The Hidden Secret in Our Report Card

How to make close to 100% annually, with safe bonds... Can you unplug from the market, even for a minute?... The hidden secret in our Report Card...

In today's Friday Digest, I'd like for you to turn off all of the news and all of the noise...

I'm serious... Shut down your Twitter or your Facebook. Close your Internet browser. Turn it all off. If you have a printer, then print this out. Go somewhere comfortable and quiet. For just 15 minutes or so, I (Porter) want you to read and think quietly. Calmly. With zero urgency.

It's incredibly difficult for most people to unplug. But just for a few minutes, ignore the websites that "shout" information at you, manipulating your emotions, giving you a false sense of confidence about your decisions, and pressuring you to take action.

Turn off CNBC.

Those networks try to create the impression that the markets are like a sporting event. That's so you won't turn them off, even for a minute. All of that drama doesn't benefit you or help you make better, more thoughtful decisions. It drives brokerage orders and advertising revenues.

Investing – good investing – isn't ever urgent.

So just relax. Put your feet up. Open your mind to a different rhythm. There's no hurry. It's not a race. You're not going to miss the opportunity.

This isn't dramatic. It isn't urgent. It's safe. It's almost boring.

But this – the investment lessons in the story below – will make you far, far more money than you will ever make buying stocks. It's also vastly safer.

And nobody on CNBC or at your brokerage firm wants you to know anything about it.

Last fall, one of America's best businesses received what looked like a death sentence...

Iconix Brand Group (ICON) is a business you've probably never heard of before. It operates behind the scenes, with only a handful of employees.

It doesn't make anything or provide any services. Instead, it owns iconic consumer brands – more than 30 of them around the world. Brands like Joe Boxer, London Fog, Mossimo, Ocean Pacific, Danskin, and Umbro. These brands signal quality and value to consumers in multiple product categories, helping retailers like Target (TGT) and Walmart (WMT) sell products.

Every time one of those products is sold, Iconix receives a royalty, typically 3% of the sale price. At the end of last year, Iconix was collecting royalties on more than $13 billion in retail sales. Doing the math, you'll discover that's roughly $400 million in annual revenue.

If you've followed our work for any period of time, you should know that we greatly prefer and admire businesses like these, which are extraordinarily "capital efficient." Iconix doesn't have to build factories or retail outlets. It doesn't have to hire designers or spend money trying to drive traffic to retail stores. It can just sit back and cash its royalty checks.

It sits in the epicenter of global commerce and gets a free ride on the back of lots of other big, capital investments. As a result, Iconix produces about $0.40 of "free cash flow" – that's its cash profits after all expenses and capital investments – from each dollar of revenue. That's unheard of in any other kind of business.

This is a great business. It is one of the most capital-efficient businesses in the entire world. And... do you think consumers are going to stop buying branded products anytime soon? I don't. By early 2014, Iconix was worth more than $2 billion, and its shares were trading for more than $40.

But even great businesses can stumble...

By Halloween last fall, Iconix's stock had fallen 70% in only a few days. The company was suddenly worth less than $100 million. Clearly, Wall Street expected the company to go bankrupt. Even the firm's bonds were selling off, trading for about $0.50 on the dollar.

What went wrong? Just about everything. The company's founder and CEO, Neil Cole, was cooking the books. The truth came out in late 2015, and that led to a U.S. Securities and Exchange Commission investigation in 2016. The firm had to restate its earnings for 2013, 2014, and 2015. But the real trouble was that the fraudulent accounting had covered up several mistakes that the former management made – paying too much to acquire brands.

And then... in the fall of last year... the real hammer fell.

Walmart announced it would no longer sell Danskin, Iconix's 135-year-old fitness brand for women. This came on the heels of an announcement by Target that it would drop Iconix's Mossimo brand.

All of these problems led to a potential 'death spiral'...

The reduction in revenues and the company's declining financial position meant it couldn't comply with various covenants on its outstanding debts. These potential debt-covenant violations drove the company's banks to pull the $300 million of new financing that had been in place to meet a bond repayment that was rescheduled for early 2018.

That's why Wall Street thought the company would go bankrupt.

These troubles were enough to keep virtually any investor away from Iconix's stocks and bonds.

But two things interested us...

First, even with reduced revenues, the company's inherent capital efficiency meant the firm was still capable of producing large amounts ($50 million-plus) in cash flow each year. And second, at the newly "wiped out" share and bond prices, there was, in our view, almost zero risk left in the company's securities.

No, this kind of investing isn't 'sexy.' It's not bitcoin...

The stocks and bonds of Iconix are not going to the moon. But at less than $2 per share, the stock was trading for about 25% of book value. So even though the company still had challenges ahead, there was the potential for a 300% gain if it didn't go bankrupt.

And at around $0.50 on the dollar, the company's bonds would double in less than six months if they were redeemed at par value. The downside in the bonds? Almost none. The average corporate bond that defaults has a recovery of $0.45 on the dollar, and this company's assets were of a much higher quality than average.

For good investors, there was plenty of opportunity here...

All you needed was a talented forensic accountant/auditor and an experienced corporate attorney who could read all of the loan documents to make sure you had a thorough understanding of the debt instruments.

Easy, right?

Well, that's where it stops for most investors.

They look at this mess and throw up their hands and just say, "It's too hard. There's no way I can figure out what this stuff is really worth." And that's fine. You can go your entire life without buying any distressed corporate debt and still be successful as an investor.

But I have a fundamentally different belief. I think every investor ought to understand bonds and become successful at buying them before you ever buy a stock.

And here's a big secret. If you learn how to buy bonds the right way, you can earn more money in bonds than you will make in stocks. You'll do so with a far higher winning percentage, too.

And that raises the question... if you can make more money in bonds, with less risk, why would you ever buy stocks?

Why indeed.

That's why I urge anyone who hasn't yet reached what they consider a satisfactory level of success as an investor to seriously consider learning how to invest in bonds. Focus on those investments first, rather than stocks.

How do I know that you can make more money, with less risk, buying bonds instead of stocks?

Well, because we've done it.

Our Stansberry's Credit Opportunities research product primarily recommends bonds and structures trades around opportunities that originate in the bond market.

We launched this product in the fall of 2015, and we've made 22 recommendations since then. As you might have seen in our 2017 Report Card, this product got an "A+," with a winning percentage of 77% and an annualized return of 21.1%. If you had bought the S&P 500 Index (stocks) instead of the bonds we recommended, at the same times, your annualized return in stocks would have been 16.8%.

In other words, you could have far, far outpaced the returns in stocks by using our bond research. You would have taken far less risk, too. The highest win percentage among our stock-research products for this period was True Wealth's incredible 70% winning percentage. But of course, Steve Sjuggerud is a truly rare and exceptional investor. Most folks buying stocks aren't going to see a 70% win rate.

And so, I'll put the question to you...

If you know that you can make far better returns in bonds than in stocks... with far less risk... why aren't you primarily investing in bonds?

There's no good answer. But what most people will say is: "I don't know how to buy bonds."

And think about that for a second. There's a virtually unlimited number of brokers who are happy to help you buy just about any stock you want, no matter how risky. They spend millions and millions of dollars advertising to you on TV and online to try their trading platforms. They urge you to trade early and often. Again and again. Always stocks.

Have you ever seen them advertise bonds? No.

And trust me, when you tell your broker that you want to buy a bond, even one that we've recommended and that you know a lot about, they will try their hardest to talk you out of it. They will even tell you that you're not qualified to buy. (So just ask them why they're willing to sell you the stock of the exact same company, a security that's by definition far riskier.)

Nobody will ever encourage you to buy bonds. Nobody will ever make it easy. Why is that? Just think about it. I'm sure the answer will come to you.

And there's another reason...

Most individual investors don't buy individual bonds because they don't have the expertise to read all of the legal documents or to figure out the seniority of the different bonds. Well, problem solved. We do all of that hard work for you in Stansberry's Credit Opportunities.

You may be wondering, 'How do we find good bonds to buy?'

We spend a fortune buying all of the data available in the capital markets. We've built our own proprietary database that includes each of the 40,000 separately traded corporate debentures. We focus on the 6,000 or so securities that have a large enough size and trading volume to be tradable. That's our universe.

We then assign each of these securities our own proprietary credit rating – yes, really. And then we look for anomalies between how we rate each security and how the major agencies (like Moody's and Standard & Poor's) rate them. About 97% of our ratings are the same. But every now and then, we find big differences.

That's how we found the Iconix bond I mentioned above. We'd been watching that bond for almost two years. And we consistently rated it much more highly than the major credit-rating agencies. Why?

Well, as we told subscribers to Stansberry's Credit Opportunities, the unique and high-quality characteristics of the underlying business meant that it was extremely likely that additional financing could be found and that the bond in question would pay off at par.

Here's what we wrote back in early November...

Even though the price of our bond has recovered some from its Halloween collapse to around $770 today, the market clearly thinks Iconix is at risk of not being able to repay the full $236 million of principal of our bond. We're not nearly as worried...

We believe it's extremely unlikely that Iconix will file for bankruptcy...

By recommending this bond, we're betting that Iconix can come up with the additional $125 million it needs under the bank's conditions by next March.

With Iconix's portfolio of brands and strong cash flows, that shouldn't be a problem. The company can secure the $125 million in any number of ways... we believe Iconix will most likely attempt to sell some of its brands. Remember, the company has already sold some brands to reduce debt...

If Iconix sold all of its remaining brands [on the same terms], the company would net more than $2 billion.

That's enough to pay off all of its debt two times over. So we know selling assets is a strategy that will work.

We were exactly right...

Iconix announced a new financing last week that will allow its current bondholders to be repaid, in full. Folks who followed our advice will make 31% on this bond in about four months – an annualized return of 85%. And none of last week's volatility hurt this trade in the slightest.

And that's my biggest point. Investing in stuff that you can fully understand, that has defined timelines, precisely specific risks, and excellent opportunities for real profits... well... it's a much different kind of investing than most people are used to.

It's not like driving a race car. There aren't any big curves. It's more like a chauffeured limo. It's quiet. There's nothing to worry about. You don't even need to know where you're going. You're going to get paid, no matter what.

If you never take any other advice from me, do this...

Try Stansberry's Credit Opportunities. It is the best, most valuable research we produce. And when you see how easy it can be to trounce the stock market's returns without taking anything like stock market risks, you'll never, ever, want to buy a stock again.

By the way... I'm sure you'll think this is all an exaggeration...

It's not.

We've transformed the investment lives of thousands of people with this product. Here's one of our Alliance members, Robert R., who wrote in last week about Stansberry's Credit Opportunities.

I want to highlight a recent recommendation from Credit Opportunities that is a prime example of the very high quality, high value add research that Stansberry provides.

Iconix, which has bonds maturing in March 2018, have been recently trading in the mid-$0.70s and was first recommended last November. After extensive research on this company, Stansberry concluded it was very likely the debt would be repaid. This morning [Feb 12] a plan was announced. The bonds will get paid at par on March 15th.

I started buying the bonds in November in the mid-$0.80s and bought all the way down to md-$70s for about 25% return in a few months (annualized well north of 100%). It is quite impressive for Stansberry to sniff out an opportunity where one can make that kind of return and not take that much risk in the process. My Alliance Membership was one of the best investments I have made and this is just another reason why that is the case. Thanks for all of the great work!

If you're at all interested in bonds...

The first thing to understand is that bonds have two qualities that make them much easier for outside investors to understand and profit from.

First and foremost, unlike common-stock investors, bondholders, have strong legal rights to both their principal and their coupons (the interest payments).

Companies that try to screw over bondholders get completely destroyed.

Every corporate asset can be seized by a bankruptcy court and liquidated to benefit bondholders. Bondholders are no joke.

As a common-stock holder, you have virtually no protections from self-dealing boards and executives. The dividends you receive, if any, are completely at the whim of the board of directors. Bondholders, on the other hand, have a contract with the corporation that requires they be paid, or else.

Secondly, bonds are 'binary'...

That is, there are only two possible outcomes for bondholders. The bonds will either pay off, in full, at maturity or else they will default. So their final price is either going to be "par" – typically $1,000 per bond – at maturity or some amount of capital in a recovery. As I mentioned, the average recovery on defaulted corporate bonds is about $0.45 on the dollar, or about $450 per bond.

In my mind, dealing with binary outcomes is a lot like "training wheels" for investors. No, you're not likely to make 10 times your money on a bond. But you're also not likely to lose everything either, provided of course, that you know what you're doing. Folks who treat bonds like penny stocks are likely to be sorely disappointed. You've got to know what you're buying, just with any other investment. But the risk-to-reward setup that's possible in bonds is frequently far superior to stocks.

Here's just one example of why... If a stock has crashed from $100 to $10, it probably isn't any safer to buy. Obviously, something is seriously wrong with the business. If it isn't fixed, it will go to zero.

But when a bond goes from, say, par to a "distressed" price of $0.50 on the dollar, it probably is a lot safer to buy, assuming an average recovery. Also, like Iconix shows, if the company has high-quality underlying finances, a bond can turnaround a lot faster than a stock. It might take a stock that's fallen from $100 to $10 a decade to reach a new high. But that can happen for a bond overnight, as soon as new financing is established.

That's the power of being in a binary investment. And it's a big advantage for investors who understand how to use it.

All right... that's it. That's the best I can do...

If you want a quieter, safer, and more rewarding path as an investor, consider studying bonds. Start with our research and branch out as you gain more experience and knowledge. You'll end up far wealthier than stock investors. The only trouble will be managing your boredom. Learn more about Stansberry's Credit Opportunities right here. (You won't have to sit through a long video presentation.)

Horse, meet water.

New 52-week highs (as of 2/15/18): Amazon (AMZN), Bristol-Myers Squibb (BMY) CME Group (CME), Cisco (CSCO), Grubhub (GRUB), Huntington Ingalls (HII), Lockheed Martin (LMT), New York Times (NYT), Sprott (SII.TO), and VF Corporation (VFC).

In today's mailbag, thoughts on a "jubilee" for student loans... and a new subscriber weighs in on our 2017 Report Card. Send your notes to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.

"Regarding Bard College Levy Economics Institute researchers' proposal about erasing the student debt of $1.4 trillion, seems like that could only have been formulated within the hallowed halls of tenured college academics. That debt is an 'account due' somewhere. Oh yes, the federal government and taxpayers. What is another trillion when you are already $60 trillion in debt?" – Paid-up "free of debt" Stansberry Alliance member Thomas S.

"I really enjoy reading all you offer. Wiping away a young person's school debt who went to college? What about the middle class parents who worked hard, saved for their child's schooling and sent them to school to emerge debt free. Do we get a rebate too?" – Paid-up subscriber "gusharko"

Porter comment: Uh... we don't endorse the idea of allowing folks to renege on their debts. We think that will encourage still more, even greater reckless behavior.

We are simply reporting on the rise of these ideas, because from what we've seen, there's not a politician in America who won't embrace a bad idea if it wins a vote. And there are a whole lot of Americans who can't possibly hope to ever repay their debts.

Seems like a winning combination, doesn't it?

I don't mean winning for our country. I mean winning for our feckless leaders and deadbeat neighbors.

"I was new to Stansberry earlier this year. I have been happy with the investment advice I've received. And I was astounded to receive your performance grades for your various advisories.

"Frankly I have been taken in by other so-called investment services that promise: Big Fat Money Average 258% gain every 37 days, Staggering 453% over the recent 5 weeks, Averaging 350% weekly gains. Of course, all of this is impossible, but gullible people fall for it and then fail to get much of anything.

"These are actual statements, and I'm sure you know who they are from. They also charge high prices for their service. It is certainly unethical and should be illegal. Again, I am happy to have an honest advisor. Thanks." – Paid-up subscriber Philip Jackson

Porter comment: Philip, it mystifies us as well that anyone would believe the claims many publishers make about their investment recommendations.

Likewise, we can't imagine taking investment advice from anyone who wouldn't comment honestly about past results.

But... maybe we're old-fashioned.

Regards,

Porter Stansberry Baltimore, Maryland February 16, 2018

P.S. The Stansberry Research offices are closed on Monday in observance of the Presidents' Day holiday. We'll resume our normal publishing schedule on Tuesday.