The S&A Digest

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

As of 07/02/2013

Subprime blowup... Lear sells us out... Get a cheap TV Wednesday... The start of a financial mania... Black & Decker's new buyback plan... "Japanese phooey"... Even doctors don't like other doctors...

Signs of financial weakness: The combined market value of the eight major subprime lenders in the United States fell by $10 billion.

Lear – the auto-parts maker we recommended to you in these pages last month – has agreed to be acquired by Extreme Value pick American Real Estate Partners (ACP) for $5.3 billion – or $36 per share. ACP, an investment vehicle of Carl Icahn, is getting an absolute steal...

Dan Ferris, who writes our deep-value newsletter, Extreme Value, says of the deal and Lear's managers: "What a bunch of idiots. Lear is worth at least mid-$40s, even if Pzena [an activist investment group and a major Lear shareholder] is wrong about earnings. If it's right, Icahn's getting it for nine times the net income. And there's only one other company with a sizeable chunk of this market. It's something, isn't it? AML [an Extreme Value recommendation that Morgan Stanley bought] goes for $37.75. Fairmont goes private for $45. Levitt merges at $14. And now Lear for $36... Sometimes I think managers get tired of dealing with offers and negative attention, so they say, 'Screw it, let's just take this thing private.' The CEO of Freescale [a semiconductor company that recently went private] was in the press recently saying how nice it was to have time to actually do his job, and not have to give away profitability information to competitors."

Need a cheap flat-screen TV? Circuit City, the No. 2 electronics retailer behind Best Buy, is closing 69 stores in the U.S. and Canada. The company quoted gross margin pressure from lower prices on flat-panel TVs as a large reason for its troubles. The closings represent nearly 5% of Circuit City's stores. The company will not announce which stores it is shuttering, but keep your eyes open. The targeted stores will close on Monday and reopen Wednesday for a major clearance sale.

The Fortress Hedge Fund IPO went off today without a hitch – raising $637 million and valuing the business at $7 billion. The IPO was heavily oversubscribed. The market cap of the IPO prices this hedge fund operator at 17 times earnings, which is an extremely rich earnings multiple. Compared to Goldman Sachs (which trades at 10 times earnings), Fortress is extremely expensive.

Wall Street types are saying this means the two other publicly traded hedge funds – Goldman (GS) and Sears Holdings (SHLD) – should go up substantially. That will probably happen. And in the short term, the Fortress IPO is certainly bullish for financial firms. In fact, it creates the potential for a real mania here. Consider: Hedge funds go public, raising huge amounts of capital. Then they can invest the capital in other hedge funds, before they go public... and make even more money. As long as the public keeps paying 17 times earnings for financial firms, the game will make a lot of Wall Street folks rich. The hard part? Making sure you've got a seat before the music stops.

The Wall Street Journal today reported that Steve Jobs is being investigated for his options backdating at Pixar. Disney, which purchased Pixar last year, is launching an internal investigation into the options granting that occurred while Jobs was chairman and chief executive of the company. This investigation will put Jobs back in the spotlight after he was cleared of any wrongdoing in regard to options backdating at Apple. I wrote about Jobs and Pixar in the October issue of my Investment Advisory. You can read an excerpt from that issue here... I stand by my previous statement: Steve Jobs is going to jail.

Ferris also brought this interesting situation to my attention: Black & Decker (BDK) just upped its share buyback to 5.2 million shares, about 7.7% of the float. It has reduced its share count by 3.6% a year, on average, since it peaked around 94 million in 1997. The cash dividend is now about 1.9%. So, if it keeps up the same pace of buybacks – easily doable, considering cash flow and buyback authorization – it'll really pay out something like 5.5% over the next two years or so.

Interested in knowing more about how much you're overpaying for health care? See "The Cost of a Long Life" in a chart published by researchers at the University of California, Santa Cruz

New highs: Akamai (AKAM), BG Group (BRG), Convergys (CVG), Silver Standard Resources (SSRI), Xcel Energy (XEL).

The Friday mailbag… more about doctors, "Japanese phooey"… and the generally low regard some of our subscribers have for our products. Send your complaints here: feedback@stansberryresearch.com. Please understand, we cannot reply directly to you. (For customer service, please give our customer service team a phone call at 1-888-261-2693.)

"As a pharmacist & pharmacy owner for 52 years I certainly agree with your evaluation – every word. When I was young & proud to be associated with the Pharmaceutical industry, the companies were held in high esteem – No longer, sad to say... My old friend used to tell me the biggest word in the English language is FREE. So grab that free health care with both hands ... It's worth what you pay for it!" – Paid-up subscriber Joe Brazill

"OK Porter! Now you've gone too far and you are in a heap of trouble with your comments about doctors. I'm a doctor (a very humble doctor) with an opinion. I'm mad as hell and I ain't going to take it anymore! I've been a doctor longer than you have been alive and my opinion is that you should leave the doctoring to those of us who have a degree. You should just stick to helping us make money, lots of money. You have a yucky day!" – Paid-up subscriber Jack Ford, MD

Porter Comment: I'm sure you're a wonderful person. And I meant no disrespect towards you personally. But even my friends who are doctors say they don't like other doctors...

"I am not sure why some of our kind (physicians) get so upset over a statistic that most physicians spend much of their lives in debt. The newer generation of doctors has $100K in student loan debt, unless Father M.D. or a rich uncle paid for their education. Medical school, like any higher education, costs more money now than it did 30 years ago. Conversely, physicians are not paid now nearly the amount they were paid 30 years ago. Although it is wonderful to rid oneself of the dreaded student loan debt, it typically does not happen overnight. And at less than 4%, locked-in-forever interest, what is the advantage when your investment plays are bringing in 30%? I for one, would rather carry debt on student loans 4% and get greater than 30% ROI."

– Paid-up subscriber Anonymous, M.D.

"While you are speaking to the sugarman you might mention to him that I am not satisfied with my membership in his alliance. Most of my available $$$ is in my two IRA accounts. I have no use for a number of his recommendations in [Sjuggerud] Confidential and would not have coughed up over $2K for his lifetime offer had I known what was coming month after month. Japanese real estate, phooey." – Paid-up subscriber RG

Porter Comment: We have found, consistently through the years, that the more unpopular an investment idea is with most of our subscribers, the better the likely returns. Contrarians in our audience take note.

"I want to thank you for your Digest and newsletters! I am a new subscriber and I have learned quite a bit already from reading your stuff and wish I had this stuff 10 years ago! In particular, you have me looking at different types of investments than I would have before, such as the unloved income trusts I bought recently with 15% and 10% dividends (chemicals and sugar)!! I don't think I ever got that much from a bank... lol. Your rules for investing have already helped save me from myself on one trade, too! Keep up the interesting newsletters, love reading this stuff. Tell Steve to get out of Japan and go up to Canada for some good skiing and give us the scoop on investments closer to home. Also, nobody talks about bonds, are they dead or are they unloved, too?" – Paid-up subscriber Peter Morgan

"You might add this to the signs of a market top: According the FT, folks in China – mainly Shanghai, I think – are PAWNING(!!) their apartments and putting the proceeds into stocks. Some margin rate." – Paid-up subscriber Bill Gray

Regards,

Porter Stansberry

Baltimore, Maryland

February 9, 2007

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