The S&A Digest: Long-Term Value in an Unpopular Stock

Ian gets on the Wal-Mart bandwagon... Puts on HMA...? A busted fishing trip... "Tarzan of the Sea"... Getty's "How To Be Rich"... Sjuggerud's tokyo ideas... What about 'global cooling'...?

Our resident "quant" Ian Davis gives Wal-Mart a closer look. You'll be surprised, I bet. See his essay (and his incredible charts) below.

"Have yew 'eard of zee 'Tarzan of zee Zea'? We find de shark and he go – jump – right on zee back," Fernan told us with a big smile.

I've been fishing in the Florida Keys every winter for about the last 10 years. The guides are always colorful – usually Florida rednecks with strong views about knots, tides, the location of tarpon, and Haitian immigration. This year, we were treated to something altogether different: A French-Canadian redneck. I could hardly understand his patois – a mix between French and Florida Cracker. But, if I heard him correctly, he told me that he'd been taking around a man who would attract big sharks to the boat... and then film himself jumping on top of them. He hoped to get himself on the Discovery Channel as the "Tarzan of the Sea." As though it was a surprise, Fernan said, "He get bit too... here (pointing to his crotch)."

With the exception of the colorful Fernan, our fishing trip was a bust. My laptop broke. Little Palm Island's Internet and cell phone service went out. And we arrived hours before the worst cold front of the year. After two hours of fishing, it was raining so hard we couldn't see 50 yards in any direction. Later, it was so windy the National Weather Service issued a small craft advisory, even in the backcountry, where the water is only three- or four-feet deep at high tide. Blown out, we came home two days early. Why did we even bother? Because in the two hours we fished, Fernan put us in the middle of three huge schools of tarpon, the most elusive and beautiful fish in the world. I hooked into one... but it got away. There's always next year...

If you want to go fishing in the Keys, for first-timers I recommend either the Cheeca Lodge or Little Palm Island. These are both very nice places that can take care of everything for you – meals, guides, and cooking the grouper you catch. If you want to do it yourself, you can find lots of cheap motels throughout the Keys. The backcountry guides at Bud n' Mary's marina are the best in the Keys. Ask for Ted Wilson, or simply call him directly. Ted is the best guide I've ever had down there. If you use him, be sure and tell him that you heard about him from me – he doesn't believe anyone reads my letters.

On my trip, I re-read J. Paul Getty's classic memoir of wealth, How To Be Rich. At the time he wrote the book (as a series of articles in Playboy) in the early 1960s, Getty was the richest man in the world. He got rich as a wildcat oil driller. But he became wealthy by buying up common stocks and trophy real estate during the Great Depression. For example, he bought the Pierre Hotel in New York City in 1938 for $2.35 million, less than one-fourth of what it cost to build the hotel nine years earlier. What I like about the book – and why I re-read it every few years – is the striking dichotomy between how Getty actually got rich and the strategies employed by (and recommended to) investors today. Getty, in his lifetime, only bought three or four stocks (including Tidewater and Skelly Oil)... and kept buying them until he controlled the companies.

"That's fine, Porter," you're probably saying, "but where in the world are today's real estate bargains, like the Pierre for $2.35 million?" Not in Miami. I was there expecting to find bargains... but it's going to take years and years for that market to wash out. Everyone still expects to sell his condo for more than he paid for it. And new buildings are still breaking ground, almost every day. On the other hand, Sjuggerud was in Japan last week. He told me that the second-home market in Japan has been dead for 20 years. Commercial properties are one-tenth the price of London's and one-fifth the price of New York's. Sjug is working on three investment ideas... you'll see them soon.

Microsoft's new Vista operating system goes on sale tonight.

Today, PSIA pick Verizon announced fourth-quarter earnings of $1.03 billion, down nearly 40% from fourth quarter 2005. While revenues were higher, Verizon posted smaller earnings because of a $541 million charge due to the sale of its Dominican Republic operations, and further charges from the sale of its telephone book and online directory business. Not including the tax-related charges, Verizon earnings were $0.62 per share, beating estimates of $0.61. Share prices were up 0.6% in intraday trading.

No, there's no such thing as a free lunch. We have received many – dozens, if not hundreds – of e-mails about buying puts on the HMA special dividend situation. (The ex-dividend date, by the way, is February 23, 2007.) As you know, when a $20 stock pays a $10 dividend, you can expect the share price to fall by $10. According to our options expert, Jeff Clark, "Special dividends are treated like stock splits for options – specifically, the strike price is reduced by the amount of the dividend. If a $100 stock splits 2:1, then a holder of one call option at $100 strike price will now own two call options at a $50 strike price. So the aggregate amount of the position remains the same (100 shares at $100 is the same as 200 shares at $50)."

Please excuse a brief personal note. Today is my mother's birthday. Mom, it's amazing you survived my childhood. God bless you. And happy birthday.

New highs: Plum Creek (PCL).

And now... our favorite "part of the movie," the mail bag. Send your questions, comments and recriminations to: feedback@stansberryresearch.com. It is impossible for us to respond individually, but we read every single letter that's sent to us. We review the best (and the worst) letters below.

"Very interested to see my old friend Pete Churchouse profiled by Dr. Sjuggerud. I would not call Moonblue 2 a 'sailboat;' she's more of a sybaritic sailing yacht. Steve could ask Pete whether or not there was any pole dancing in the Main Saloon at the Moonblue Cocktail party in Phuket this year? I unfortunately missed it. 'Lord Churchouse' as he is known in certain circles is certainly the guy to listen to for Asian property. If Pete's on board I am into the Sjug Confidential Tokyo play first thing tomorrow." – Alliance subscriber Ian Dubin

"What's wrong with these people that complain about Porter's writings and comments? As far as I can see it is 'tongue in cheek' humor and an attempt to lessen the day-to-day stress, and NOT an investment advisory as such. That's what we want and get from the newsletters we pay for each year. Come on lighten up and smell the coffee and realize that The Digest is meant to lighten the mood and the moment. I, for one, look forward to The Digest each day."

– Subscriber John Gauthier

"I thought that you might be interested in the fact that there is a huge boycott against Ford for their blatant homosexual agenda. This could explain some of their financial problems." – Subscriber Kathleen

Porter Comment: What...?

"I'm old enough to remember the global consensus of scientific experts in the '70s: The earth was cooling at an alarming rate, and that we are headed into another Ice Age, unless we take drastic (and expensive) action right now! Thirty years later these same experts are saying that the Earth is warming, and drastic (and expensive) measures are required immediately. Why can't they make up their minds? And isn't this flip-flop reason enough to doubt their credibility?" – Subscriber Mark Diehl

"I've read these comments about there being no debate within the scientific community that global warming exists. That kind of blanket statement is as ignorant as the one that says global warming doesn't exist. There is a great deal of debate as to the CAUSES of global warming, with MANY climatologists coming down on the side of natural cycles and orbital resonances. We should all take care in getting the full story and not jumping on one or two out-of-context statements that fit with our pre-conceived notions." – Subscriber Gary Forsberg

Regards,

Porter Stansberry

Baltimore, Maryland

January 29, 2007

Long-Term Value in an Unpopular Stock

By Ian Davis

I spend most of my time scouring the globe for hated and cheap investments.

Over the past couple of months, I've looked at everything from Thailand and Asian automobile manufacturers to U.S. homebuilders. But sometimes a company doesn't need to be obscure or foreign for it to be a great investment...

Throughout all my searching, I've found that Wal-Mart (WMT) is one of the best buys in the world right now.

Wal-Mart's stock could go up by as much as 300% in the next couple of years. It is one of the most hated companies in the United States. In fact, it is so hated that the bad publicity surrounding Wal-Mart has extended beyond the Internet chat rooms and the 24-hour news networks and has found its way to Wall Street, where the stock is now trading at some of the lowest valuations in its 35-year history.

- Wal-Mart is still 31.6% below its all-time high, which occurred more than seven years ago.

- Wal-Mart's valuations are at a 34% discount to its historic medians.

- Wal-Mart has had a lot of bad publicity, resulting in bad investor sentiment.

BULLISH INDICATORS:

1. Sentiment: Rarely has a company received as much bad publicity as Wal-Mart. Wal-Mart's relentlessly low prices are responsible for putting countless small neighborhood stores out of business. Numerous claims of underpaid and overworked employees have emerged, all of which paint the picture of Wal-Mart being a heartless corporate machine.

2. Valuation: The last time Wal-Mart's stock was this inexpensive, the stock went up by about 400% over the following two years. The charts below demonstrate why now is the time to buy Wal-Mart. Buy when book value is less than four, as it is now. Likewise, Wal-Mart historically has performed well immediately after its P/E ratio decreased below 20 times.

CONCLUSION:

In a market that is increasingly expensive, Wal-Mart is one of the best value plays out there. If you are willing to hold a stock for two to three years, I don't think a return of 300% on Wal-Mart is unachievable. Furthermore, Wal-Mart is a fairly safe, low-volatility stock, with a proven track record of strong consistent growth.

Buy Wal-Mart (NYSE: WMT) below $52.44 and hold for the next one to three years, use a 20% trailing stop loss.

UPDATE ON PREVIOUS PICKS:

On November 6, I recommended Toll Brothers (TOL) at $28.05. The stock closed this Friday at $32.43, up 15.61% since its recommendation. This stock is still inexpensive and until it becomes expensive, our 20-month time-horizon is reached, or we are stopped out, this stock will continue to be a HOLD.

On November 13, I recommended Home Depot (HD) at $36.62. The stock closed this Friday at $39.94, up 9.07% since its recommendation. This stock was another play on the housing sector, though with the shorter-term timeframe of six months. Like Toll Brothers, this stock is still inexpensive and will remain a HOLD at this time.

My December 4 recommendation, Thai Fund Inc. (TTF) stopped out on January 9 at $9.27. I recommended the stock at $10.92, resulting in a 15.11% net loss on the trade.

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