Wal-Mart health clinics
Banks charge high fees and pay low interest. That's a bad combination for those with little money. So Wal-Mart decided to get into banking a few years ago, only to have its application to establish a bank denied. It applied for an Industrial Loan Corporation (ILC). An ILC is just a bank within a nonfinancial company. A slew of them are incorporated in Utah, where the laws make it easier to do.
Wal-Mart was denied because the banking lobby is too powerful. Wal-Mart could easily cut into the banks' turf. Heck, Wal-Mart can undercut just about anybody selling just about anything.
Health care costs, like bank fees, are way too high in the United States. As with every overpriced good or service, Wal-Mart sees an opportunity. It's been opening health care clinics in stores around the country, mostly in California, Florida, Illinois, Minnesota, and Texas. Hospitals that run the clinics see them as a way to reach patients who need affordable care or don't have a family physician.
Gluskin Sheff analyst David Rosenberg says investors should do a few things to survive deflation... He emphasizes safe income, featuring high-quality, dividend-paying stocks and hard-asset income vehicles like REITs and royalty trusts. He says investors should look for companies with "low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies."
Rosenberg also says to look for businesses with "low fixed costs, high variable cost, high barriers to entry or some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care – these sectors are also unloved and under owned by institutional portfolio managers)."
And Rosenberg recommended holding precious metals for the inevitable "re-flation" trade.
Even though we're worried about inflation – not deflation – Rosenberg's advice reminds me of... well... ours. It sounds like the strategy I've been urging you to follow for two years. I've been begging everyone and his brother to buy the best blue-chip stocks, which all have the characteristics Rosenberg describes above.
Lately, almost every S&A editor has joined in... I've seen recommendations of big, safe blue-chip stocks from Porter Stansberry and Braden Copeland, Steve Sjuggerud, Tom Dyson, David Eifrig... even Jeff Clark has made a bunch of options trades around these stocks. Even our low-priced stock guru, Frank Curzio, has ventured into big-cap territory recently. The point is, high-quality, blue-chip stocks have become too attractive to be ignored.
I suppose you could accuse us of drinking each others' Kool-Aid. But you could also say a bunch of guys who look for investment opportunities all day find themselves irresistibly drawn to the highest-quality assets and businesses in the world.
One group of people knew how we felt about safe big-cap blue chips before anybody else – our Alliance members. They pay a one-time fee plus a nominal annual maintenance fee to get all our publications (except Phase 1) for life. And they're invited to attend our annual Alliance meeting, held this year in Zurich, Switzerland. We'll spend a day going through our favorite investment ideas, hearing from some of our favorite businesses and investment firms, and then we'll sit down to an elegant dinner and talk about life. It's a great time, one I never miss.
I e-mailed Microsoft's investor relations office to see if the rumor is true about the company issuing debt to buy back stock and pay dividends. I got a one-sentence reply from a fellow named Peter Wootton at the PR firm Waggener Edstrom: "As a policy, Microsoft does not comment on rumors or speculation." So it's still just a rumor.
I e-mailed back to ask why Microsoft needed to send my question to a PR firm to issue a one-sentence reply. No reply yet. Maybe Waggener Edstrom doesn't comment on comments about rumors or speculation or answer questions about questions?
Somebody obviously believes the rumor, because Microsoft's share price has held onto the approximately 6% gain realized since a Bloomberg story first mentioned the buyback.
It's believed Microsoft will borrow $6 billion or so, an amount that will allow it to keep its triple-A credit rating. Even though the stock is up 5%-6%, it still trades at an enterprise value of less than nine times free cash flow. That's dirt-cheap for such a great business. There's hardly a better investment in the stock market than a great business Mr. Market hates.
Microsoft isn't the only company buying back stock... U.S. companies have announced $258 billion in stock buybacks so far this year, compared to $52 billion in the first nine months of 2009, according to stock market research firm Birinyi Associates. That's the largest increase in share repurchases for any January-to-September period since Birinyi started tracking data in 2000.
Investors are encouraging share buybacks, too. David Nierenberg is one of my favorite investors in small-cap stocks. His investment firm takes large, focused positions in companies with small market caps and engages management in a constructive way (which most people call "activism") to improve business results.
Today, Nierenberg filed a letter with the SEC that he wrote to the CEO of one of his company's big investments: RadiSys (RSYS). Nierenberg encourages the CEO to use some of the firm's cash to buy back shares and initiate payment of a regular cash dividend. Nierenberg thinks the company should repurchase its stock when it trades for $8 or less. (It's around $9.45 today.) That's a good one to keep on your radar screen. It's not often a company's smartest, biggest shareholder tells the world the exact price at which he thinks the stock is suitable for creating shareholder value via buybacks. If it's a bargain for them, it's a bargain for you, too.
Attached to Nierenberg's letter is a research piece by Tavis McCourt of Morgan Keegan called "Why Cash Hoards Are Destroying Public Equity Value in Tech." McCourt says large, mature technology companies like Microsoft, Cisco, Dell, Apple, and many others should pay out 70% of their profits in dividends. He provides a list of 21 stocks he believes would appreciate an average of 76% above current prices, assuming a 3.6% dividend yield.
McCourt's hypothetical dividend scenario would more than double the share prices of National Semiconductor, Texas Instruments, CA Technologies, Computer Sciences Corp., Microsoft, Corning, Dell, and Hewlett-Packard.
Problem is, most big tech companies get more than 70% of their distributable profits overseas. They'd have to transfer the money into the U.S. to pay it out in dividends. That would cause substantial corporate tax liability. That's why Microsoft is thought to be borrowing billions to pay out to shareholders, instead of paying it out of existing cash. McCourt says our aging population wants income investments, a fact politicians seeking re-election should want to exploit. Maybe McCourt should call his report, "How the U.S. government keeps you from getting rich in the stock market."
If Komrade Obama wanted to make us all more docile, he could eliminate double corporate taxation and allow repatriation of overseas corporate profits without penalty. We'd all be so happy to see Microsoft at $55 a share instead of $25 a share, we'd barely notice when he seizes our paychecks before we get them...
That's what they're talking about doing in the U.K. – seizing paychecks before employees get them. The government there is considering a plan to first send U.K. paychecks to Her Majesty's Revenue and Customs (HMRC). The HMRC would deduct the appropriate tax and send the poor employee what's left (if anything). Good luck getting your money back when they deduct too much.
And if you think U.S. tax authorities aren't coming after you, watch this Orwellian video. It reminds me of the movie, Eagle Eye in which a government computer with a feminine voice can track anyone's movements and access any financial account. Am I paranoid or is it getting really scary around here?
New highs: Atlantic Power (ATP.TO) and Philip Morris International (PM).
Not much in the reader feedback this morning. You better write in soon. If you don't, I'll do a whole Digest on the wit and wisdom of George Soros.
We'd love to hear about your favorite investments or maybe about a business you know that's having great success. Write feedback@stansberryresearch.com.
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September 21, 2010