Two Steps to Take to 'Steal the Crown Jewels'

One of South Florida's 'crown jewels'... The key attributes of crown-jewel stocks... Three factors of enduring value... The beauty of these types of investments... Where our opportunity lies... Two steps to take to 'steal the crown jewels'...

My good friends John and Kendra settled on their dream home 25 years ago...

It was "more house" than they should have bought at the time. But they couldn't resist...

The property was located in a desirable South Florida neighborhood, just a few minutes from their new business. And it offered John and Kendra plenty of room to raise their growing family... They'll soon be in the unenviable position of having three kids in college at the same time.

While the first few years were tough on their budget, things couldn't have worked out any better for John and Kendra in the long run. They paid less than $400,000 for the property... and now, it's worth at least $2.5 million. I (Mike Barrett) wouldn't be surprised if its value eventually exceeds $5 million.

You see, this property is special because of its location... It's on a quiet, unusually wide, deep-water canal near the Intracoastal Waterway and the Atlantic Ocean. Ultra-rich yacht owners love this area... especially during the winter months, when they can escape the cold Northeast.

John and Kendra didn't fully appreciate its attractiveness a quarter-century ago when they moved in, but they certainly do now... They own one of South Florida's "crown jewels."

Now, I know most of us will never get the opportunity to own prized real estate like John and Kendra's house. But that doesn't mean you can't own any crown jewels...

Crown jewels are plentiful in the stock market – if you know what to look for. By buying these gems with the intention of holding them indefinitely, you have the opportunity to accumulate massive wealth in the same way that John and Kendra have with their house.

So in today's Digest, I want to help you learn how to uncover these crown jewels. I'll break down the two critical qualities of crown-jewel stocks and show you how to maximize the wealth-creating potential of your capital with this strategy. Let's start at the top...

Crown-jewel stocks possess two key attributes – enduring value and optionality...

Enduring value typically comes from at least one of the following three factors...

• Unique physical assets
• Special rights
• Special capabilities

Well-located waterfront property like John and Kendra own is special because it's very scarce. It has enduring value because you can only buy so much land in South Florida with quick access to the Intracoastal Waterway and the Atlantic Ocean.

Many public companies have also amassed impressive real estate holdings, although investors don't necessarily think of them as ways to put money to work in the space.

Consider Copart (CPRT), the country's leading provider of vehicle-reselling services...

If you've ever been in a car accident that resulted in a total loss, there's a good chance that its resolution involved Copart. The company picks up damaged vehicles from repair shops, transports them to nearby storage lots, then resells them to buyers all over the world.

Copart has tens of thousands of vehicles for sale at any given time on its website. And it actively promotes the number. We snapped a screenshot of its inventory earlier today...

Maintaining a huge inventory of damaged vehicles requires a lot of land in strategic locations. That's why Copart has regularly acquired it for decades... The company currently owns more than 8,500 acres, most of which is in the U.S.

But extensive land holdings in good locations alone isn't what makes Copart special... It's special because of how it turned this asset into a unique and often underappreciated competitive advantage. In that regard, it's a unique physical asset...

You see, since large land tracts in or near major cities are scarce, their value has risen over time. These higher valuations have also translated into higher rental prices for the land.

Because Copart's competitors generally rent rather than own, they must pay increasingly higher rates to use the land that's an essential part of their business. But by acquiring its land years ago at lower prices, Copart avoids much of this persistent land inflation and earns industry-leading operating margins. Its land costs are already accounted for.

And sometimes, it's about more than just the land itself...

In the June issue of Extreme Value, Dan Ferris and I recommended a company that has amassed almost 20 times more land than Copart, much of it in fast-growing metro areas.

But this land is even more valuable than Copart's because it has special rights that are nearly impossible for competitors to replicate. The company leverages this tremendous advantage into something every business prizes – the ability to regularly raise prices.

In a similar way, the special right to sell products under a well-known, highly regarded brand is one of the greatest sources of enduring value ever created...

Iconic brands like Coca-Cola, Quaker Oats, and Campbell Soup have been around for more than a century. They provide a durable source of cash flow for their owners. Dominant brands typically command special privileges, too – like premium shelf space at top retailers.

In April, Dan and I recommended the owner of a portfolio of well-known and emerging brands in the food and beverage space with the type of growth that its competitors envy. One of its flagship brands, for instance, is more popular in California than two of its largest competitors combined. Now, the company is using this tremendous brand equity to roll out an entirely new class of products nationwide.

Royalties and patents, like high-quality brands, are also special rights that create durable cash flow streams for their owners. But royalties and patents differ from high-quality brands in one important way...

A brand owner must continually invest in its brand to keep it relevant as time passes. But no such outlay is typically required of royalty and patent owners. Once they've made their initial capital investment, they can sit back and collect the payments as they roll in.

Our Extreme Value portfolio includes a company that owns one of the best assets in the precious metals sector. It's a larger-than-usual royalty on a world-class gold deposit that's a top producer today... and likely will be for years to come.

If gold prices continue to push higher from here – something I consider a strong possibility – most of the benefits of those higher prices will fall directly to this company's bottom line.

Certain companies also possess special capabilities that make them crown jewels...

One particularly valuable skill is the ability to acquire other companies in a way that creates synergy. This capability actually involves two different sets of skills...

1. Finding and acquiring the right companies at good prices, and then
2. Integrating them into the legacy business in a way that's additive.

Many acquirers excel at one or the other. Few companies are exceptional at both sets. But in Extreme Value, our past three recommendations fall into the latter category...

Between them, these three companies have acquired hundreds of competitors over the years, while managing to improve the overall performance of their businesses along the way. And with thousands of potential targets still out there, we expect each of them to become meaningfully larger over the next decade as they exploit these special capabilities.

In addition to enduring value, crown jewels often feature another critical attribute – optionality...

Think of this as something special that you don't necessarily count on, or even know about today... But in the future, it could become a very big deal.

When my friends John and Kendra bought their South Florida home 25 years ago, they were still a long way from retirement. Now that it's closer, they're evaluating other places to live.

The good news is... they'll never have to sell their amazing waterfront property (and incur a huge capital gains tax hit) to fund the move.

That's because the home-rental market has developed so much over the past decade due to operators like Airbnb, HomeAway, and other online rental companies. John and Kendra can easily rent their waterfront home for $15,000 per month in-season (December to April), then use part of that income to live comfortably somewhere else for the rest of the year.

In mining, optionality usually occurs when operators discover more gold or silver...

One of the top 10 gold stocks that my colleague John Doody holds in Gold Stock Analyst already owns a world-class deposit, at more than 5 million ounces of gold mineralization. But he believes that could double, putting the mine on par with other "monsters" in the same mining-friendly jurisdiction.

And if this optionality plays out as John expects, our Extreme Value subscribers will reap the rewards. That's because the company I mentioned earlier owns a royalty on this mine, as well as 17% of the mine operator's shares. Right now, Extreme Value is the only Stansberry Research product that holds this stock, which still trades below our maximum "buy" price... even though it's up almost 150% from its March intraday low.

More than a decade ago, we added a small company to the Extreme Value portfolio where optionality is an integral part of the business model. That's because it creates assets, including royalties, where none previously existed.

Over the past couple of years, this company's management team has used this expertise to build a $100 million business with a promising future from scratch in a brand-new space. The effort has been so successful that it might spin it off into a separate public company.

None of that was anywhere near the radar when we first recommended this company in 2009.

That's the beauty of crown jewels...

They can change with the times in ways that are impossible to predict... and make astute, early investors a fortune in the process. This might be the best example...

One investor I know purchased $5,000 of Apple (AAPL) stock in the late 1990s, long before the iPhone was even on the drawing board. Today, that position is worth about $800,000... and provides the investor with $6,500 in annual dividend income.

Think about that... This investment is now generating more income each year than it originally cost the investor, due mostly to a product that didn't even exist at the time!

If you take nothing else from today's Digest, I hope it's an appreciation for the incredible, wealth-creating power of optionality.

Now, I know every long-term investor faces the same fundamental challenge...

How do I maximize the wealth-creating potential of my capital?

You can start by gradually building substantial positions in the market's crown jewels.

Of course, it's challenging to accumulate anything of value if you're not mindful of the price you're paying. So if your strategy is to accumulate the market's top businesses... it's critical that you also buy them at the best possible prices.

That sounds easy, but it often isn't... unless you make one important metric the cornerstone of your strategy – intrinsic value.

Intrinsic value is the discounted present value of all of the cash flow that business owners are likely to remove from it in the future. Alternatively, think of it as the price a knowledgeable buyer would pay today for the rights to all of those future cash flows.

For example, our proprietary valuation model recently estimated the intrinsic value of chipmaker Maxim Integrated Products (MXIM) to be around the low $70s per share. Last week, competitor Analog Devices (ADI) agreed to acquire Maxim for roughly $78 per share.

Many investors aren't familiar with the concept of intrinsic value...

That's because it can take some work to estimate it. You can't pull up a company's intrinsic value on a free service like Yahoo Finance. Heck, you can't even spend thousands of dollars annually for an in-depth service like Bloomberg to get it. You need to roll up your sleeves...

Estimating intrinsic value is more difficult than just comparing numbers gleaned from a company's financial reports. I know because it's how I spend most of my time as an analyst.

It involves looking ahead over the next few years and imagining how the company's revenue and cash flow will change. It also involves scouring the market for comparable transactions – like the deal between Analog Devices and Maxim, for example. As far as I know, Extreme Value is the only newsletter that regularly reports this valuable information.

Once you've developed a reliable estimate of a company's intrinsic value, you now have a benchmark for its highest expected share price. Intrinsic value will change over time, but it's primarily a function of a company's longer-term financial prospects.

While the COVID-19 pandemic has negatively impacted the financial performance of many companies, the longer-term earnings power for most of them remains intact. Don't tell that to trigger-happy investors who have a hard time looking past the current quarter's results.

But that's where our opportunity lies...

Knowing a company's intrinsic value lets you easily track the discount between its real value and the current share price. And more important, it allows you to directly address the fundamental challenge I noted earlier – maximizing your capital's wealth-creating potential by paying the lowest possible price for the highest possible quality.

To see what I mean, take a look at the following chart. It's a list of our four most recent Extreme Value recommendations – all wealth-creating crown jewels. At the time of our recommendations, these businesses traded at discounts between 33% and 42% of their respective intrinsic value. Those discounts are now smaller due to rising share prices...

The opportunity to buy crown jewels at discounts near 40% doesn't happen every day. And as you can see from these recommendations, the discount often closes quickly. I've learned that the vast majority of stocks generally trade within 15% to 20% of their intrinsic value.

But every once in a while, the opportunity arises to "steal" these crown jewels at tremendous discounts to their intrinsic value – like what happened back in March and April.

With the market in freefall, two existing Extreme Value positions in particular reached discounts of about 70%. And Dan and I pounded the table for both... Subscribers who took our contrarian advice have been handsomely rewarded – with the two stocks up 146% and 92%, respectively, from their March intraday lows (compared with 44% for the S&P 500 Index).

Tracking the discount to intrinsic value in real-time also provides a powerful "comparison shopping" tool...

For example, an investor looking to put some money to work into these four stocks today would get the biggest bang for his investing dollar by choosing our July recommendation. That's because it currently offers the largest discount to its intrinsic value on the list.

As I hope you've seen today, investing success doesn't have to be elusive. If you want to "steal the crown jewels" as an investor, you just need to take two steps...

First, seek out the crown jewels – the stocks with the best assets and capabilities. Then, be sure to only buy them at prices that substantially discount their real value.

It's one of the most powerful wealth-creation strategies available to any investor with a brokerage account... If you can consistently do these two things, you'll make money over the long run.

And if you're ready to get started, I encourage you to check out the July issue of Extreme Value...

We just recommended shares of a company with a special capability that its CEO likes to call "one of the best-kept secrets in North America."

It's a 62-year-old company that has only been trading in the U.S. for a few months. That means institutional investors who were previously restricted from owning it can now do so. And that's only one of the reasons why we're so bullish on this company in the long run...

It's a well-run, consistently profitable business that knows how to take advantage of economic downturns. So we're confident that it'll survive the current COVID-19 worries... and thrive moving forward. We doubt the big discount to its intrinsic value will last long.

Right now, this company's shares still trade below our maximum "buy" price. But we don't expect this story to remain a secret once the biggest U.S. investors get wind of it.

That's why we hope you won't delay if you're interested in learning more. And today, you can get all the details about this company – as well as all of our in-depth research in Extreme Value – for the lowest price we've offered in years. Get started right here.

New 52-week highs (as of 7/21/20): Alamos Gold (AGI), Sprott Physical Gold and Silver Trust (CEF), Calibre Mining (CXB.TO), Quest Diagnostics (DGX), Franco-Nevada (FNV), Fortuna Silver Mines (FSM), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), VanEck Vectors Gold Miners Fund (GDX), SPDR Gold Shares (GLD), Barrick Gold (GOLD), GrowGeneration (GRWG), Green Thumb Industries (GTBIF), Home Depot (HD), Hecla Mining (HL), Lonza (LZAGY), MAG Silver (MAG), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), ResMed (RMD), Seabridge Gold (SA), Sandstorm Gold (SAND), Global X Silver Miners Fund (SIL), SilverCrest Metals (SILV), iShares Silver Trust (SLV), Silvercorp Metals (SVM), TFI International (TFII), Torex Gold Resources (TORXF), Victoria Gold (VGCX.TO/VITFF), Vanguard Inflation-Protected Securities Fund (VIPSX), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), and Wheaton Precious Metals (WPM).

In today's mailbag, an answer to a question that a subscriber raised on Monday about the Post Office's ills... and more feedback on Dan Ferris' Digest from last week about "screaming inside your heart." Share your comments at feedback@stansberryresearch.com.

"The cure for the financial problems at the US Post Office is changing the congressional requirement that they fund their retirement and health care costs based on a 75-year retirement. Unless you retire at 25 and live to be 100, you will not have a 75-year retirement. This is ridiculous.

"US corporations that still have retirement plans fund those plans based on 20-25 years of retirement for those covered by these plans, so basing the Post Office pension benefit funding on more than 30 years is generous to a fault.

"Also, companies that provide health care for their retirees, turn that duty over to Medicare as soon as the retiree turns age 65. Making these two changes (Medicare at 65 and pension funding based on even 35 years of retirement) would make the Post Office solvent overnight." – Paid-up subscriber Gary H.

"Hi Dan. Great column [Friday]. I hope your readers send it to others. I absolutely love The Princess Bride and enjoy watching it over and over again with my grandchildren. I believe that all sane Americans should take a good look at what's happening to America and scream with their voices. Here's an idea, let's ask all the peaceful protesters to take a day off and then we can deal with what's left so the great idea of America can still be the shining light on the hill." – Paid-up subscriber Bill R.

"This may be the best article I have ever read. The insight is really deep." – Paid-up subscriber Harry K.

"I am a 72-year-old retired home builder, married, we have 3 grown daughters who collectively have 6 children. I am screaming in my heart for my kids and my grandchildren.

"Both my wife and I are pretty well set. She is retired from AAA and has a couple mutual funds, plus a retirement pension. I have a few stocks in gold royalties, bio-tech, etc., and I am pretty much debt free. I built 4 homes for us over the years, never had a mortgage since I left the US Navy in 1971. My father taught me how to build and sell homes until you can build one for yourself free of any outside money. So, my wife and I have been 'paying' ourselves all these years. Our cash and precious metal is held in a remote vault.

"My parents went through the Great Depression, WWII, and my mother's mother died in 1918 from the Spanish Influenza while giving birth to my uncle, who never saw his mother at all. My mother was 4 years old. Hardship was a way of life for them. But, they passed on all that hard times knowledge to me and my brother and sister. My father built his own home and lived his entire life there and died there. We raised chickens and other animals, we farmed 14 acres, my mother canned everything. We had two big fireplaces my father built. We had chores to do every day to help around the house and farm. We also hunted for a lot of our food.

"I grew up from 1948 through the 50s in a great time in America. Graduated High School in 1966, and went to Viet Nam in 1968. I went to college on the GI Bill and worked after the military in construction. I learned from the 'Greatest Generation' how to save EVERYTHING! There were no credit cards, cash was king. Spend less, save more. I try to teach that to my grandchildren.

"But I am afraid of the world they will inherit. No one in my family trusts the government, Democrats and Republicans, very much. I learned that from the Viet Nam debacle, and what is going on now with all the subversion and lies just reinforces that distrust. I see hatred everywhere, and ridiculous kneejerk reactions by mayors and governors that do more harm than good.

"The only thing I see that will save people is to become SELF RELIANT, SELF SUFFICIENT. Provide as much of everything as you can for your own family. Defend yourself and your family with weapons if need be, stockpile food packaged or canned for long term storage.

"We live in a very small town of around 475 inhabitants, so it is easy to know who is who. We have no police department and only volunteer fire companies. But we all are the 'militia' spoken of in the Second Amendment. We all take care of one another. But how long can our Republic hold out?

"I am screaming in my heart for our country!!!" – Paid-up subscriber Andrew K.

"Dan, I really was moved by the latter part of your article. The problem is that the silent majority may be doing this and they really need to be Screaming AS LOUD as they Can, because if we don't we are almost assured of repeating the history of the 1930s." – Paid-up subscriber Mike W.

"Thanks to Dan for another great column. He keeps topping himself week after week with the Digest and the Investor Hour. However, I do have a problem with the 'scream inside your heart' line. Frankly, it doesn't 'do' anything, and must sound like a weak joke to the enemies of this country rioting at will and with impunity, and those who are cheering them on.

"People keep saying they don't know how things got to this point 'so quickly.' This has been building up for at least 100 years – but, unfortunately, our pathetic media has let this country down and refused to do its job, which is necessary for a society to enjoy liberty and freedom.

"This war has reached a tipping point, and the 5th column will not stop, and has been given no reason to stop. The citizens must decide what they really want – and if anyone thinks screaming inside their heart will help anything, well they might as well just carve it out and put it on a silver platter." – Paid-up subscriber Gary S.

Regards,

Mike Barrett
Orlando, Florida
July 22, 2020