Greenblatt to Jeremy Grantham to Warren Buffett have developed the same viewpoint. Buffett, for example, bought ExxonMobil recently, a stock I've been high on for two years.
Now, even the World Dominators are getting out of buying range. Only two members of the Extreme Value World Dominators list remain under their maximum buy price, and one of them is within pennies of its limit. One of them is the safest credit risk in the world among publicly traded equities. It's up nearly 100% off its March bottom, yet it's still cheap enough and earns enough free cash flow to finance enough debt to buy itself. To get access to the Extreme Value buy list, featuring the World Dominators, click here.
Otherwise, you'd better be careful buying stocks of any kind these days. The U.S. market trades for an astounding 32.5 times earnings and yields a paltry 1.8% in dividends. Most people I know would laugh at a deal that might double their money in 32.5 years if everything went swimmingly.
Yesterday, Franco-Nevada announced the buyout of Extreme Value pick International Royalty Corporation at a 240% premium over our initial recommended price. It's the second Extreme Value buyout this year. As Goldfinger told James Bond, "Once is happenstance. Twice is coincidence. Three times is enemy action." So I can't quite claim a talent for picking acquisition targets just yet. I need one more this year to do that.
The lesson we've learned from these buyouts is our scenario featuring the stock market ratcheting sideways is playing out. In the November issue of Extreme Value, I said the overall stock market should go sideways from here, ratcheting up and down, creating a frustrating pattern that will push stock valuations gradually lower on average for the next several years.
That depressing effect on valuations is evident in the buyout of Extreme Value pick IMS Health, which went out at $22 a share. Two years ago, it would easily have gone out at $30 a share. International Royalty Corporation might have gone out at $8 or more had the deal happened two years ago, rather than the $6.75 price Franco-Nevada will pay.
Now more than ever, you need to understand business values to avoid big risks and consistently make money in stocks.
By lowering my expectations and recommending only dirt-cheap stocks, I've been able to make some money off the sideways market's latest rally since March, without taking the insane risks small-cap junk speculators have been taking since March, and continue to take today. (My friend Vitaliy Katsenelson wrote a book about sideways markets and has a great website, too. Vitaliy is the one who first told me about IMS Health.)
Expensive and unattractive as most stocks are, returns on cash are barely visible with the naked eye. In his December letter to investors, PIMCO's Bill Gross laments his cash's 0.01% yield. Gross says at that rate of return, it would take 6,932 years to double his money. Even if you don't think the dollar is doomed, you must face the fact that you're still losing money after inflation by holding it. And it doesn't look like the situation will change any time soon, either...
Yesterday, Fed Chairman Ben Bernanke said he will keep interest rates near zero for "an extended period." Bernanke said the U.S. economy faces "formidable headwinds" despite recent signs of strength (unemployment down, commodity prices up). He's wary to prematurely hike rates. You see, the Fed can't raise interest rates. If it did, the government couldn't afford its debt. Instead it will keep rates low and inflate its problems away. Surprisingly, gold dropped this morning. Once all the new converts are shaken out of the precious metal, it will be time to start buying again.
I am not making this up: If you steal money in China, it could cost you your life. Today, China executed a former securities trader for embezzlement. He was the first person in the industry to be put to death. Yang Yanming was sentenced to death in late 2005 for embezzling $9.52 million.
Doc Eifrig asked we publish his latest Retirement Millionaire discovery in today's Digest. This information is too important not to share...
AARP is one big lie. I used to assume the American Association of Retired Persons was looking out for the interests of... well... retired people. But it's not. For example in the health care debate, it is supporting cuts in Medicare... to the tune of $460 billion.
And the reason is simple; it collects royalties on the so-called "gap" insurance – the private insurance that covers what Medicare doesn't. The less Medicare covers, the more private insurance is needed, and thus the more AARP makes. But not you.
In fact, AARP along with its foundation are as left-leaning liberal as you can get. The foundation is separate from, but closely linked and related to, AARP. Its business is to raise money to lobby Congress.
The foundation is essentially a special interest group bent on keeping large institutions in control of your life. It lobbied against privatizing retirement accounts funded by your own Social Security taxes... why? Again, because it's in bed with big business.
More than half of AARP's income is from advertising and royalty payments from big business. And the deals from companies in its publications and website aren't even competitive. You can find better deals yourself on almost anything.
If you've been paying your $16 a year AARP fee, you should think again. Ask for your membership money back and tip your garbage collector instead. I guarantee you'll get more personal benefit next year from it.
It's these sorts of in-your-face deceptions and myths that Doc uncovers every month in his newsletters. To see what else he's working on, click here...
New highs: Vanguard Tax Exempt (VWSTX), Fairholme Fund (FAIRX), Verizon (VZ), Johnson & Johnson (JNJ), iShares High Yield Bond Fund (HYG), Burlington Northern Santa Fe (BNI), AmeriGas Partners (APU), Enterprise Partners (EPD), Altria (MO), Markel Corp 7.5% Senior Debentures (MKV), Tejon Ranch (TRC), International Royalty (ROY), Akamai (AKAM), Providence Service Corporation (PRSC), 3SBio (SSRX), Ormat (ORA), Rex Energy (REXX).
Some kind e-mails in today's mailbag. Feel free to send us your success stories: feedback@stansberryresearch.com.
"Based on Dan Ferris and Rick Rule's assurances that International Royalty Corp. (ROY) was deeply undervalued and a good inflation hedge... I bought a healthy position in it. Today, in an otherwise flat day in the markets, I showed a gain of $41,040 from ROY... Thanks for all of your great research and recommendations." – Paid-up subscriber Steve C.
"One subscriber recently asked which publications he should get since he can't afford the Alliance membership. I was reminded of my own similar predicament. First I tried various less expensive publications you offered. I liked them and was slowly lured in to more costly subscriptions. Some of them were way over my head, and in fact I couldn't even perform many of the trades in my brokerage account because I wasn't set up for it. Though I saw the potential, I wound up cancelling some subscriptions due to my own lack of education and willingness to delve into trades that I didn't fully understand.
"I later increased my awareness and boned up on some new trading skills just in time to take advantage of the incredible savings offered in one of your Alliance Membership promotions. At that time I think is was under $5,000 and I was taking another serious look at Jeff Clark's work, which was about half that for a year as well as Porter's Put Strategy report. At that point it was a no-brainer. As a reward for taking the plunge I discovered some other fantastic publications that have made me many times more money than the price of membership. It was certainly the best decision I made in my investment career.
"Now you keep offering new publications that I would gladly pay for, but alas, I get them for free since they are included in the Alliance membership. For those of you on the fence or thinking about the high cost... I could cite numerous trades from numerous publications that have more than paid for the one-time membership fee! Oh, and unlike some members, I love the honest rants, raves, conjectures and witty replies.
"It helps break up the monotony and provide valuable food for thought, and if I'm not in the mood, I can always scroll to the bold face type and get right to the meat! Thanks for helping me recover a good percentage of my losses from 2008!" – Paid-up subscriber Tod
Ferris comment: We're glad you've done so well with the Alliance, Tod. We truly believe an Alliance membership is the single best investment you can make toward your financial freedom. To learn more about the S&A Alliance, a lifetime subscription to everything we publish (except Phase 1), click here... We're closing our Alliance offer tomorrow night.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
December 8, 2009