The Ice Cream Shop Lesson: How to Find Your Next 600% Winner

The ice cream shop lesson... How to find your next 600% winner... This simple idea is responsible for some of the biggest returns in Stansberry Research history…

One of the most important business lessons I ever learned came from the late, great Lee Garfield...

It may not seem profound, but I (Dan Ferris) will never forget what he told me one day when I was working in his ice cream shop in the early 1980s...

Even if people can't afford a nice vacation or a new car, they'll still shell out a few bucks and take the family out for ice cream.

Lee opened Lee's Ice Cream Factory, the iconic Baltimore business where I worked my way through college, in 1979. His first store was a 10-minute walk from Towson University, where I studied music in the early 1980s. We made ice cream in small batches right there in the store.

Back then, I knew little about business or investing...

Lee was hanging out behind the counter one day when he told me why he chose to open an ice cream store instead of some other type of business. He had dreamed of it since he was a kid, where the ice cream he ate at Baltimore's now-defunct Gwynn Oak Park amusement park created a lasting childhood memory.

Then, Lee told me he didn't want a business that cost too much (like a restaurant), or one where you had to own a bunch of inventory (like a bookstore). All we needed was an ice cream machine or two for each store, a few freezers, a milkshake machine, and dirt-cheap items like spoons, cones, and cups. It was a great idea, and folks have always loved ice cream.

He knew the business could weather economic recessions because the product cost so little and because people would still buy it even when they couldn't afford more expensive luxuries, like a family vacation.

The lesson didn't just stick with me...

It also helped me find some of the biggest winners in Stansberry Research history.

In the wake of the financial crisis, investors were running fast from companies that had lots of debt on their balance sheet. One of those companies was household-products company Prestige Brands Holdings (PBH) – which is now known as Prestige Consumer Healthcare.

Prestige's market cap was less than $260 million, and it was sitting on $378 million of debt. Most investors don't like it when a company's debt exceeds its total market equity value. They think it means the company has something seriously wrong with it.

Even worse in the eyes of many investors, the share price had fallen more than 70% from its 2005 highs due to the financial crisis bear market. I knew Prestige had a lot of debt, but as I told Extreme Value subscribers back then...

Prestige is not a financial fortress. It has much more debt than cash. But if you look at the financial risks more closely, you'll see the stock isn't as scary as the market seems to think.

It was clear to me that Prestige was an excellent business. It owned popular over-the-counter health care brands like Compound W wart remover, Clear Eyes eye drops, and Chloraseptic sore throat spray.

Better still, it owned only the brands, not the manufacturing or distribution. That dramatically lowered the company's expenses and raised its profit margins and returns on capital.

I knew I had found something special...

It was like a royalty on a bunch of low-cost consumer products, some of which had been around for several decades.

Just like Lee had taught me decades earlier, even if folks were finding it tough to make ends meet, they'd still shell out a few bucks to get rid of warts and soothe dry eyes and sore throats.

I shared the nitty-gritty details about Prestige and the over-the-counter health-products industry, including the All Commodity Volume Food Drug Mass Index ("ACV"). An ACV of 90% means a product is on the shelf in 90% of the stores where products of that type are sold. At that time, I noted that Chloraseptic had a 96% ACV, and that 11 of Prestige's 15 brands had a 60%-plus ACV.

With a portfolio of market-dominating brands, and no distribution or manufacturing costs, Prestige had low expenses and tiny capital requirements. As a result, it gushed free cash flow (another important metric we've educated readers about over the years). On sales of $322 million, it was generating $63 million a year in free cash flow – a thick 19% margin.

In Extreme Value, we recommended the stock in May 2009 at $6.23 per share. As the financial crisis passed, the stock did well, doubling in about two years.

In February 2012, with the stock trading around $13.50 a share, pharmaceutical firm Genomma Lab tried to buy Prestige for $16.60 per share. The stock soared to that level immediately, and Extreme Value subscribers were up more than 160%.

But it was a lousy offer... I told readers I didn't expect it to close and that if the offer was withdrawn and no competing offer appeared, the stock would fall back to its previous levels.

Sure enough, the deal never went through and the stock fell to $13.24 in the aftermath. We continued to hold and watched it climb all the way to $32 a share by November 2014. That's when we recommended closing the position for a 406% profit. To this day, Prestige is the seventh-biggest winner in Stansberry Research history, listed in the Hall of Fame at the bottom of every Digest.

My experience with Prestige reinforced the lesson I learned while making ice cream in the 1980s...

The key is to own businesses that sell essential, low-priced products.

They're "Lee's Ice Cream" businesses. Even if customers can't afford an expensive home or a fancy new car, they can always find a few bucks for a scoop of ice cream, an over-the-counter health care product... or a cocktail.

In June 2011, a sharp sell-off and large debt load were keeping investors away from wine and beer giant Constellation Brands (STZ).

When I recommended shares to Extreme Value subscribers in June 2011, they traded around $20 – more than 30% off their previous highs.

The company had borrowed to buy up one wine company after another. Its debt load peaked at more than $5 billion in 2007 after an eight-year acquisition spree, as Constellation bought more than a dozen wine brands from around the world. Management had overestimated its ability to take on debts, and the company logged operating losses in 2008 and 2009. As I told subscribers in that month's issue...

Then management surprised us... by demonstrating a superior understanding of its business, its predicament, and doing the right thing. It decided to sell its less profitable assets, pay down debt, and turn the focus from growth by acquisition to growing through its most profitable premium wine brands... all the excellent brands it had bought during its decadelong acquisition spree.

We showed subscribers the excellent business that was buried under a $3 billion pile of debt...

Constellation was the No. 2 overall wine producer and the largest premium wine producer in the world. It was (and still is) also the biggest beer importer in the U.S. through its ownership of Crown Imports, which has exclusive rights to Corona. The company generated more than $500 million in free cash flow the year before we recommended it, and management expected between $600 million and $650 million a year after that.

The market saw a company that had grown too fast and still had more than $3 billion in debt in 2011 – roughly 10 times its 1998 debt load. But we saw a cash-gushing, World Dominating business in one of the best industries for investors that had already paid down $2 billion in debt.

It was Prestige all over again, and Lee Garfield's words spurred us on... But as was the case with Prestige, Constellation faced its own set of challenges.

In June 2012, global beer giant Anheuser-Busch InBev (BUD) agreed to buy Mexican beer maker Grupo Modelo. To satisfy antitrust regulators, Grupo agreed to sell its 50% stake in beer importer Crown Imports to Constellation. After the transaction closed, Constellation would own 100% of the No. 1 beer import company in the U.S. and have exclusive rights to the Corona brand in the U.S., including the right to create new products.

The market loved it, and Constellation's share price nearly doubled, from around $22 to $39 by the following January.

Extreme Value subscribers were up more than 80% in about a year and a half, but the drama wasn't over...

Then, AB InBev announced the deal was off, meaning Constellation would no longer be able to buy the 50% of Crown it didn't already own. Constellation's share price fell 20% in four trading sessions.

We continued to recommend holding the stock. Just like with Prestige, we believed investors would compound at high rates by holding onto a great business over the long term.

About two weeks later, the deal was back on. We held the stock for another few years, and finally recommended selling in November 2016 for a 631% gain (including dividends). It remains the fourth-biggest winner in Stansberry Research's 20-plus-year history.

As you can see in the charts below, both stocks performed poorly right before we recommended them. They were hated, and for good reason. But we knew the fears were overblown... that investors were ignoring a pair of great, cash-gushing businesses that would be around for decades to come.

Our job is to know businesses. That's exactly what Lee Garfield meant when he taught me to focus on simple businesses that sold essential, low-cost products.

Here's the price chart for Constellation before we recommended it...

And here's the chart for Constellation after we recommended it...

Now, here's the Prestige chart before we recommended the stock...

And finally, here's the chart of Prestige after we recommended it...

Extreme Value subscribers have earned triple-digit returns on other companies I found with Lee Garfield's sage advice, like cigarette makers Altria (MO) – another stock that's in the Stansberry Research Hall of Fame – and Philip Morris (PM) for 174% and 113%, respectively... beermaker AB InBev for 150%... and clothing retailer Blair for 111%.

I could show you the same pair of charts for every single one of those stocks: down or sideways price action before we recommended them... and up, up, up after.

But our big wins weren't just limited to "Lee's Ice Cream" businesses. In tomorrow's Digest, I'll explain how his advice helped me lead Extreme Value subscribers to other big winners, too.

New 52-week highs (as of 6/7/19): Automatic Data Processing (ADP), American Express (AXP), Blackstone (BX), Blackstone Mortgage Trust (BXMT), CME Group (CME), Essex Property Trust (ESS), Hershey (HSY), Invesco Value Municipal Income Trust (IIM), Ingersoll Rand (IR), Kinder Morgan (KMI), Coca-Cola (KO), Lockheed Martin (LMT), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), McDonald's (MCD), MarketAxess (MKTX), Microsoft (MSFT), Motorola Solutions (MSI), Nestlé (NSRGY), NVR (NVR), PepsiCo (PEP), Procter & Gamble (PG), Starbucks (SBUX), Under Armour (UAA), Vanguard Real Estate Fund (VNQ), and W.R. Berkley (WRB).

Have you owned any "Lee's Ice Cream" businesses? I'd love to hear how you've done. Drop us a line at feedback@stansberryresearch.com.

Regards,

Dan Ferris
Vancouver, Washington
June 10, 2019