Wal-Mart blowback...
Wal-Mart blowback... Two Frank Curzio home runs!... Frank's next triple-digit winner?... CHK board backtracks... Housing: 'The crash is over'...
On Tuesday, I stirred the pot by asking who, if anyone, was hurt by Wal-Mart's alleged Mexican bribes… clearly implying the acts hurt "nobody." Many readers were able to let go of their fears about appearing disreputable and gave the matter serious consideration. Bravo to them. They made me proud and happy to do what I do for a living.
Other responses dismissed my question with the glib phrase… "The law is the law." That's what otherwise rational adults sound like when they refuse to take responsibility for determining right from wrong. It's the easy way out of one of life's most important and difficult tasks. To suggest U.S. law is an infallible representation of right and wrong is just silly.
The United States imprisons 700 people for every 100,000 people in the population… That's more than any other country on Earth… more than North Korea… more than Libya… more than Iraq or Mozambique... Pick whatever godforsaken hellhole you like… it doesn't have nearly the per-capita prison population that we do. More than 7 million people in the U.S. are in prison, jail, or on probation. If you say, "the law is the law," you're not even in the conversation.
The funniest response of all came from one subscriber who told me to "get a grip"… and then found a way to brag about having met President Clinton at a White House Rose Garden party. I read it three times and laughed every time. This guy is telling me "wrong is wrong," that bribes are a crime, blah, blah, blah... And then he tries to impress me by bragging about cavorting with someone who is among the most mendacious and corrupt public figures in recent memory. It'd be easier to believe if he wrote back and said he was only pulling my leg!
More to the point for investors, nobody offered a compelling suggestion of who got hurt by Wal-Mart's alleged Mexican bribes. One reader suggested Wal-Mart's customers were hurt because bribes make products cost more. That's possible... but highly unlikely in the case of Mexico. Bribes in this case clearly and substantially increased the supply of low-cost goods and services. Making something more abundant means making it cheaper, not more expensive. Again, without the bribes that pervade life in Mexico, its citizens are screwed out of a higher standard of living and more than 200,000 Mexican workers would go unemployed. It's like I said in October 2005 – when I first recommended Wal-Mart's stock to Extreme Value subscribers – "A war against Wal-Mart equates to a war against poor people."
Exactly three weeks ago... Frank Curzio recommended subscribers to his Phase 1 Investor advisory add the small-cap biotech stock Human Genome Sciences (HGSI) to their portfolios. HGSI is a U.S. pioneer of gene-based drug development. Its flagship drug, Benlysta, treats the autoimmune disease known as lupus. It's the first lupus drug to win Federal Drug Administration approval in 50 years.
Here's what Frank wrote about HGSI in the April issue of Phase 1...
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... HGSI stands a good chance of receiving a takeout offer from its partner GlaxoSmithKline – one of the largest pharmaceutical companies in the world, with a market cap of $225 billion. |
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GlaxoSmithKline and HGSI have been partners since 1993. Both companies share in the revenue and profits from Benlysta. However, with HGSI shares trading near 52-week lows, it would make sense for GlaxoSmithKline to purchase its smaller partner outright. |
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I know... This rumor has surfaced from time to time in the market for three years. However, sales of Benlysta are expected to jump sharply over the next two years as more doctors begin prescribing the drug. Plus, HGSI has a strong pipeline and its stock price is at its lowest level since Benlysta received FDA approval. |
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On Tuesday, GlaxoSmithKline announced strong Phase III results for Albiglutide. It's used to treat type-2 diabetes. HGSI created Albiglutide and licensed it to GlaxoSmithKline in 2004. HGSI could receive $183 million in royalty payments on Albiglutide, plus single-digit percentage of worldwide sales. |
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Benlysta is also in Phase III trials for vasculitis, a B-cell mediated autoimmune condition marked by chronic inflammation of blood vessels. Late-stage clinical trials are also ongoing in lupus nephritis, a kidney disorder complication of advanced SLE. |
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At less than $9 a share, GlaxoSmithKline could buy HGSI's pipeline – including the only drug approved by the FDA in the last 50 years to treat lupus – for less than $3 billion. That's not a lot of cash for a company that has $10 billion on its balance sheet and is losing market share to generic competitors. |
On April 19, HGSI management rejected a $2.6 billion takeover bid from longtime partner GlaxoSmithKline. Human Genome hired Goldman Sachs and Credit Suisse to advise on strategic alternatives, including a possible sale... The news sent HGSI shares skyrocketing 100% in one day. Based on HGSI's opening price on the first trading day after Frank's recommendation came out… subscribers are sitting on an 82% gain in 21 days.
Assuming shares keep rising, this will be Frank's second triple-digit winner in four months for Phase 1 subscribers… In January, Frank directed subscribers to Gold Standard Ventures, a junior gold mining company working the last unexploited territory in Nevada's prolific gold region, known as the Carlin Trend. Just seven weeks later, Gold Standard Ventures announced it had discovered high-grade ore on its key drilling project, called "Railroad." The share price leaped 50% on the day of the announcement.
Today, Gold Standard Ventures released more good news from its drilling program… And shares popped up another 43% (as of midday trading). We asked our resident geologist, Matt Badiali, to explain the results…
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Gold Standard Ventures is looking for a giant gold deposit in the land of giant gold deposits. The key is to find thick, continuous sections of gold rich rock. |
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As a quick primer... Anything less than 1 gram per ton is pretty low grade. But the value of a deposit is about more than just grade; it's also about the deposit's thickness. For example, Seabridge's Mitchell gold deposit in British Columbia, Canada, is low grade... about 0.6 grams per ton. But there are square miles of ore, so that makes it mineable. |
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In this case, Gold Standard Ventures showed us a hole that cut through 537 feet of rock that contained 3.38 grams per ton (nearly 0.1 ounces of gold per ton). That's great grade, roughly $165/ton rock. And there was a lot of it. |
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That tells us two things about this project. First, there is definitely a big gold system here. Second, the geologists are figuring out where to find the gold. |
Frank recommended subscribers buy Gold Standard Ventures when shares traded for $0.71… Today, following the announcement, shares are at $2.55… Phase 1 readers are up 260% in less than four months.
These are exactly the kinds of stocks – and gains – we have in mind when we say Phase 1 takes a "venture capital" approach to investing. By getting in on the ground floor of emerging companies... usually in the technology, natural resources, or biotech sectors... we can set ourselves up to make an absolute fortune when positive news sends share prices soaring.
Now, Frank has identified another small stock with the same kind of explosive upside potential… It's a tiny North American energy firm that has just been awarded the rights to drill for natural gas in more than 1 million acres of untapped shale deposit in Eastern Europe.
We've written a lot in the Digest about how "unconventional drilling" technologies like horizontal drilling and hydraulic fracturing (or "fracking") have revolutionized our ability to unlock the massive energy sources from previously inaccessible formations of shale rock. The shale gas boom of the past decade in North America is one of the biggest developments in the history of the energy market.
Many people don't realize these technologies remain under-used around the rest of the world. Although European countries like Austria, Ireland, Romania, Hungary, Sweden, the Netherlands, Germany, and Lithuania have nearly as much recoverable gas as we do…. they have only just begun their quest for shale gas.
It won't stay that way for long… These countries are turning to the companies with experience in shale gas production to help them unlock these deposits. Many of these companies are big, multinational energy firms – ExxonMobil, Chevron, ConocoPhillips, Marathon, etc. But Frank's found an exception…
The company Frank is recommending is less than 0.1% the size of ExxonMobil. But its Eastern European drilling rights are extremely valuable. Positive drill results there could send shares soaring… Frank says shares could double (or triple) in price within 18 months.
Frank has prepared a video and companion report analyzing this opportunity… (He's also arranged for a conference call with the company's management to discuss its work in Eastern Europe… which Phase 1 subscribers can listen to tonight at 5:30 p.m. Eastern time) But to get the details, you have to be a subscriber to Phase 1 Investor. You can learn more about subscribing – and gain access to Frank's best current "venture capital" idea – by clicking here.
And a final note… Phase 1 is our most exclusive service… Right now, we're offering a generous discount on a subscription… But to take advantage, you must subscribe by midnight Eastern time tonight. (Don't worry if you sign up after the call... a replay will be available on our website immediately.)
Speaking of natural gas... It seems Chesapeake Energy founder and CEO Aubrey McClendon's sweet deal couldn't survive public scrutiny... McClendon had a deal with the company that enables him to take a 2.5% stake in every well drilled by Chesapeake, an $11.5 billion natural gas producer. The program is called the Founders Well Participation Program (FWPP).
The FWPP made news last week when it came to light that McClendon had borrowed $1.1 billion in personal loans from a bank and two investments firms... and used this stake in the wells to secure the loans. One firm, EIG Management, gave McClendon a $1 billion line of credit... and participated in a $1.2 billion preferred stock offering earlier this month.
The company initially insisted there was no conflict of interest. The board stood behind McClendon, saying in a statement last week that it was "fully aware" of the loans and supported the FWPP. Now, the board is backtracking. In a new statement published yesterday, Chesapeake says its board didn't review or approve any of the individual transactions. Today, the board and McClendon say they've agreed to negotiate an early termination to the FWPP, which was scheduled to expire in 2015.
The loans look bad for McClendon and Chesapeake... While shareholders sometimes benefit from deals like this if the company sells some execution risk to a partner (even if the partner is the CEO)... it's not clear that happened here. And McClendon's interests don't seem aligned with those of the shareholders.
There is no evidence that McClendon or the company did anything illegal... but it's not how I like to do business. Investors are better off avoiding the stock of businesses that engage in complex and potentially conflict-ridden deals. I doubt you'll ever find me purchasing a Chesapeake share after this. (Yes, I'd buy Wal-Mart, a possible lawbreaker... But I won't buy Chesapeake, which doesn't appear to have broken the law.)
Housing has bottomed. That's the verdict given to a Bloomberg reporter yesterday by Mark Zandi, chief economist for economic analysis and forecasting firm Moody's Analytics. Zandi said of the housing market, "The crash is over. Home sales – both new and existing – and housing starts are now off the bottom."
Our own Steve Sjuggerud recommended a housing play more than a year ago in True Wealth. It's up 8% since then, but I bet it's got plenty of upside left in it. And I told Extreme Value readers housing was an attractive proposition in the March 2012 issue.
Not so long ago, everybody believed housing could only go up. They were wrong. Nowadays, nobody believes housing can go up at all. They're wrong, too. Housing is perhaps the best – or at least most current – example that what the wise man does in the beginning, the fool does at the end. Wise investors are getting into real estate these days. Fools will wait...
New highs (as of 4/25/12): Coca-Cola (KO), Abbott Labs (ABT), Hershey (HSY), Texas Pacific Land Trust (TPL), and Tetra Tech (TTEK).
If you want to tell me I'm a bad person because I would buy Wal-Mart, which appears to have broken the law, but I wouldn't buy McClendon's stock, even though he appears blameless in the eyes of the law… write us at feedback@stansberryresearch.com.
"I worked for state and local governments for over 30 years here in California and they were corrupt in their own way, morally and professionally, because of careerism, cronyism, nonfeasance, laziness, nepotism, lack of due process, indifference, etc. Taking a bribe, in contrast, seems like an honest, straightforward approach since it is between two parties and each knows where the other is coming from and what needs to be done. Once at the front counter, some middle eastern guy pulled out a roll of bills, but his wife was horrified and he put it away before I could speak up." – Paid-up subscriber Merle Betz
"I have been in Mexico doing business. Bribery is a way of life in Mexico. It is often necessary to bribe the concrete contractor, the electricians, the window installers, etc , just to name a few, in order to get a building up. That is why there are so many buildings partially finished in Mexico City. Often the bribery demands by the contractors or city inspectors are so outrageous, the project is put on hold – sometimes for years – until something more reasonable can be worked out with perhaps a different contractor or elected official. As far as Walmart is concerned, it was simply, 'When in Rome, do as the Roman's do!'" – Paid-up subscriber Noreen Ecclesto
Ferris comment: The only problem I can find with Wal-Mart's Mexican bribes is the same problem I find with committing crimes that obviously shouldn't be crimes, like smoking a joint or trying to keep the money you earn. You expose yourself to getting caught. But even then... I suspect Wal-Mart's punishment for the Mexican bribes will hurt, but not enough to impair its earnings power. It certainly won't be hurt enough to endanger its status as the World Dominator of global retailing. In the long run, its "investment" in Mexico will have been worth it to Wal-Mart and its shareholders. I can't say I like it, and I certainly would never offer or accept a bribe. But I must also admit that I have yet to find anyone who was really harmed by Wal-Mart's alleged actions in Mexico.
Regards,
Dan Ferris
Medford, Oregon
Thursday, April 26, 2012