THE S&A DIGEST

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

As of 07/05/2013

The Home Depot paradox… keep an eye on WYNN… the real reason behind our Alliance offers… more hate mail

"Housing-related issues came faster and deeper than we thought… and we think there is deeper to go," said Robert Nardelli, chief executive of Home Depot (HD). Same-store sales were down more than 5%. Home Depot cut its 2007 earnings-per-share growth forecast by more than half. Logically, you might have expected Home Depot shares to drop like a stone on Mr. Nardelli’s forecast and the company’s poor same-store results. Yet on Monday, our quant analyst, Ian Davis, told us to buy Home Depot because, paradoxically, housing stocks and home-improvement retailer stocks perform best when there’s a supply glut of homes.

What happened? Was Ian right… or would common sense prevail?

Chalk one up for the quant. Against all reason, Home Depot’s stock rallied by more than $1.50 yesterday, up more than 4% on the day. And that’s not all… Last week, Ian told us to buy Toll Brothers (TOL) on the same basis. Yesterday D.R. Horton (DHI), one of the country’s largest homebuilders (and the most recent recommendation of one of our most popular advisory letters), said profits fell by 50%. And yet… its stock jumped 8% on the day. Ian’s Toll Brothers was up almost 5%.

It’s one of the hardest lessons for new investors to learn: Investment performance is negatively correlated with earnings growth. The time to buy most sectors is when results are terrible, when the forecast is worse, when investors are terrified, and when stocks are very, very cheap. D.R. Horton has been trading for about five years’ worth of pretax, cash earnings. Even if its profits fall in half from the peak and never recover, it’s still a very profitable business (return on equity is more than 25%) trading at a very low price.

Keep your eye on shares of Wynn Resorts (WYNN). The company announced it will pay a big special dividend ($6 per share, $660 million) on December 4 to shareholders of record on November 23. Financial theory says it’s impossible for investors to "grab" the dividend by buying the stock now. The market cap should decline by exactly the same amount ($660 million) as the dividend. But… we’ve studied dozens of these situations over the last five years… and, in every case except one, the stocks reached a new high within six months, suggesting that it is possible to "grab" dividends safely. Why? Because managements are always loath to distribute assets to shareholders. Any cash they pay out must truly be "excess" cash, money that’s not required to generate future profits. As such, distributing excess cash shouldn’t diminish the intrinsic value of the company.

"You know, in a few months or a few years, we’ll look back on this situation and this economic data… and we’ll say, ‘how did we miss this? It was all right there; it was obvious.’" I was speaking to our managing editor, Brian Hunt, on the likelihood of a recession. As I reported yesterday, Jim Rogers says he thinks a recession (negative GDP growth) already has begun in America… and if it hasn’t, he expects one to start next year. You can count me in the "expecting economic weakness" crowd. Since September 11, 2001, our entire economy has been driven by the housing market and kept afloat by the mortgage market. With the housing market frozen and the mortgage industry finally clamping down on lending practices, the U.S. consumer must finally roll over.

And that’s what we’re seeing in the data. Retail sales have dropped two months in a row, down 0.8% in September and down again 0.2% in October. If you read about these numbers in the newspapers, you also read commentary that these figures are nothing to worry about – just the result of falling gas prices. But here’s an inconvenient fact: Core inflation, which excludes energy costs, fell by 0.9% last month, the biggest drop in 13 years. And here’s another inconvenient thought… since gas prices fell sharply, shouldn’t other retail sales increase by at least an equal amount as the consumer has more to spend?

Dan Ferris with this update on last week’s Value Investing Congress: "Lately, I’ve become more willing to embrace slightly higher earnings multiple valuations. Our decision to stick with Janus Capital Group is evidence of this. In fact, we were somewhat vindicated on the first day of the Value Investing Congress. Host Whitney Tilson said asset-management firms are generally worth 4% of assets under management. At that rate, Janus is worth about $28 per share, though it’s selling for less than $20 today…"

Yes, there’s more mail. And yes, we’ll share it with you. Even the ugly stuff. But, fair’s fair. You’ve got to send us something to chew on, too. Why not today? Send it here: feedback@stansberryresearch.com.

Paid-up British subscriber Matt Willcocks suspects our Alliance offer is merely a ploy to trap our dear readers into a lifetime of antagonism: "…if the teeth gnashing and sack cloth tearing brigade are this upset now, [I’ll be] very amused to see the reaction, and your newsletters, when you’ve got more of your customers signed up to the lifetime offer. Actually, wonder if this was the real reason for the Alliance. ‘Thinking about canceling your sub? Well, by all means, sir. And you can rest assured we’ll take good care of the three years’ worth of money you passed on.’"

Porter Comment: That’s so cynical… I wish I’d thought of it. But, in truth, our Alliance offers are genuinely win-win propositions. We get long-term subscribers, giving our business up-front profits and long-lived customer relationships. You get our best work over years and years, for a very low average cost, allowing you to pick and choose carefully among our ideas. And if I bother you that much… you can always stop reading the Digest.

"I am a busy working woman and have limited time to read the newsletters, free or not, that I get. I have a tendency to not read yours because there is so much preaching and often very little substance…" complains paid-up subscriber Janice Liane.

I bet paid-up subscriber Tom Popplewell thinks he’s got me stumped with this one… "Perhaps you can answer the question I’ve heard often but I’ve never heard answered. If investment letter writers are so good at picking winning investments, why haven’t they already made their millions and retired?"

Porter Comment: Who says they haven’t? All of the good writers I know have made millions in the market, for clients or for themselves, dozens and dozens of times. But why would anyone want to retire from a job that’s this intellectually stimulating and this much fun? (Not to mention all the fan mail…) More directly to your point, Jeff Clark and Steve Sjuggerud are both former professional money managers. I’ve been offered the job many times. I’ve always declined… Managing money is a different business than researching investments. You’ve got to hold your client’s hand, night and day. You’ve got to raise money. You’ve got to deal with an army of lawyers and accountants. What we love to do is research investment ideas. Newsletters allow us to focus on that, to the exclusion of almost everything else.

Paid-up subscriber Dick S. wants to see our warts… "I recently lost over $150,000 on your Canadian trust recommendations. I think you should add to your ‘Hall of Fame’ winners a list of ‘Hall of Shame’ losers…. just to show that no one is perfect."

Porter Comment: You know, I think that’s a great idea, actually. I think we should publish a special report on our worst investment mistakes… to show how things can go wrong.

That’s enough punches for one day. Let’s see… did we get any "hugs" from our friends, the drunk, the gullible… or our relatives?

Paid-up subscriber Robert Rush must be slurring his words… "After reading those letters I’m hoping you have a thick skin and that your wife and kids love you."

And here’s a keen insight from paid-up subscriber Charles Devalon: "I enjoy reading the sarcastic comments from your disgruntled readers. They tell me more about them than about you."

Good investing,

Porter Stansberry

November 15, 2006

Cockeysville, Maryland

P.S. Forgive me if I can’t write tomorrow or Friday… I’m on my way to New Orleans to give three presentations at the New Orleans Investment Conference, the biggest investment conference I’ll attend this year. I’m also hosting a private dinner in Doug Casey’s honor on Thursday night, prior to his big debate with Newt Gingrich. I’ll write up all the details for you when I get back… and I’ll send what I can from the meeting.

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