The S&A Digest: The Annual Report Card

Our "Report Card"... Amex spending plummets... Bank of America's all-stock deal... Buffett on the move, and he's not buying financials... A big shift coming in Venezuela... Bet against the Pats... The Federal Reserve shakes down Second Life...

Well... Here it is, our 2007 "Report Card" (see below). I don't pull any punches. Just keep in mind, all of these "grades" are subject to revision. Lots of stuff that went south over the last three or four months might end up being the big winners of 2008.

U.S. consumers with American Express cards – who on average are wealthier than other cardholders – charged 10% less than a year ago in December. Cardholders in California and Florida (where the housing bust is hitting hardest) were singled out as the main culprits. And like Capital One reported last month, Amex "charge offs" and delinquent account totals are now rising sharply. If you were still in doubt as to whether or not the housing bust would eventually spill over into the general economy, this seems to answer the question.

As you surely know, Bank of America will buy troubled mortgage lender Countrywide Financial for approximately $4 billion, five months after making a money-losing $2 billion investment in the company. What we found interesting is that this time it's an all-stock deal, indicating the growing weakness of BAC's balance sheet. Prediction: Bank of America will cut its dividend next year.

Buffett on the move... Berkshire Hathaway bought 751,400 shares in railroad company Burlington Northern Santa Fe between January 7 and January 10. The recent purchase brings Berkshire's holdings to 61.58 million shares (17.6%). It's interesting that Buffett hasn't bought any of the troubled financial firms... yet. The last time there was a big mortgage bust (the early 1990s), he bought shares of Wells Fargo by the truckload.

It's only a rumor. But one of the most "plugged-in" members of our editorial advisory board passed along some market scuttlebutt. Anadarko, the big independent oil and gas exploration and production company, is rumored to be selling its Venezuelan assets for $8 per barrel. Applying the same valuation to the other main U.S.-based operator in Venezuela (a PSIA recommendation) would move the stock up 90% overnight.

Contrarians take note... The New England Patriots are so heavily favored to win the Super Bowl that Las Vegas bookies are actually discouraging bettors. The undefeated Patriots (the first team to go undefeated since the 1972 Dolphins) have 1-6 odds to win the big game. That means it would take a $600 bet to win $100 in the case of a Pats victory.

Tom Dyson's ears perked when he heard those odds. From Tom Dyson: "In the last three weeks of the regular season, I backed some of the worst teams in the league against the NE Pats... First, I took the Jets on December 16 with a 20-point handicap, then I took Miami on 12/23 with a 21-point handicap, then I took the Giants on 12/29 with a 13-point handicap. I won all three bets. I'm going to bet on Jacksonville this weekend with a 12-point handicap. The odds are just too juicy..."

Of course, we include Tom's thoughts only in the spirit of sharing ideas. We would never encourage anyone to place an illegal wager on a football game.

Steve Sjuggerud is shouting, "It's virtual bank season!" in today's DailyWealth.

Click here to learn why he thinks these stocks will double.

Our government has added a new universe to its sovereign domain – Second Life. Second Life is a virtual world in which people – "residents" – interact with other "residents" via digital alter egos, or avatars. Yes, people really do spend entire days living in this digital world, setting up businesses and earning "Linden dollars," which is the virtual currency.

Recently though, Second Life was alerted to the fact that it might be in violation of Federal Reserve regulations, as Linden dollars could be construed as competing with U.S. dollars. So Second Life has had to change the rules of its universe... From its press release: "As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter."

And the rest of the story is even more amazing. Apparently, Second Life has seen a rash of Ponzi schemes – banks that were promising to pay 40% annual interest rates. "Some may argue that Residents who deposit L$ with these 'banks' must know they're assuming a big risk – the high interest rates promised aren't guaranteed, and the banks aren't overseen by Linden Lab or anyone else. That may be true. But... we can't let this activity continue."

So... even in the virtual world of Second Life, the Federal Reserve's monopoly remains intact. Their Ponzi scheme is the only one allowed...

New highs: Centamin Egypt (CEE.TO), Coca-Cola (KO), streetTRACKS Gold (GLD), Genomic Health (GHDX).

In the mailbag, praise for Dan's efforts on Tuesdays and Thursdays in The Digest and support for his investing strategy following a tough 2007 campaign. Praise for Porter, too? Hard to believe... but yes, it's in there. Must have been the big sale on booze after Christmas, 'cause all the drunks are writing to us again. If you sit down to jot us a note, please make sure you're sober first: feedback@stansberryresearch.com.

Tell us true, Porter, is Tommy real? Or is he is an archetypal postman, like the postman in Lucifer's Hammer or maybe the title character in The Postman (the book, NOT the movie!). And like the Hammer postman, he'd probably get into hot water with his supervisor for not sticking to the mail. USPS is arguably the worst-managed organization of its size in the world – especially regarding employee management. As a former eleven year Postal employee, I fully understand what drives people to 'Go postal'!" – Paid-up subscriber John Mathew

Porter comment: I can assure you my postman Tommy is absolutely a real person. I'm not creative enough to invent a guy like this... On the Sunday after Thanksgiving, my wife and I go over to the local Christmas retailer – you know, the kind of place that sells ornaments and garlands all year round. We went to pick up wreaths for our house. We're getting ready to head to the check-out line and, of course, the whole store is a zoo. Who do we see coming through the crowd, offering to help us with our five wreaths? Tommy, of course. "Yeah, you know... I like to pick up some extra money for the holidays by helping out over here. It's fun. It's real laid back. They don't care if I take off early to go huntin' or nuttin'. And it's better than being at home with my kids..."

"Reading The Digest is one of the highlights of my day... I subscribe to several of the S&A investment letters because I wanted original thoughts and ideas, not what one finds in the mass media magazines or TV talking heads. I'm glad Porter takes on all comments good and bad and I'm amazed at how he can keep a straight face with some of the complaints that come in... Based on being in 200+ S&A recommendations over the years (I haven't done an exact scientific study other than my invest portfolio keeps growing) I'd say the S&A guys are well North of 65% or higher with winning recommendations. In my opinion most folks who complain about bad picks are not disciplined enough to follow the techniques that are taught by S&A... A satisfied 52 year investor who will be able to retire sooner than planned thanks to S&A recommendations." – Paid-up subscriber J. Eason

Porter comment: We know there are thousands of satisfied customers who say little, but generously send us renewal checks or lifetime maintenance payments year after year. We might find the insults, the attacks, and the sometimes-bizarre thinking of our detractors more entertaining than compliments... but we'd soon go out of business without people like J. Eason. We love what we do. And we're grateful for your support. Even when we sound like "arrogant know-it-alls."

"Dan – I want you to know that I invested in the majority of your most recent picks. HD, WLK, BGP, AXP, DNB, MOT, WU and several others that made me rub my temples at 4:00pm at the end of each day. I did not sell HD and WLK as you recommended, take that for what it's worth. There is still value in the long run. It has been an extremely tough Oct, Nov, Dec, Jan. Actually, I could ramble on and on about the past few months, the losses incurred, the future value that I hope is contained in my portfolio, etc. But I'll save you the boredom and 'intellectual thoughts.' I'll leave you with this, I started investing with you one year ago with WMT, and then purchased the above mentioned companies. All great things wear terrifying masks, before they become great. I'm confident that is the case with these Extreme Value picks and portfolio. If not, I'll be joining you at Wal-Mart, except one a little closer to Pittsburgh. Keep the insight coming." – Paid-up subscriber M Kessler

"I must have started subscribing to Extreme Value, at what some would consider the worst possible time (about a year ago). But I am still very happy with your work. I have been accumulating Wal-mart every time it hits $46 and more when it hits $43.50, and I have no complaints. I am also holding RAIL and HD, and plan to keep holding them in spite of your recent sell recommendation. If the fundamentals are still in place I certainly do not mind holding a company like HD who continue to raise their dividend as they have been doing." – Paid-up subscriber Bjorn Sack.

"Just for further info, the advice on surviving a 'bear attack' [in the most recent issue of Advanced Income] applies specifically to grizzly bears. For more common black bears, yelling and shouting to convince them you are not prey is probably the best option. This won't work with grizzlies, who aren't afraid of anything." – Paid-up subscriber Tom Luneburg

The Annual Report Card – How Did We Do in 2007?

This is my favorite e-mail of the year – our report card.

This annual review helps distinguish our business from our competitors. Most newsletter publishers don't want you to see any objective analysis of their track records. We take the exact opposite approach. In fact, we can't imagine why anyone would read an investment newsletter that doesn't track the results of its recommendations. Without a track record to consider, how could you judge which strategies and editors to follow?

We have selfish reasons for keeping score too. The analysts here at Stansberry & Associates Investment Research are very competitive with each other. We work very hard at what we do, and we like to keep score. We're sure you feel the same way about the work you do. You want it to be great. You want your customers to be satisfied. You don't mind taking some time to prove that your work is of the very highest quality.

Before you read our review, please keep the limitations of this analysis in mind.

First, our annual review looks at all of the stocks our analysts recommended in their regular publications. It doesn't include any of the picks made (and perhaps still recommended) from prior years. So it's not a comprehensive analysis of anyone's complete track record – it's merely a snapshot of how well our picks did during the calendar year of 2007.

We recognize the weakness of this approach, but it's simply not practical for us to review in detail every pick ever made by each of our analysts every year. To help you understand the value of our work more completely, we have begun building a comprehensive track record database for each product. We will add this feature to our website one letter at a time over the next six months, starting with my own letter. (Yes, I know we promised to do this last year, but building our new website took precedence. My staff is now actively working on this project.)

Second, some readers will undoubtedly take issue with our use of plain, simple averages. Some prefer for us to use geometric averages or annualized results. We don't monkey with the numbers, though. Why not? We want to present our track records as accurately as possible and in the same format as you'd see them in your own brokerage account. During our years in this industry, we've seen many newsletter publishers use annualized figures to transform horrible track records into record-setting wealth creators. We won't play games with our numbers – even when they're very bad.

Using simple averages over a relatively short period of time puts us at a huge disadvantage. For example, using a simple average, Jeff Clark's recommended trades in our S&A Short Report made 14.1% over the last 12 months. But because his average holding period was less than 30 days, customers following his advice would have compounded their returns and produced a much, much higher total return – probably something more like 50%. We trust that you'll use whatever adjustments seem warranted based on your own trading habits.

Finally, our newsletters typically add one or two positions per month to their recommended portfolios and at least a few of them are sold very quickly. So, the average pick made this year has only been in the portfolio for four or five months. It's hardly "fair" to compare the average returns of recommendations that are only a few months old to an entire year's worth of stock market returns. Nevertheless, that's what we do because it's a simple standard that everyone can understand.

Remember: We're not truly managing portfolios, so we believe what matters is the average returns of our recommendations. Readers pick and choose from among our recommendations. They want to know what to expect, on average, from the different analysts and strategies. Our annual reviews help provide this information. Read in conjunction with our past annual report cards and used with the open-position track records in each of our letters, this review should help you understand how to use our newsletters and what to expect from them.

(If you didn't read the Report Card from 2006, please do so here.)

Now... just because a letter got a bad grade last year doesn't mean you can't make money using it or that it's an inherently bad product (or bad editor). No strategy or approach to investing will work every single year. (In 2006, we had a truly outstanding year with seven newsletters earning "A" grades.) Likewise, no editor or analyst is going to make only profitable picks. And, most importantly, positions that were in the red at the end of last year can return a profit over time. By assessing our newsletters at the end of each year, we're not trying to grade the newsletters on any kind of permanent, intrinsic basis. We're merely showing you how they have performed, on average, over the last 12 months.

The Best Way to Judge the Quality of Our Work

Given these limitations, the best way to judge the quality of our work is to compare our S&A 16 Model Portfolio to the market's average return.

The S&A 16 takes recommendations from across all of our newsletters and puts them together in a balanced portfolio consisting of four growth stocks, four value stocks, four income stocks, and four "macro" recommendations. We publish these model portfolios for the benefit of our S&A Alliance subscribers at the start of each quarter. This portfolio has the benefit of being fully invested for the entire period, unlike newsletter portfolios, which only add one or two positions per month. Additionally, Editor in Chief Brian Hunt and I are free – like our subscribers – to pick whichever stocks we believe are the best for inclusion. This allows a true apples-to-apples comparison with the indexes.

We published last year's first quarter S&A 16 model portfolio on January 12. If you had bought the S&P 500 on the same day, you would have been down about 1% by the end of the year. Our portfolio produced an average return of 4.1%. We beat the market by a substantial margin.

Our own internal goal is to earn a positive rate of return each year that outpaces inflation by at least 10%, regardless of what happens in the market. We fell short of our internal goal primarily because of a speculation that hasn't worked out (yet) in biotech. That one position in the S&A 16 was down 42% on the year – which is a big drag on a portfolio of only 16 stocks. (Like many of you... we get in trouble with our model portfolios when we try speculating in risky stocks.) Also, the income portion of the portfolio was hard hit by the mortgage debacle. We suffered losses in several mezzanine capital funds and in Healthcare Realty Trust.

Meanwhile, last year's first quarter S&A 16 had several big winning positions in our blue-chip recommendations, like Verizon, Telstra, and Coca-Cola. Each was up more than 20% in our portfolio for the year. We also continued to do exceptionally well with our macro investing, which featured three winning positions out of four: Merck, Westshore Terminals, and the Thai Fund.

I'd give the S&A 16 a "C+" for 2007. While we didn't achieve our internal goal of 10% plus inflation (and thus don't deserve an A or a B), we did earn a positive return and beat the market's return for the same period.

We know that we won't be able to grow our business with C+ results. Nevertheless, I can't promise you that our results will be materially better next year. We believe 2008 will be another difficult year for common-stock investors as the credit markets continue to seek a bottom. We think it's very likely the S&P 500 will decline by more than 10% in 2008. (We hope we're wrong, of course. And given the history of our macroeconomic predictions, we'd estimate we've got as good a shot at being wrong as just about anyone else.) Based on this outlook, we've designed our latest S&A 16 model portfolio to weather a storm. Even so, I would be very surprised if we're able to produce double-digit capital gains from our model portfolio this year. If we can, it will be an extraordinary achievement.

We hope you'll adjust your expectations and your own portfolios accordingly.

The Best of S&A in 2007

I'm pleased to report that six of our newsletters earned As or Bs in 2007.

The best results, in my judgment, came from one of our new products, The Medical Investor.

Written by George Huang and Rob Fannon, this is primarily a "picks and shovels" strategy newsletter. Rather than buying risky, emerging medical stocks, Huang and Fannon have selected the best firms that supply the medical industry with the tools and support it needs. They've also recommended other "safe" medical tech stocks, like generic drug companies, health management companies, and health marketing firms. Not only is the strategy working brilliantly, but the average returns have been exceptionally high, 8.9% – more than double the S&P 500.

Yes, I know a certain number of readers will think I've lost my marbles to say 8.9% is a great result. But they're not considering the limitations of this analysis. The average holding period of these recommendations is less than six months. Thus, this portfolio is on track to produce average gains of around 18% on an annual basis. (To show you what I mean, if you look at the picks made prior to July 2007, picks that have had more than a few months to mature, the average jumps up to nearly 16%.)

Even more than the total returns, what impresses me about the letter is the consistency. Out of 18 recommendations, only three stocks are down. Meanwhile, nine stocks – 50% of the total recommended – have already earned double-digit gains. This tells me two things: our analysts are doing a good job and, perhaps even more importantly, the strategy they're following has real merit.

Three other letters (True Wealth, S&A Oil Report, S&A Short Report) produced higher average returns than Medical Investor. You might wonder (and I'm sure the editors of these other letters will argue this point) why I would rank Medical Investor's performance above the others. The answer is consistency.

If you're looking for a very safe approach to investing in the booming medical industry, this is something you should try. (Ironically, despite the letter's obvious quality, we've had a very difficult time selling subscriptions. It's simply not the kind of letter that's easy to explain in a soundbite. Try a risk-free subscription, here.)

Of course, I would also give "A" grades to all of the letters that produced average returns greater than the Medical Investor.

Special mention should be made of Steve Sjuggerud's True Wealth. Year after year, Steve delivers outstanding performances. He does it by avoiding mainstream investments and finding value in most places other advisors have never even considered... or perhaps heard about.

True Wealth enjoyed a banner year in 2007, with an average gain of more than 12% for all the recommendations made during 2007. On an annualized basis, this would put Sjug well over 20% for 2007.

Steve made almost all of these gains using exceptionally safe – almost oddball – securities. For example, as Sjug saw trouble building in the U.S. economy and watched the Fed begin to cut interest rates, he put out a new buy recommendation in March on Annaly Capital. As most of you know, Annaly is one of our "portfolio repair" stocks. It only buys mortgages that are 100% guaranteed by Fannie Mae or Freddie Mac, corporations created and backed by Congress. Sjuggerud figured out how Annaly uses this government backing to put money directly in the pockets of its shareholders several years ago and has recommended it (off and on) since 2003. It was up 35% this year. He followed up on the theme with another totally safe mortgage company, whose shares ended up 44%. In a year in which most mortgage firms were crushed, Sjug steered his readers into two different exceptionally low risk/high return situations – classic True Wealth investing.

He was also able to deliver on one outstanding, relatively unknown speculation – Seabridge Gold. The shares moved 68% higher following Sjug's June recommendation of the stock in True Wealth. Likewise, he scored huge profits speculating on the run-up in Chinese stocks, booking 71% gains in PetroChina. Sjug only made one significant mistake all year – trying to buy the homebuilding stocks too soon. He took a big 21% loss on the homebuilders iShares. Unfortunately... several of his contrarian ideas haven't panned out yet and are sitting slightly in the red, including a bet on a strengthening dollar, a rebound in regional banking, and a biotech sector fund. As a result "only" six out of Sjug's 12 recommendations made in True Wealth in 2007 are clear-cut winners.

The S&A Oil Report, written by our in-house geologist, Matt Badiali, also posted average results (10.8%), which if annualized would have resulted in more than 20% gains in 2007. And, like Medical Investor, Badiali's results were incredibly consistent, with only one real disappointment – a 33% loss in shares of a deepwater drilling company, which took a market-related tumble just after our recommendation. These results are very good... but they're also to be expected given the huge run-up in oil prices and everything related to oil. The real test for Badiali still awaits him: How will his picks fair in a big down market for oil prices?

Finally, Jeff Clark, as he seems to do every single year, produced great average return numbers (14.1%) with his options trading service, The S&A Short Report. No editor is more penalized by our official, plain-average ranking system than Jeff, whose trades typically last 30 days or less. Given his rapid-fire style, any actual capital employed in his trading would have been reinvested several times over, producing much, much higher real-world profits. We would estimate the real dollar profits earned using Jeff's trading advice to be close to 50% annually.

As anyone who has attempted to trade options knows, making money trading options is very difficult and requires a lot of experience and an iron stomach. As such, it's not possible to make apples-to-apples comparisons between Jeff's options recommendations and our stock-based newsletter recommendations. But... if you did... every single one of our Hall of Fame slots and every single one of our Top 10 slots would be taken by his options picks – many of which have booked 1,000%+ gains. And he would have been the top A-rated analyst in every year's report card too, because his average gains are always the biggest. If you have a small amount of trading capital to play with and if you're built of the tough, disciplined, unemotional fiber that it takes to be a trader, Jeff is, in my experience, the best options-trading advisor in the world.

Now... I have one more "A" to award... and I'm sure it's going to get me a chorus of boos...

I'm going to award an "A" to my own newsletter, Porter Stansberry's Investment Advisory (PSIA). No, my average overall performance wasn't very good. I didn't even beat the market, on average. My portfolio made only 0.44% – essentially breakeven. And I wasn't very consistent, either. I booked three large losses – down 36% on a mortgage company, down 29% on a risky tech stock, and down 22% on Harley Davidson, a stock I thought was safe enough to buy, despite being a bit expensive when I recommended it.

On the other hand, I've gone to great lengths to explain to my subscribers that they should focus their investment dollars heavily into the "no risk" stocks I recommend. It's simply not possible (at least for me) to find truly great investments on a monthly schedule. But, when I do find them, as I do several times each year, I tell you.

During 2007, I recommended five "no risk" stocks. Each no risk recommendation was clearly labeled as such at the time and was put into my separate "no risk" portfolio on the back page of my letter. The average return from my no-risk recommendations was 17.7% – the highest average return of any portfolio we published last year.

Only one no-risk recommendation wasn't significantly profitable, and that's because I only recommended it in December. This performance isn't an anomaly – since I began making "no risk" recommendations in 2002, my no-risk picks have produced average annualized returns near 30% per year and have been profitable about 90% of the time.

The other editors at S&A will probably croak about how the boss only judges his portfolio by his best picks. My reply? It's fair as long as you set aside which picks are your best at the time you recommend them. (By the way, if you're a reader that has followed my advice and focused his or her portfolio on my "no risk" recommendations, please drop us a note: feedback@stansberryresearch.com. I'm very interested to know how you've done following the strategy.)

Finally, we have one more letter that has more or less kept pace with the market's averages this year, our new Quant Trader written by Ian Davis. I'm giving the Quant Trader a "B" for the year. Why the high grade when the average return has merely kept pace with the indexes? Well, keep in mind how many quant traders lost billions on Wall Street last year. The wind-up of so many quantitative-based strategies caused the markets to move against Ian's strategies. Even so, he made a positive return and suffered only one serious loss out of 16 recommendations. That's a solid result given the environment he was operating in.

Treading Water

I'm awarding two of our individual letters "Cs" for 2007 – S&A Prospector and The 12% Letter. The former produced an average return of roughly breakeven (-1.2%), and the latter was down 6.6%. Why do losing portfolios deserve a "C"?

In the case of The 12% Letter, aiming to produce income essentially requires you to be invested in financial companies – in particular, mortgage stocks. Thus, Tom Dyson, the editor of our 12% Letter was smack dab in the middle of last year's financial hurricane. He took substantial losses on several housing-related stocks, all of which had promising yields and a reputation for conservative lending, including Thornburg and Newcastle. Limiting the losses to only 6.6% on average was as good a performance as we had any right to expect, given the carnage. I'm confident Tom will return to his winning ways in 2008.

As for the S&A Prospector, this is the letter where we expect our geologist, Matt Badiali, to land a few really big fish. In this letter, we don't expect to see consistent results; we expect to see a few big winners surrounded by a bunch of small gains and even a few big losses. While there aren't any huge losses... we haven't yet hit the jackpot with any of our small speculative resource exploration stocks. And, given the soaring market for commodities... we simply expected to see better results in this letter. We're confident our time will come, as Matt continues to build the contacts and do the traveling required for success in this sector.

Failing in 2007

While I can give a gentleman's "C" to Tom Dyson for his 2007 campaign despite a negative 6% average, I can't do the same for Graham Summer's Inside Strategist. Unlike Dyson, Graham is charged with earning total returns, not focusing on income, and thus he had no reason to be so concentrated in financial companies. But... those were the stocks where the insiders were buying. And Graham followed the insiders into double-digit losses in six different housing-related stocks, making it nearly impossible for him to achieve good average results. Additionally, the strategy of following the insider buying simply didn't work very well last year: Only seven out of our 26 recommendations ended up in the black. I don't think there's anything seriously wrong with our approach: It's well documented that corporate insider buying is a market-beating strategy. But... the bear market in financial stocks fooled even the insiders and had a negative impact on our results. And therefore, I've got to give Inside Strategist a "D" for the year.

I wish that was the worst grade I had to give...

It certainly gives me no joy to be so critical of my company's products... but we had several obvious failures in 2007. Five different newsletters had average returns that were double-digit in the red: S&A Dividend Grabber, Sjuggerud Confidential, Phase 1, Extreme Value, and S&A Penny Letter. I have to give each of these letters an "F" for the 2007 campaign. The results were so bad in two of the letters that we've had to seriously alter our strategy.

First, we took the Penny Letter out behind the shed at the end of the December and put a bullet through its head. We have ceased publication. With an average return of negative 33.5% and only two winning recommendations out of 14, it seemed clear to us that something was wrong with our strategy. Dan's deep value approach to penny-stock investing simply didn't work – or at least it didn't work within a timeframe and a risk parameter that we could tolerate. We would like to publish research on penny stocks and we have done so successfully in the past. (Anyone remember Brian Hunt's Microcap Moonshots?) But our Penny Letter was a failure.

Next... the poor S&A Dividend Grabber. Starting last fall, I began recommending stocks that were paying out big, one-time special dividends. I recommended eight of them, for free, in the Digest. Most made big profits as the shares rebounded quickly after paying the special dividend. Investors could either buy the stocks before the dividend was paid (to collect the cash immediately) or wait until after to collect the capital gain over the next few weeks as the share price rallied after being marked down from the dividend payment. But... as soon as we began charging for the service, the returns got worse. Suddenly, instead of seeing companies that were paying out cash as attractive, Wall Street began to worry about the implications of weaker balance sheets. Instead of buying up these big cash-paying stocks, they began to sell them. As a result, only three of our next 11 trades ended up in the black by the end of 2007. Obviously, we can't continue on this course, even though I believe the strategy is valid and will work most of the time (just perhaps not in the middle of a financial crisis). So, we've added coverage of corporate spin-offs, which in many ways are just like big dividend payments, except instead of being paid in cash investors are paid out in shares of newly independent corporations. So far, so good. Our first spin-off recommendation, Covidien, was up at the end of 2007.

As bad as the results were in Penny and Dividend Grabber, I was actually more disappointed in the performance of three of our premier letters – Extreme Value, Sjuggerud Confidential, and Phase 1.

Extreme Value saw only one of its stocks recommended in 2007 go up during the year. This is a long-term investment service, and we've seen negative results before turn into excellent positive gains later, but I can't remember any stretch where everything seemed to fall at first. If I had to pinpoint what went wrong, it looks like Dan Ferris ended up buying several deeply cyclical businesses at the wrong time – stocks like Westlake Chemical, FreightCar America, Delta Financial. Now... several high-quality businesses fell after Dan recommended them last year, too – like American Express. I'm sure, in time, the average results from the recommendations he made last year will greatly improve. Certainly nothing is permanently wrong with his strategy, which has been our most consistent publication since 2002. Last year was just a bump in the road.

Sjuggerud Confidential suffered the worst loss in the history of Steve Sjuggerud's career last year, a 93% wipeout on the shares of Opteum (later called Bimini Capital). Those of you who were reading the letter know Steve broke his own risk-management rules... and paid the price. For those of you who want or need confirmation about the importance of trailing stop losses (or other risk-management tools), look no further than the average gain of Sjuggerud Confidential last year: negative 14.3%. It's nearly impossible to do well when one position out of a dozen loses more than 90%.

Finally, our most speculative service, Phase 1, had a horrible year, with an average return of negative 23.1%. Out of 14 new recommendations, only one ended the year in the black. Before you reach any conclusions... don't forget that in 2006 the same team of analysts produced average returns of 40% and only had one losing position out of a dozen. With this product, it's either feast or famine, depending on the mood of the market. And, in 2007, anything that was risky or speculative didn't do well, including biotechnology.

You've probably noticed that I didn't include a review of two of our newest products, International Strategist and Advanced Income. Both products have less than a year of recommendations under their belts. We'll add them to our report card next year.

Below you'll find a simple summary of our products and their grades in 2007.

Thank you for your continuing support of our research. We will continue our efforts to deserve your trust.

Warm regards and best wishes for the New Year,

Porter Stansberry

Baltimore, Maryland

January 11, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/24/2013