The S&A Digest

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

As of 07/01/2013

How I lost $50k in options… Drilling rigs down… Pita-bread trader at NYSE… An insider's deal in London… Contrarian enough to buy Vonage?… Opening Day!

Subscribers, we have news you're sure to welcome…

On Monday, we'll give you a day off from The Digest. It's opening day in Baltimore. We'll bolt the door to the office and, along with our staff, make our way through the flotsam and the jetsam, past the rats and the drug dealers, down to Eutaw Street and the wondrous Camden Yards. We'll drink a beer to your health. And another to your wealth as we welcome spring the old-fashioned way.

Inside Strategist pick WCI Communities (WCI) urged shareholders to reject Carl Icahn's $22-a-share bid last night. Shares are currently trading at $21.99 in the after-hours market. Look for shares to jump higher as a new bidder may enter the ring. The board hinted that Icahn has rivals, stating, "Credible potential buyers have shown interest in the company."

The number of U.S. rigs drilling for oil and natural gas fell by 46, or 2.4%, to 1,852, according to a weekly update issued by Baker Hughes. The number of offshore rigs increased by two to 75. The total rig count is 147 units higher than a year ago.

How contrarian are you? A jury found Vonage (VG) guilty of infringing three of Verizon's patents. While Vonage appeals the ruling, the judge has ordered the company to stop using Verizon's technology (which would shut down the service) for any new customers. A lawyer for Vonage said the ruling is like "a bullet to the head" for the company. The ruling came on Friday, while the market was closed. On Monday, Vonage stock – which is already down to $3.30 from its IPO price of $17 – should tank even more. The company's market cap is now $500 million. It has $300 million in cash and has been losing about $40 million per quarter on operations (mostly because of heavy marketing expenses – $100 million per quarter – to sign up new customers). Citigroup, which brought the company public, now rates the stock a "sell" – something that almost never happens.

Before you decide to speculate… Here's something you should know. Vonage's founder and chairman, Jeff Citron, paid a $22.5 million fine to settle "allegations" that he used SOES (small order execution systems) to egregiously rip off small investors while he was the head of Datek Online. Says the SEC: "At the time, National Association of Securities Dealers, Inc. rules restricted use of the SOES system to small retail customer orders and prohibited broker dealers from using SOES to trade for their own accounts. By fraudulent means… Citron used the SOES system to execute millions of proprietary trades, resulting in tens of millions of dollars in illegal profits."

Citron was sanctioned by the NASD and, as part of his settlement with the SEC, is barred from the securities industry. Mmmnnn… Not trustworthy enough to deal stocks, but still reputable enough to launch a national phone service? As Vonage says in its SEC filings, "There is a risk that some third parties will not do business with us… or that some customers may be wary of signing up for service with us as a result of allegations against Mr. Citron and his past SEC and NASD settlements" Interestingly, though, Citron hasn't sold any of his 42 million shares.

This week, we heard about a London-based merchant bank that, according to our sources in the industry, employs the best resource-sector bankers in the world. These are the guys that really own the mines, the production, and the hedges of the world's gold, silver, and platinum producers. Some people are plugged into the resource market… but these guys are the market.

It's a tiny company (less than $250 million market cap, half of which is cash). And there's a trick to understanding the stock… It's not allowed to book its equity profits on its balance sheet. So the true enterprise value – only $60 million – is known only to a handful of insiders. Last year, this bank earned $19 million. So… you're buying the world's best resource merchant bank for about three times earnings. Its top competitor, Quest Capital, which has a U.S. listing, is valued at $400 million. Sound interesting? We thought so too. Next week, I'll tell you how it's about to break into the Chinese resource market, a move that will see its earnings grow by two or three times next year…

To fill the void left by departed floor traders, the NYSE installed new computer stands and flat-panel TVs. The remaining traders, upset by the loss of their colleagues due to heavy automation of the trading process, constructed a dummy trader, complete with jacket and tie, sporting a pita-bread face. When John Thain, CEO of NYSE, brought out EuroNext executives to the big floor to celebrate their merger, he was greeted by boos and the pita-bread trader, who was quickly removed.

New highs: Alexander & Baldwin (ALEX), Allegheny Tech (ATI), FLIR Systems (FLIR), Gabelli Dividend & Income Trust (GDV), KLA-Tencor (KLAC), Coca-Cola (KO), Kayne Anderson (KYN), Macquarie Global (MGU), Annaly (NLY), Nokia (NOK), POSCO (PKX), Silver Standard Resources (SSRI), Telstra (TLS).

And Friday's mail… There's no Easter spirit, no forgiveness, no understanding. Well, that's okay with us. You are the customer. You are always right. Let us know how we've let you down, here: feedback@stansberryresearch.com.

"On the day the market dropped 500 points, I owned 20 OEX puts. I sold them in the first 30 minutes of the day… Thinking I could outsmart the market, I bought more puts when the market began its current upswing. I was very cavalier and proceeded to watch my $50,000 drop to $9,000. With the jobs report spiking futures, I can imagine my OEX Apr 635 puts going to virtually worthless on Monday. I have lost the down payment for a house and have resigned myself to renting for the foreseeable future. I wasn't investing, but gambling. Gambling is a problem that has cost me before… The money goes away so much faster than it comes. I don't know why I felt like writing this to you – I know you would never recommend doing what I did. I have ruined my life temporarily, and I'll come back. I just hope I learned a lesson. Perhaps you could find something in my story to pass on to others. Thank you for your newsletter." – Paid-up subscriber "Greg T"

Porter comment: I've long feared that some subscribers use our letters (particularly our options advice) to further their addictions to gambling. This has always made me very uncomfortable. I love finance and following the markets because, to me, it's a giant intellectual game. It's like playing chess against millions of people at the same time. Of course, I like making money with my own account, but I actually get more enjoyment from being right about my research – even though I'm not allowed to invest in what I write about.

For me, the excitement comes from trying to win the game. In fact, I enjoy finding "no risk" situations the most, because there's nothing more pleasurable than knowing you can't lose. Thus, it is difficult for me to understand the compulsion to gamble… but I know it must be a factor in many of the situations I'm told about by my readers. If you think a desire to gamble is hurting your investing, a good place to start learning about how to manage those impulses is to read Van Tharp's book about the psychology of investing – Trade Your Way to Financial Freedom. Dr. Tharp makes a very compelling case that an individual's psychology is at least as important to his investment success as the strategy that he follows.

"I notice that you periodically mention SSRI making new highs in The Digest. However, this is a stock that you recommended selling (after some nice gains). What's your rationale for continuing to post its performance, and do you now recommend owning it?" – Paid-up subscriber Paul Deepan

Porter comment: Matt Badiali recommended Silver Standard (SSRI) in his S&A Gold Report letter. And, because it is currently in one of our recommended portfolios, we track the new highs in these pages. (I recommended selling SSRI when it announced it would move into production, after years of simply being a silver "hoarder." That was about 50% ago, as the stock has continued to rally strongly… much to my chagrin.)

"I find it disappointing that you only publish your top gainers. It would be useful to see the total record for each of your newsletters. I suggest that you look at the Motley Fool newsletters and how they support their members." – Paid-up subscriber Stanley Levine

Porter comment: We review the performance of each newsletter at the end of the year. Go look at our December 27, 2006 Digest. You'll find it in the Digest archive on our website… if you're not too busy on the Motley Fool website, that is.

"Just curious… what's with all the obvious bad blood between you and the other divisions of Agora? It seems like you really, really, really don't like them. That's OK, I'm just curious why." – Paid-up subscriber James McGovern

Porter comment: Actually, we're friends with most of the other publishers and analysts inside the Agora Inc. holding company. We have a lot of respect for guys like Alex Green of the Oxford Club and Chris Mayer of Agora Financial – both top-notch analysts.

However, as separate businesses, we compete fiercely. And we've had problems in the past with people copying our work (word for word), using our designs, using product names that sound suspiciously similar to ours, and even folks using our actual trademarks to sell their newsletters online. Imagine clicking on a link about "Steve Sjuggerud" only to discover you've landed on a promotion for a totally different newsletter.

These problems aren't unique to us, of course. Weiss Research (not part of Agora) launched "Real Wealth" about a year after our True Wealth became a big success. Probably just a coincidence… I'm eager to see how long it will be before another publisher launches a knockoff of our Dividend Grabber. We should have a contest and see who can guess the knockoff product's name. Maybe True Dividend…

"Dr. Steve S. mentioned about stops and keeping track of them in his DailyWealth letter some time ago. To do it right involves a lot of work. He found a service called TRADE STOPS, which does an excellent job for a very reasonable fee. I have 3 brokerage accounts, they keep track of dividends, fees, you can set different % stops for each stock etc. etc." – Paid-up subscriber Corky Hall

Porter comment: Yes, that's right. Dr. Richard Smith, a mathematician and True Wealth subscriber, built the website with Steve's input. If you want help with your trailing stops, try www.tradestops.com.

"5 ft tall tank of nitrous oxide. Wow, what a party. Those kids sound very entrepreneurial to me. Baltimore sounds like a town for me… lots of dregs. I have always liked s--t and garbage most of my life. Made a fair amount of money on depressed real estate due to just such conditions." – Paid-up subscriber David

Porter comment: You won't find any more dregs and garbage than we've got in East Baltimore… except in West Baltimore.

"Hi Porter, I just wanted to ask if any of these penny stocks that were recommended are ever going to take off? There are no overnight wonders here. I know that they have been going up 6 cents here and the next day they go down. What happened to those overnight wonders that I thought we were going to receive? I know things sometime take time, but without getting any gains I can't get into anything else. P.S. You said that power shares were going to take off so I got PTE and they have been flatter then my mom's flapjacks. Do you have any answers? Not asking you to recommend anything, just like an answer." – Paid-up subscriber Steve Hunter

Porter comment: We're doing our best…

"Paid-up subscriber RRH yesterday asked about buying leap calls on DF rather than the underlying stock. Your curt reply was 'we don't recommend or follow options in these situations.' By 'we,' I presume you mean 'I' since you have an option expert on your staff named Jeff Clark, whose office, I presume, is a few short yards down the hall from yours. So, if you really wanted to give a more informed response to RRH (and all your other option enthusiasts), you could have asked Jeff." – Paid-up subscriber Al Venosa

Porter comment: As a subscriber, you're free to do whatever you'd like with our work… but it seems strange to ask for our help when you decide to specifically ignore our advice (which was to keep things simple and avoid options) in the first place, doesn't it?

Regards,

Porter Stansberry

Baltimore, Maryland

April 6, 2007

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