Wed, Oct 22, 2014|Sean Goldsmith

The most valuable thing Porter can teach you...

The most valuable thing Porter can teach you... Why these stocks consistently outperform... A new high in one of our favorite sectors... Sparkling water's growth makes readers 27%... 'The single most important medical discovery of the past 40 years'...

"There is nothing more valuable we can teach you than understanding how to invest in good insurance companies."

Porter once again heralded insurance as one of the greatest businesses in the world in the June 18 Digest. He says insurance stocks are the only stocks he wants his children to buy... He believes if investors would limit their investments to the insurance sector, they would greatly increase their annual returns. As he explained...

"There's a simple reason for this. If you'll think about it for a minute, it should become intuitive. Here's why insurance is the world's best business: Insurance is the only business in the world that enjoys a positive cost of capital.

"In every other business, companies must pay for capital. They borrow through loans. They raise equity (and must pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations. Often, it's the dominant consideration. But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it."

Insurance companies collect premiums before paying out claims. These firms must maintain strict underwriting standards. If they underwrite excessive risk, they will likely end up paying out more in claims than they collect in premiums. Again from the June 18 Digest...

Insurance companies take the premiums they've collected and they invest that capital in a range of financial assets. Assume, just for the sake of argument, that they earn 10% each year on their premiums. (That is, they make 10% on their underwriting.) And assume they invest only in the S&P 500... What do you think the average return on their assets will be each year? In this hypothetical example, their return would be 10% plus whatever the S&P 500 returned.

In reality, of course, few insurance companies can make such a large underwriting return. And few insurance companies invest a large percentage of their portfolio in stocks. Most stick to fixed income to make sure they can always pay claims. But the point remains valid. By compounding underwriting profits over time, year after year, into the financial markets, insurance companies can produce very high returns.

And here's the best part: Insurance companies don't really own most of the money they're investing. They invest the "float" they hold on behalf of their policyholders. Float is the money they've received in premiums, but haven't paid out yet. Underwritten appropriately, this is a risk-free way to leverage their investments and can result in astronomical returns on equity over time.

Today, one of our favorite insurance companies – W.R. Berkley (WRB) – hit a new high. W.R. Berkley is one of the best underwriters in the industry. Porter recommended shares back in the March 2012 issue of his Investment Advisory...

W.R. Berkley's 10-year average combined ratio (a standard term in the industry that refers to underwriting profit) is 94%. Anything less than 100 means it collected more in premium than it paid out in claims. Over the last five years (beginning in 2007), W.R. Berkley's combined ratios have been 88.1%, 93.1%, 94.2%, 94.5%, and 98.3%.

I can't stress this enough... nothing is more important to the value of an insurance company than underwriting discipline. It is the key to the entire model. With it, vast wealth will accrue. Without it, all is quickly lost. The thing I admire most about W.R. Berkley is its proven underwriting discipline.

Stansberry's Investment Advisory subscribers are up 44% since buying in March 2012...

W.R. Berkley isn't the only stock in our portfolio hitting new highs lately...

While Coca-Cola fell 6% yesterday after a disappointing earnings announcement, another beverage company has been ringing up consecutive new highs: National Beverage (FIZZ).

National Beverage is the maker of sparkling-water brand LaCroix, soda brands Faygo and Shasta, and generic grocery-store soda brands.

The company's soda business steadily produces $650 million in annual sales. That number grows 2%-4% annually as National Beverage passes cost increases on to its customers.

But the real crown jewel in National Beverage's business is its LaCroix sparkling-water brand.

By sales, LaCroix is the fifth-most-popular brand of "sparkling water" in America.

Research firm Statista says LaCroix accounts for 12% of National Beverage's current sales.

Sparkling water is incredibly simple. It's carbonated water with a splash of natural flavor. There's no secret formula.

But sparkling water is a high-margin (and growing) segment in the beverage industry. LaCroix's rivals are Sparkling ICE, Perrier, and San Pellegrino.

Porter and his research team recommended shares of National Beverage in the October issue of his Investment Advisory...

Not only is sparkling water where the margins are, it also happens to be the only water segment that is consistently growing. Sales of sparkling water rose 16% in 2013 and will be up another 12% in 2014. And that trend should continue as Americans gravitate toward healthier food and drink choices...

Coke and Pepsi have been unable to create a top-10 sparkling-water brand... and what the big brands need is growth... especially profitable growth.

At 12% of National Beverage's annual sales, LaCroix accounts for roughly $78 million in annual sales. If it maintains its current 19% growth rate, it will be generating more than $180 million in sales five years from now. With the rest of the business growing at 2%-4% a year... that would make National Beverage nearly a billion-dollar revenue company with double-digit profit margins.

Thanks in large part to LaCroix, National Beverage's net operating margins have expanded 62% in the last five years.

Plus, the company has a history of paying large special dividends to shareholders... and Porter and his team of analysts think National Beverage may pay a large special dividend again soon. Shares are up double digits in just a few weeks since their recommendation.

In addition to National Beverage, Porter's team recommended a stock set to benefit from "the single most important medical discovery of the past 40 years."

This pharmaceutical company is hoping its drug turns into the next blockbuster cancer drug... and that it becomes a cure for most types of cancers. As Porter and his team put it, "It's the best opportunity for investors in medical technology we've ever seen."

Plus, with some approvals from the Food & Drug Administration, this company's shares could double – or more – in the next few years. You can gain immediate access to this company's name with a subscription to Stansberry's Investment Advisory. Learn more here.

New 52-week highs (as of 10/21/14): CVS Health (CVS), National Beverage (FIZZ), Leggett & Platt (LEG), Altria (MO), and W.R. Berkley (WRB).

One S&A Short Report subscriber is enjoying the brand-new Direct Line app... and another reader argues that IBM isn't a World Dominator. E-mail us your comments on today's choppy market at feedback@stansberryresearch.com.

"Just a quick note to tell you what a GREAT new addition the two apps for the Direct Line are. They really make following [Jeff Clark's] thoughts and ideas about the market super easy! Thanks!" – Paid-up subscriber Mike

Goldsmith comment: Thanks for the note, Mike. We're glad you're enjoying the new app. S&A Short Report subscribers can download the Direct Line app on their iOS device by clicking here and their Android device by clicking here. We feel it's one of the best perks to being an S&A Short Report subscriber.

"I disagree with your recommendation of IBM and the term 'World Dominator' to describe this company. Left out of your commentary was that 10 quarters of declining revenue, financial engineering with stock buybacks and tax wizardry, employee layoffs, a mountain of debt, and a negative net worth when taking out 'goodwill', hardly sounds like a company to recommend, let alone a 'World Dominator.'" – Paid-up subscriber Dave S.

Goldsmith comment: Your points are well-taken. But IBM is still the largest IT-services company and the second-largest software company in the world. The company has raised its dividend every year for the last 18 years.

Extreme Value editor Dan Ferris – who recommended IBM shares in August 2012 – recently told subscribers why IBM has all the financial clues of a World Dominator...

IBM continues to gush free cash flow, reward shareholders through dividends and share repurchases, maintain a great balance sheet, generate consistent profit margins, and earn consistently high returns on equity.

Dan literally wrote the book on World Dominators. His Extreme Value "World Dominators" portfolio is up an average of 94% – IBM included – as of yesterday's close. So we'll trust his analysis on this one.

Regards,

Sean Goldsmith

October 22, 2014

How to guarantee the art you buy is real... and actually yours...

Yesterday, we heard from The Art Fund Association founding member and distinguished art lawyer Enrique Liberman, who discussed the most important thing you need before purchasing works of fine art.

In today's Digest Premium, he explains the steps to take to establish the authenticity of a piece of artwork... and how to ensure that you're the rightful owner...

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

How to guarantee the art you buy is real... and actually yours...

Editor's note: Yesterday, we heard from The Art Fund Association founding member and distinguished art lawyer Enrique Liberman, who discussed the most important thing you need before purchasing works of fine art. In today's Digest Premium, he explains the steps to take to establish the authenticity of a piece of artwork... and how to ensure that you're the rightful owner...

Before buying a work of art, you must diligently investigate two things... One, is the artwork authentic, and two, are you acquiring a valid and marketable title to the artwork?

There are a number of ways to do your due diligence and give yourself the comfort that you're actually buying what the seller is claiming that you are acquiring. If you're working with an experienced and trusted art advisor or acquiring the work from a reputable gallery, those are good signs.

For one, they have the market expertise and understand the works you're acquiring. And they have a reputation to protect in the art marketplace, so they are incentivized to stand behind the acquisition and help you in the event that an issue arises relating to its authenticity or title. These are not people who want to be known for selling fake works.

If you're buying art from auction houses that do their due diligence – like Sotheby's, Christie's, or Phillips – you can take general comfort in knowing that they are doing what's necessary to make sure they're selling authentic artworks.

As an additional benefit, when you're dealing with a major auction house in the U.S., there's a concept called "rescission," where if you can demonstrate that the work you bought at an auction was either fake or not as described in the sale materials within five years of your purchase, the auction house will often rescind the transaction and return your money.

When making sure that you are acquiring good and valid title to artworks you are buying, you want to see the prior bills of sale. You should also do your own research and check the artist's catalog raisonné – which generally depicts all of an artist's works during his lifetime.

If artwork was previously exhibited at a museum or gallery, you can look for stickers and address labels from the museum or gallery on the back of the artwork or its frame and review any exhibition catalogues prepared by the exhibiting institution. This will help you confirm that your artwork matches the photos and other identifying characteristics in the catalogue.

Art title insurance is also available to insure against problems in the chain of title that could affect your ownership of the artwork you are buying. ARIS offers such a title insurance and will issue policies that protect against third parties making a claim of ownership on your artwork. To be clear, ARIS does not guarantee the authenticity of the work (i.e. that it was created by the identified artist)... but it will insure that you will hold valid title to the artwork (whether authentic or not).

The dangers of defective titles are very real. Think about it this way... A thief can never transfer a good title to a work of art, even to a purchaser who has no knowledge of the previous theft. If the art was previously stolen and you are a good-faith purchaser, even years down the line, the original, rightful owner or his or her heirs can make a claim for – and take back – the artwork.

Other problematic situations can occur when a collector has previously promised an artwork to his or her heirs... or if a collector has pledged a piece of artwork as collateral for a loan or other accommodation prior to selling the work to you.

If a collector sells you artwork while he or she is in the midst of a messy divorce, you might also face claims by the spouse for fraudulent and unauthorized sales by the collector.

In all of these situations, buyers will have to deal with third-party claimants on their artworks. Accordingly, researching proper title is an important part of the acquisitions process for artworks.

– Enrique Liberman

Editor's note: You can learn more about Enrique and his art-focused law firm by clicking here.

How to guarantee the art you buy is real... and actually yours...

Yesterday, we heard from The Art Fund Association founding member and distinguished art lawyer Enrique Liberman, who discussed the most important thing you need before purchasing works of fine art.

In today's Digest Premium, he explains the steps to take to establish the authenticity of a piece of artwork... and how to ensure that you're the rightful owner...

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 07/21/2014

Stock	Symbol	Buy Date	Return	Publication	Editor
Prestige Brands	PBH	05/13/09	411.6%	Extreme Value	Ferris
Enterprise	EPD	10/15/08	316.2%	The 12% Letter	Dyson
Constellation Brands	STZ	06/02/11	310.5%	Extreme Value	Ferris
Ultra Health Care	RXL	03/17/11	268.2%	True Wealth	Sjuggerud
Ultra Health Care	RXL	01/04/12	222.2%	True Wealth Sys	Sjuggerud
Altria	MO	11/19/08	210.2%	The 12% Letter	Dyson
Targa Resources	TRGP	12/13/12	187.6%	SIA	Stansberry
Blackstone Group	BX	11/15/12	179.1%	True Wealth	Sjuggerud
McDonald's	MCD	11/28/06	178.1%	The 12% Letter	Dyson
Automatic Data Proc	ADP	10/09/08	158.2%	Extreme Value	Ferris

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

3	Extreme Value	Ferris
3	The 12% Letter	Dyson
2	True Wealth	Sjuggerud
1	True Wealth Sys	Sjuggerud
1	SIA	Stansberry