THE S&A DIGEST: Stocks To Struggle Over the Next Two Months

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

As of 07/05/2013

The S&A poker tournament… What’s really causing global warming… OPEC’s move out of the dollar… Buffett goes to Hooters… Sjug needs to study (according to a subscriber)… Ian’s report on market sentiment…

More signs of a top in stocks: Insider selling has reached its highest level in two years.

And if you’ve been buying foreign stocks to get away from the dollar… careful… the herd is heading your way. Last month, only $50 million in new capital was put to work in domestic mutual funds, according to CNBC, while foreign stock funds saw $700 million in new money. (Jeff Clark recently went long the dollar in Short Report.)

"Poor-tah, I will have to call." Tom Dyson, our group’s most experienced poker player, was "calling" my very large raise. In fact, to call required Tom to put up all of his remaining chips…

With only three players left at the table, I’d found myself in the most desirable position in the game. The two cards I’d been dealt were "the nuts" – they were unbeatable in this particular hand. I had a five and a seven. Why were these such good cards? Because a pair of sevens and a five had "flopped." As a result, I had a "full boat" (a full house) – the best possible combination given the five cards on the table. No matter what Tom had in his hand, he couldn’t beat me.

Tom didn’t suspect I had the nuts because most players would have folded a five/seven hand long before the flop. Why did I play the five/seven? I’ve found that to win the game, you’ve got to play odd hands at the end. That’s how you draw a good player into making a bad bet. The same thing is true in investing, by the way. You should always have most of your money on the best "cards"… while making one or two speculations each year that can really boost your returns.

"Sorry, Tom… hate to do this to you."

Knocking Tom out of the game left only Mike Cottet, our sales director, and me. At stake was the tournament pot, about $150.

The betting was big. I quickly won 20% of Mike’s chips, making very large bets early and then pushing all of my chips in after the flop. He kept folding. But I’d been bluffing. And finally he called one of my "all-in" raises.

"What do you have?" Mike asked.

I’d been dealt a pair of threes. I was hoping for a three in the flop. Then on Fourth Street. Then on the river…

My three never came. Most speculations don’t work either. "Pocket threes," I replied. "What do you got?"

"Pocket tens," Mike said.

It was the first time Mike Cottet had played in our poker game. And, as almost always happens… the first-time player won. Congratulations, Mike.

The board of directors of Berkshire Hathaway, Warren Buffett’s publicly traded holding company, posed for the annual Christmas-card photo at… Hooters in Kansas City, Kansas. You’ll recall that Microsoft founder Bill Gates sits on Buffett’s board. Together, they’re the two richest men in the world. And what did they want for Christmas? It’s nice to know we all have something in common.

A new United Nations report identifies cattle as the greatest threat to the world’s climate – ahead of cars. According to the 400-page "Livestock’s Long Shadow" report, the world’s 1.5 billion cattle and the methane they… uh… emit… are responsible for global warming, dead zones in the ocean, acid rain, etc. Cow flatulence generates 18% of all greenhouse gases – more than cars, planes, and all forms of transportation put together. Maybe Al Gore will make a new movie… A Very, Very Inconvenient Truth.

According to Reuters, Russia and members of OPEC have been dumping their dollar holdings, reducing their dollar exposure from 67% to 65% in the last quarter. They’ve been shifting their currency exposure into the euro, which moved up an identical 2% of their holdings, from 20% to 22%. This move, according to the Bank of International Settlement (BIS) explains the recent weakness in the dollar and the strength of both the sterling and the euro. Just wait until they start buying silver…

Speaking of a weak dollar… The post office needs to raise postage prices again. It’s asked for an 8.5% jump, the biggest price increase in 12 years. The price of a first-class postage stamp will rise to 42 cents in May from the current 39 cents. There’s talk of approving the increase, but then limiting future increases to the official inflation rate. Here’s a much better idea… Why not simply allow UPS and FedEx to use mailboxes (which should belong to the people who bought them)? The Post Office would be out of business in no time, and prices for letter delivery would fall.

Dan Ferris passed along a great Forbes interview from 10 years ago. Ken Fisher, one of the great investors of the last century, was being profiled, and Forbes asked, "What’s the single most important lesson to be learned from your career as an investor?"

Fisher: "It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow. It’s a small-win proposition. If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater. One of my early clients made a remark that, while it is factually correct, is completely unrealistic when he said, ‘Nobody ever went broke taking a profit…’ That is a totally ridiculous argument. Either this is a better investment than another one or a worse one. Getting your bait back is just a question of psychological comfort. It doesn’t have anything to do with whether it is the right move or not."

Great investors like Buffett, Fisher, and our own Dan Ferris tend to hold stocks far longer than the average investor – because they pick the right stock from the beginning. Likewise, when you’ve got genuine insights into great businesses, you realize how few of them trade at attractive prices at any given time. So, while most investors are very diversified, great investors tend to be very concentrated. A modern example? Whitney Tilson has 37% of his mutual fund in three stocks: McDonald’s, Berkshire Hathaway, and Microsoft. Because he’s a newsletter writer, Dan Ferris needs to find a new stock each month. But as he told his Extreme Value readers this month, there are only four stocks you need to own right now… and all four are in his current portfolio.

In June of this year, I wrote the following to readers of my newsletter, Porter Stansberry’s Investment Advisory:

"There are so many top-quality investments available right now at bargain-basement prices that you’d probably do better than almost any hedge fund just by buying that list of blue chips I mentioned above. And yet… when confronted with a can’t-miss opportunity to earn 15%-20% a year in the world’s safest stocks… most investors (and especially the wealthiest) have turned to bonds, bond hybrids, asset management firms, private equity, and, worst of all, hedge funds. Let the rich get soaked. Trust me: you’ll have great returns for years and years to come if you begin to purchase blue chip stocks now – especially if you continue to add to your positions over the next several years (assuming they stay cheap for a while, which they probably will)."

Today, The Wall Street Journal reports Goldman Sachs’ flagship hedge fund, the $10 billion Global Alpha Fund, is down 12 percent this year. Goldman is one of the largest hedge-fund managers in the world, with $30 billion under management. Many of the best managers have closed their funds this year, as too much money flooded into their strategies, making them unprofitable. This is the main dichotomy of Wall Street at work. The Street gets paid to manage money. What it wants is more and more dollars under management, damn the effect that has on returns.

So… how did my simple strategy of buying blue chips work out this year? Very well; up more than 20% on average. Lexmark, the first blue chip I recommended, is up 62%.

New Highs: Akamai (AKAM), Lexmark (LXK), McDonald’s (MCD), Ares Capital (ARCC), Macquarie Global (MGU), Alnylam (ALNY).

And… the mailbag. Send your vitriol, your praise and your mindless ramblings here: feedback@stansberryresearch.com.

"Looking at Extreme Value’s recommendation on Wal-Mart, Home Depot, etc., I have difficulty understanding why these are such good investments. I held Microsoft for 5 years and it did nothing except pay a dime+ dividend each year! Is the gain from these big caps to be had by selling at their highs and buying at their lows? The dividends don’t seem to add up that much. Am I missing something?" – Paid-up subscriber Bill Williamson

Porter comment: Yes… you are missing something. It’s called valuation, and it’s the whole secret to successful investing in blue-chip companies. Five years ago, Microsoft was trading for nearly seven years worth of sales and its P/E ratio was over 30. You bought in when it was very expensive.

"I signed up for your newsletter a few months ago as a beginning effort to learn how and what to invest in for my retirement. I am learning a little but a lot of it is going over my head. Can you recommend a book or Internet course I can take for beginners? I have never bought a stock and have only invested in rental property and real estate. (I don’t even know where the best place to buy stocks would be.)" – Paid-up subscriber Mark Rising

Porter comment: This is a great question. We’re working on an "investment basics" course, Investing the True Wealth Way, but we’re still a long way from completion. In the meantime, I’d recommend you start with The Wall Street Journal’s Guide to Understanding Money and Investing. I also would recommend A Random Walk Down Wall Street, by Burton G. Malkiel. While I don’t agree with all of Malkiel’s conclusions, his book serves as an excellent guide to all of the major investment strategies.

"Honestly, I could care less who splits fire wood. I have done that myself hundreds of times, probably more. And my son killed a deer last Saturday, so that is no big deal. The big deal I want to know about is what stock to buy and when, so I can profit. I don’t need to know hindsight but foresight, as your experts see it – thank you." – Paid-up subscriber Herman Cain

"I’m an Alliance subscriber and try to read all the newsletters and updates, sometimes I succeed sometimes I just can’t. But I always read the S&A Digest. It’s almost a perfect world – I’m making money (more than I ever did with any other newsletters, of which there were many) and I get to laugh. Of course, laughter is second in importance only to my family. Continue writing and I will continue to read and hopefully laugh." – Paid-up subscriber Hervé Kopciak

"…if Steve wants to avoid being too early/too late to asset bubbles and wants to play them (e.g. housing builder reco’s), then he needs to do a little reading up on ‘double tops’ and ‘double bottoms.’" – PSIA subscriber John Tepley

Porter comment: Yes… Dr. Sjuggerud needs to do a lot more reading about finance… he obviously has no idea what he’s doing.

Regards,

Porter Stansberry

Baltimore, Maryland

Stocks To Struggle Over the Next Two Months

By Ian Davis

During the previous two weeks, stocks in the S&P 500 have been advancing almost across the board, leading investors to be overly complacent and optimistic. When rallies reach this level of buying frenzy, a stock market correction almost always follows. Last time we had a situation like this, stocks fell by 5.3% and then 1.9% over the next two months.

It’s not just the breadth indicator that is signaling a market peak. Many sentiment indicators are also signaling that investors are overly bullish. For example, the Investors Intelligence bull ratio is also at a yearly high. This indicator takes a weekly poll of investment newsletter publishers and determines if the author is bullish, bearish, or neutral. The bull ratio reflects the percentage of the authors who are bullish. Many newsletter writers fall into the same trap as individual investors, becoming overly optimistic at times when the market is overextended and overly pessimistic during a correction.

Investor sentiment has recently reached an extreme not seen for over a year. Previously, when sentiment reached these extremes, the market performed poorly in the following months. By keeping an eye on investor sentiment, and avoiding large stock purchases at times when the market is approaching a short-term correction, you can increase your returns.

Update on Previous Picks

On November 6, I recommended Toll Brothers (TOL) at $28.05. The stock closed this Friday at $31.30, up 11.6%, although it is currently 6.5% below its recent high of $33.46. The reasons for this trade have not changed. The sector is still cheap, hated, and in an uptrend. Therefore, the recommendation remains a HOLD until the conditions that prompted this purchase no longer exist, or the stock falls below a 20% trailing stop loss. Currently, the stock would need to fall to $26.77 to trigger a stop. I still believe this stock will perform very well over the coming months.

On November 13, I recommended Home Depot (HD) at $36.62. It has since risen to $38.80, up 5.95%. The stock came under a lot of selling pressure late last week as reports of option backdating came to light. I don’t believe this issue will have a long-term material impact on the price of the stock, nor does it alter the original reasons for the trade. Home Depot remains a HOLD as long as the sector is cheap, hated, and in an uptrend. The stock would have to fall to $36.10 to trigger the 10% trailing stop loss.

Last week, on December 4, I recommended Thai Fund (TTF) at $10.92. It closed on Friday at $11.95, up 9.4%. I expect we will end up holding this position for another one to two years. Currently, it would have to fall to $9.59 to trigger the 20% trailing stop loss. TTF remains a BUY below $33.

Good investing,

Ian

December 11, 2006

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame