Wed, Oct 30, 2013|Sean Goldsmith

The most important number in finance is falling...

How to achieve near-double-digit yields without overpaying...

Editor's note: In today's Digest Premium, Meb Faber, cofounder and chief investment officer of the Cambria Investment Management firm, explains why high-yielding stocks are trading at huge premiums.

Meb's comments come from an interview he gave on Porter's Stansberry Radio weekly podcast. That show (Episode No. 99) aired on October 11.

As I (Meb) mentioned yesterday... People searching for yield in our current environment of really low interest rates have gravitated toward the highest dividend-paying stocks, driving them up to a premium compared with the overall market.

At Cambria, our solution to the high valuations of dividend stocks in the U.S. is to incorporate share buybacks into our investing approach.

Today, buybacks in the U.S. exceed what companies are paying in dividends. And they're essentially the same thing, in terms of value to the shareholder.

We created an exchange-traded fund – called the Cambria Shareholder Yield Fund – based on this strategy last spring. It trades on the New York Stock Exchange under the ticker SYLD.

If you look at the stocks in our fund, all the valuation metrics are cheaper than the overall market – again, unlike many dividend-paying stocks, which trade at a premium to the market. We use valuation filters to make sure our holdings offer more value. And that's important when talking about share buybacks... The trick to successfully buying back stock is for a company to only buy stock when its shares are inexpensive.

When you have a company that has a lower valuation and is buying back stock, the shareholder is getting more bang for the buck.

Incorporating share buybacks also greatly increases your total yield... If you look at the broad market today, the dividend yield is around 2.5%. And in total, companies are buying back around 6% of their shares on an annual basis. If you combine those two metrics, you're getting close to a double-digit blended yield.

– Mebane Faber

Editor's note: We previously ran another excerpt of Porter's interview with Meb in the October 16 Digest Premium. You can listen to the entire episode (No. 99) on the Stansberry Radio website.

How to achieve near-double-digit yields without overpaying...

In today's Digest Premium, Cambria Investment Management founder Meb Faber offers his secret to generating high yields without overpaying for popular, high-yielding stocks...

To continue reading, scroll down or click here.

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 10/29/2013

Stock	Symbol	Buy Date	Return	Publication	Editor
Rite Aid 8.5%	767754BU7	02/06/09	683.6%	True Income	Williams
Prestige Brands	PBH	05/13/09	408.3%	Extreme Value	Ferris
Enterprise	EPD	10/15/08	243.5%	The 12% Letter	Dyson
Constellation Brands	STZ	06/02/11	209%	Extreme Value	Ferris
Abbott Labs	ABT	05/20/11	192.7%	The 12% Letter	Ferris
Ultra Health Care	RXL	03/17/11	181.5%	True Wealth	Sjuggerud
Altria	MO	11/19/08	181%	The 12% Letter	Dyson
McDonald's	MCD	11/28/06	168.6%	The 12% Letter	Dyson
Hershey	HSY	12/06/07	168.4%	SIA	Stansberry
GenMark Diagnostics	GNMK	08/04/11	158.1%	Phase 1	Curzio

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

Top 10 Totals

1	True Income	Williams
2	Extreme Value	Ferris
3	The 12% Letter	Dyson
1	The 12% Letter	Ferris
1	True Wealth	Sjuggerud
1	SIA	Stansberry
1	Phase 1	Curzio

Stansberry & Associates Hall of Fame (Top 10 all-time, highest-returning closed positions across all S&A portfolios)

Investment

Sym

Holding Period

Gain

Publication

Editor

Seabridge Gold	SA	4 years, 73 days	995%	Sjug Conf.	Sjuggerud
ATAC Resources	ATC	313 days	597%	Phase 1	Badiali
JDS Uniphase	JDSU	1 year, 266 days	592%	SIA	Stansberry
Silver Wheaton	SLW	1 year, 185 days	345%	Resource Rpt	Badiali
Jinshan Gold Mines	JIN	290 days	339%	Resource Rpt	Badiali
Medis Tech	MDTL	4 years, 110 days	333%	Diligence	Ferris
ID Biomedical	IDBE	5 years, 38 days	331%	Diligence	Lashmet
Northern Dynasty	NAK	1 year, 343 days	322%	Resource Rpt	Badiali
Texas Instr.	TXN	270 days	301%	SIA	Stansberry
MS63 Saint-Gaudens		5 years, 242 days	273%	True Wealth	Sjuggerud

How to achieve near-double-digit yields without overpaying...

In today's Digest Premium, Cambria Investment Management founder Meb Faber offers his secret to generating high yields without overpaying for popular, high-yielding stocks...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

The most important number in finance is falling... The GM 'Chairman' is busy at work... Ferris on Apple... Huge day for U.S. Steel and DailyWealth Trader readers... The 'greatest business model in American business'... Your biggest fear for 2014...

The most important number in finance is falling.

The 10-year U.S. Treasury yield fell to less than 2.5% today for the first time since July.

The yield peaked at 2.98% on September 5... Then, the Federal Reserve's decision to continue buying $85 billion of bonds a month (when the market was expecting the Fed's purchasing to taper off) sent rates back down. Today, it hit 2.47%.

For now, the Fed's actions are working... We'll continue to see interest rates fall and credit expand. But it's all happening at the expense of the U.S. dollar, our nation's savers, and future generations.

Automaker General Motors reported earnings today... The market is happy with the news. The stock is up around 3%. However, we believe GM's "Chairman" will fill us in on what's really happening with the automaker. We've received word he's busy preparing another letter...

Yesterday, we outlined Apple's quarterly earnings... The consumer-products and computer giant beat revenue and earnings expectations. The stock initially rose before shares closed down 2% on the day.

We asked Extreme Value editor Dan Ferris, who recommended shares earlier this year, for his views on the earnings announcement...

Revenues were up and profits and margins were down a little... but all the financial clues that identify Apple as a fantastic business are fully intact.

Apple gushed $45.5 billion in cash flow last year, more than any non-financial publicly traded company, according to data compiled by Bloomberg. It spent 73% of free cash flow on dividends and share repurchases (36% after allowing for the $17 billion in debt that was used to fund buybacks).

Net margins were down, but still a thick 21%. The balance sheet is possibly the most cash-rich financial fortress among non-financial and non-holding companies. It has $146 billion of cash and securities and less than $17 billion of debt. (That's almost nine times more cash than debt.) And it earns more than 31% on equity.

Apple sold 150 million iPhones last year, up 20% from the previous year. It sold 71 million iPads, up 22% from the previous year. I can't wait to buy an iPad Air.

Porter, a longtime Apple user, says the market isn't properly pricing one of Apple's greatest assets: the strong tie it has with its users. From the October 18 Digest Premium...

It's not really a function of the economy. It's a function of Apple's unbelievably strong brand and the huge tie-in it has due to the way it has built out its "cloud." This facet of Apple is still underappreciated on Wall Street.

Once you become a defined Apple user – once you own one of its iPhones, iPads, computers, or laptops... and you're using what they call "iCloud," which allows you to access your content (books, movies, music, etc.) on any of these devices in any location – you're locked in.

I now probably have $20,000 invested in Apple content, not to mention all of my family's pictures and movies. I'm not going anywhere. It becomes impossible for me to leave Apple's hardware platform because of the unbelievably strong tie-in with that content...

Apple has built what they call in technology a "walled garden," where users' switching costs are not only a matter of time... but they also have to learn a new operating system. You have to learn all the new connections and the new language. And even if you do all those things, it's still almost impossible for you to take your resources with you. So it's not a walled garden. Now, it's more like I'm an indentured farmer.

Yesterday was a good day for DailyWealth Trader readers. Shares of one of co-editors Brian Hunt and Amber Lee Mason's recommendations – steelmaker U.S. Steel – popped 9% on a solid earnings report. Subscribers are sitting on a 35% gain in just 11 weeks. From today's DailyWealth Trader...

U.S. Steel is America's largest steelmaker. The company makes steel that goes into automobiles, structures, appliances, and containers.

The steelmaking industry is one of the market's major "boom and bust" sectors. It enjoys huge upswings... and then crushing downswings. These up and down cycles are caused by periods of overinvestment and excess supply... followed by periods of underinvestment and lack of supply.

Due to a sluggish global economy and excess production capacity, steel has been in "bust mode" for the past few years. Low steel prices are producing big losses for steelmakers... Earnings have declined. Some smaller players in the steel sector are in danger of going bankrupt.

Shares of U.S. Steel fell 73% from early 2011 to their recent low. But steel is a cyclical business. So Brian and Amber said it was time to go long steel... The sector was moving from "bad to less bad."

As they wrote in the August 15 DailyWealth Trader...

Things are definitely "bad" for the steel sector. The news is terrible. The price action is terrible. The sentiment is terrible. Few Wall Street analysts would dream of telling clients to "buy steel!"

And that's precisely why we need to buy.

Just like winter is followed by spring, big steel busts are followed by big steel rallies. And a gradually improving U.S. economy should help power U.S. Steel's earnings and share price higher.

The rebound in steel stocks is just one of the big trends Brian and Amber have nailed in DailyWealth Trader... They have also profited off trades in automaker Ford, software giant Microsoft, gold-mining stocks, and the bull market in biotech, to name a few. And they've done so following a simple set of rules...

To help readers understand some of the rules and strategies the best traders in the world use to beat the markets, they have produced a series of three-minute-long trading videos.

If you're active in the markets, you need to understand these concepts. You can watch all of the "Three-Minute Trading Expert" videos in 15 minutes. And they're completely free.

You can see the videos here, here, here, and here.

On the topic of trading... billionaire Stanley Druckenmiller, who manages the Duquesne Capital hedge fund, is long Google...

Druckenmiller told financial news network CNBC today that Google is now his largest position. And he added more shares after the company recently announced positive third-quarter earnings (which pushed shares to more than $1,000). He said Google has the "greatest business model in American business." The majority of Google's revenues comes from selling targeted ads to users of its many services.

Druckenmiller also touted Larry Page, the company's cofounder and CEO, as "this generation's Thomas Edison."

New 52-week highs (as of 10/29/13): Automatic Data Processing (ADP), American Financial Group (AFG), Aflac (AFL), BP (BP), CVS Caremark (CVS), Dominion Resources (D), Dolby Laboratories (DLB), Emerson Electric (EMR), EnerSys (ENS), Energy Transfer (ETP), Expeditors International (EXPD), Home Federal Bancorp (HOME), Hershey (HSY), iShares Dow Jones Insurance Fund (IAK), Integrated Device Technology (IDTI), SPDR International Health Care Fund (IRY), Kohlberg Kravis Roberts (KKR), KLA-Tencor (KLAC), Ligand Pharmaceuticals (LGND), Longleaf Partners Fund (LLPFX), Medtronic (MDT), 3M (MMM), National Fuel Gas (NFG), ONEOK (OKE), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology Fund (ROM), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), Cambria Shareholder Yield Fund (SYLD), Walgreens (WAG), and WPX Energy (WPX).

We're in the process of preparing a new report, and we'd like to know... What's your biggest concern about your finances and/or the stock market for 2014? Let us know at feedback@stansberryresearch.com.

"Because my schedule doesn't permit me to monitor my accounts as closely as I would like, often times I elect to take a terrific profit and run. On 9-16-2013 I got in the U S Steel trade you had written about. After reading your update email today, I elected to get out today for an annual return of 706.47%. That yield is on an IRA, not a margin account. Thank you for a great job." – Paid-up subscriber Mary Gatt

"God. Porter. Do you ever sound like a fool! You quoted Steve Sjuggerud as saying 'I expect 'bubbles' will return in the stock market and in the housing market... as people realize they NEED to do SOMETHING with their money.'

"But then you quote Shiller as saying something that totally contradicts Sjuggerud. Do you even read your own writing? 'If Steve's reasons for another bubble aren't enough to convince you, consider this bit from Robert Shiller, co-founder of the S&P Case-Shiller index and 2013 Nobel Prize winner... In an interview with Yahoo's The Daily Ticker finance blog, Shiller said he doesn't expect another bubble in real estate for some time. 'We just went through the biggest bubble in U.S. history,' he said. 'So I wouldn't expect that to repeat... maybe not in our lifetimes.'" – Paid-up subscriber Ron Gibala

Goldsmith comment: First off, I wrote that Digest, not Porter. Second, you missed the point. We thought the comment from Shiller – a Nobel Prize winner and creator of a benchmark real estate index – was ridiculous.

Regards,

Sean Goldsmith

Miami Beach, Florida

October 30, 2013