The S&A Digest: An Oil Company for Long-Term China Bulls

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

As of 06/20/2013

Dan was right on Lehman... Jeff was right on the refiners... Buy a house, get one free... We risk publishing "Soros"... Losing her shirt in Bioshaft... Ian calls a top...

We wrote it, did you short it?

I suspect that if it were more transparent in its reporting and more honest about the fair values, it would have reported much larger writedowns. As of its latest balance sheet, Lehman Brothers reported $786 billion of assets and $21.8 billion of equity. I expect a wipeout of anywhere between 20% and 50% of Lehman's equity over the next 12 months. One way or another, the $4 billion Lehman raised this month will prove to be far less than adequate.

– Dan Ferris, Extreme Value, April 2008

The front page of today's Wall Street Journal reads, "Losses Push Lehman To Weigh Raising New Capital." On June 16 Lehman (LEH) will likely announce a $300 million loss, its first quarterly loss since going public. The company needs to raise $3 billion to $4 billion to fortify its balance sheet. Shares are down about 9% today.

Lehman Brothers is Dan's first ever short sale in Extreme Value, and it's a blockbuster. His readers are up 23% on the recommendation, and Dan thinks more losses are on the way for Lehman.

"If I could recommend only one speculative trade in the entire stock market right now, this is it." That's how Jeff Clark started his May 7 S&A Short Report update.

Jeff noticed that while all oil stocks were soaring, oil refiners were in the dumps. Oil prices kept rising, and gas prices weren't keeping pace, hurting refiners' margins. But Jeff noted it's "a temporary condition. When the price of oil starts to fall – and it will fall just as the price of gold fell – the price of gasoline will stay the same... And the refiners will pocket the difference."

He recommended buying Tesoro June 25 calls, and he was exactly right. Tesoro shares have jumped 15% since then, but Jeff's options are up more than 70% in less than one month.

So far this year, Jeff has made 87% shorting a tech company, 65% selling UltraShort Oil & Gas (DUG) puts, and several more double-digit gains. If you read Short Report, you're making lots of money. In fact, because this service is performing so well, we're going to double the price on June 10... But Digest readers can get in before the hike. Click here to learn how.

This has got to be a housing bottom of some sort... San Diego-based Michael Crews Development is offering "buy one get one free" homes. If you buy one Royal View Estate home in San Pasqual Valley starting at $1.6 million, you get a 2,000 square foot home in Escondido for free. According to one Michael Crews employee, "It's our way of dealing with current market conditions to move some inventory... It's a straight-up legit deal; no prices have been increased, there are no hidden costs."

Steve Sjuggerud agrees the housing bust is nearing its end. Read about it in today's DailyWealth.

Billionaire hedge-fund manager George Soros is expected to tell U.S. lawmakers today that "a bubble in the making" is underway in oil and other commodities. Soros says institutions buying commodity index funds have driven prices to exorbitant levels. From a draft of today's speech:

I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987. In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.

Every time we publish the name "Soros," we get dozens of crazed, angry e-mails alleging we're a part of Soros' global conspiracy to take over the world. So please note: We are not endorsing Soros' view... We just think it's an interesting opinion worth considering. And we are not endorsing any of Soros' politics... We report on his activities only because he is one of the wealthiest and most successful investors of the last 40 years.

New highs: Comstock Resources (CRK), Keyera Facilities (KEY-UN.TO), International Coal Group (ICO), Anheuser-Busch (BUD).

In the mailbag... A subscriber proudly describes why he's willing to renege on his mortgage. Another explains why she's going to hold on to a penny stock she knows is probably a fraud. Reading these kinds of comments is like watching a car wreck. It's terrible... but you can't turn away. Send us your feedback here: feedback@stansberryresearch.com.

"You asked what has happened to the America you knew – hard work, etc, etc. What has happened is that many of us that have busted our tails for the last 30-40 years have just gotten fed up with being screwed by credit card companies that charge ridiculous fees for anything they perceive may have happened (true or not), credit agencies that have no obligation to get it right, mortgage companies that are quick to make ridiculous loans and then claim the borrowers were the fools for not seeing the bubble, CEO's that run companies into the ground and then collect a bonus while the dividends are cut, ever decreasing buying power, ever decreasing benefits, and a Government that is totally unresponsive to the needs of our country and its citizens. I make a good living and have money to invest but if something happens and I have to walk away from a mortgage to protect my interests you can bet I will." – Paid-up subscriber David Freeman

Porter comment: Here, dear readers, we have a classic example of the "New American" ethic. Rugged individualism and "my word is bond" morality have been replaced by "it is always someone else's fault." And so a nation that used to measure itself on outcomes and results now takes pride in excuses.

"There are a few of us still out here! My wife and I have worked hard to carry no mortgage or credit card debt. Yes, we use our credit cards, but pay them off religiously every month and earn miles and bonuses for whatever. We have sent our child to private school, at great expense to our selves and live very frugally. I like to say my wife is the greatest shopper in the world, taking every advantage of coupons, Costco sales events and rebates. Our vehicles are paid for and I keep them in showroom shape... We have already taken advantage of our States college funding program for his college expenses and have studiously put into our savings, Ira's and investments. There are still a few of us who are sickened by the handouts and taxes for every social ill available. Don't get me started when the S&A Digest tells of another Government bail-out of a poorly (ineptly) run company. Count us out on any handouts, we are self sufficient and proud of it. Yes there are still a few of us hard working, saving, independent, self reliant types still out here and I hope you get an earful from all of them. By the way, after discovering Dr. Sugg, our self directed, discount on-line broker retirement funds are doing quite nicely, Thank you very much! So Porter, my wife asked me what I wanted for Father's Day? I said if the budget can tolerate it, I would like another investment letter subscription! How about the link to your publication? You better offer a good discount and lots of additional investment information publications too sweeten the deal." – Paid-up subscriber Steve Russo

Porter comment: Steve, I'd be proud to have you as a reader. Here's a link to our latest offer for PSIA.

"Thanks for quoting Tweedy & Brown's reasoned view of stock market volatility. As a new subscriber and first-time trader, I read S&A reports and studied your book for a few months before opening my first online trading account, a Roth IRA with Sharebuilder. I chose my favorite stocks, allocating my fractional shares of approximately fifty dollars each, more and less, among oil, gold, 'Chindia' and blue chip stocks yielding dividends. So far so good...

"Then I diverged from your advice, which has been the cause of my recent unease. Perhaps I was feeling too financially prudent. Rather than congratulating myself on my discipline, at the last moment I succumbed to the promise of potential riches in a promo for a newsletter that hyped investing in a small cap that appealed to me on other levels than sheer greed, as it was a sustainable water treatment technology that also supported rebuilding infrastructure in Baghdad. With visions of becoming the next Hetty Green, contrarian me pulled 1/2 K from savings and bought 200 shares of Bioshaft (blissfully in denial of how much that name suggests the hydraulics of a Pump and Dump), at that time only $2.50 per share. By the end of the first week my confidence in the wisdom of my bold initiative was confirmed: Unbelievably, the price per share had shot up to over three dollars! What a propitious start to my relatively late start in investing! (I'm three years from retirement, and only if my mortgages allow). But what goes up must come down – on Thursday I bought 200 more shares after it dropped to $1.90, and then this Monday morning it was down 27% to $1.60.

"I'd been feeling like the proverbial pig to the slaughter until I read your article –Thanks for the reassurance. Given its volatility as a new small cap, I guess I won't apply a trailing stop and will hang on for the duration of the roller coaster ride to see if it proves to be the good long term investment I originally envisioned. And also hope my socially responsible over-allocation in foreign water treatment doesn't all go down the toilet! My daughter, who was stationed in Iraq, said the troops had to take turn burning and stirring their own body wastes..." – Paid-up subscriber Beverly Eddy

Porter comment: Oh my... Tweedy, Browne was talking about holding on to blue-chip financial firms its analysts have pored over. Tweedy is one of the finest investment firms in the world and one of the few firms that's well-equipped to take a risk like this... The situation you describe has nothing in common with Tweedy, Browne's investment in large-cap financial stocks. You're comparing the world's finest racehorses to cancer-riddled burros on their way to the glue factory.

Let's be clear about something. What you're doing with this stock isn't investing of any kind: You know nothing about this business, you've totally ignored any sensible allocation guidelines, and you've utterly abandoned your risk-management discipline. When you make decisions like this, you're gambling. And most of the time when you gamble, you lose all of your money. In this case, I'm 100% sure you're going to lose all of your money. It took me less than five minutes to scan the company's SEC documents, which contain all kinds of major red flags...

Regards,

Porter Stansberry

Baltimore, Maryland

June 3, 2008

An Oil Company for Long-Term China Bulls

By Ian Davis

Between 2006 and late 2007, a torrent of money swept through China... leaving behind all the telltale signs of an investment bubble. The market cap of the Chinese stock exchanges increased ninefold from January 2006 to December 2007.

PetroChina (PTR), China's integrated oil and gas company, won notoriety for becoming the world's first company to boast a trillion-dollar market cap, twice the value of ExxonMobil. Never mind that it had only one quarter of Exxon's reserves.

First-time Chinese investors were immune to reason. They tapped into savings accounts and, in some cases, even mortgaged homes to buy stocks. The better Chinese stocks performed, the more Chinese investors poured in... And the more Chinese investors poured in, the better the Chinese stocks performed. It was a positive-feedback loop. The torrent of new money seemed infinite.

But there's one guy you can count on to jump ship at the right time... Warren Buffett.

After spending $488 million to acquire a position in PetroChina in 2002 and 2003, Buffett dumped the stock in late 2007 with a total gain of about $3.5 billion. He sold because the value of PetroChina had grown far above his expectations.

(Buffett also mentioned the $1.2 billion in federal tax Berkshire paid on the gain could have funded all U.S. government spending – "defense, social security, you name it" – for roughly four hours.)

Following Buffett's lead, I wrote about PetroChina's ridiculous valuation in late 2007, advising S&A Digest readers to be wary of the euphoria.

Check out the following chart. It shows the valuation of PetroChina in comparison to ExxonMobil. And it shows what's happened to PetroChina since the publication of my first essay.

PetroChina's Valuations Return to Earth

As you can see, Buffett and I were correct.

The Chinese stock market began a downward spiral in November that may not even be over today. PetroChina in particular fell 56% between November 2007 and today.

But the stock price of PetroChina is finally back to reasonable levels. In fact, at around $144, it falls right in the middle of the pack as far as large integrated oil and gas companies are concerned. PetroChina now sells for 12.6 times earnings and 2.62 times book value, and it's yielding 3.47%.

Here are a couple of tables to compare. If you're interested in investing in oil companies, you may find them useful. The first shows the five cheapest integrated oil and gas companies in the world (I only looked at companies tradable in the U.S. with more than $1 billion in market cap). The second table shows the five most expensive integrated oil and gas companies.

As you can see, U.K. oil giant Royal Dutch Shell is the cheapest. It's also in an attractive slow-but-steady uptrend. It rose 6.7% in the last year.

At the bottom of the pack, you'll find Rosneft, a large Russian holding company that invests in oil and gas projects. Also down there is Suncor Energy, an oil and gas company that focuses on developing Canada's Athabasca oil sands.

Both of these expensive companies are also in uptrends. Rosneft is up 48.7% in the last year, and Suncor Energy is up 55.8%. However, these uptrends are so extreme, they're likely unsustainable. Given their valuations, I'd be leery of throwing new money at these stocks.

As for PetroChina, it's still not a screaming buy at its current valuations. However, it is now fairly valued for an oil company, and its stock price is showing signs of traction (up 12.7% since it bottomed in April). If you are a long-term China bull, PetroChina's worth a look.

Good investing,

Ian Davis

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame