What I Learned From Sharing an Office With Porter

What I learned from sharing an office with Porter... An appreciation for 'capital efficiency'... The high costs of building a new business... A better – and much cheaper – alternative... Revolutionizing the software industry... An incredible 256% gain in 18 months... Hunting for 'uncovered' opportunities in this sector...

You can learn a thing or two when you share an office with Porter...

Regular Digest readers know Porter founded Stansberry Research in 1999. And over the past two decades, our company has grown into one of the world's largest independent financial publishers.

I (Bryan Beach) joined Stansberry Research in 2012. Living in suburban Atlanta, I travel to our Baltimore headquarters about once a month for meetings. And for the first five years or so, one of the highlights from these trips was my front-row seat to "The Porter Show."

Back then, Porter's office was a converted bedroom in a 19th-century mansion...

He shared the space at the time with his former Stansberry Radio co-host Aaron Brabham. When I was in town, I worked at a desk in the corner of the room.

Longtime Digest readers who remember Porter and Aaron's radio show can appreciate how hard it was to concentrate in that setting. The two of them were always going at it. But despite all the debates between Porter and Aaron, we still got a lot done...

In my five years as a reader before coming to work at Stansberry Research, I always figured that Porter was a prolific writer. Between Stansberry's Investment Advisory, all the Digests, and other publications, it seemed like his byline always popped up in my inbox.

Being in the room as he churned out essay after essay only strengthened that view... Porter can write more in three hours than I can in three days.

These days, our firm has outgrown the old Victorian mansion... Our headquarters are now in a modern building around the corner in the historic neighborhood of Mount Vernon.

Porter no longer needs to share his space... In the new building, he has a corner office all to himself. And now, when I come into town, I sit out in the "bullpen" with the other analysts.

Despite the change in scenery, I still recall many of the lessons from those early years...

I'm a certified public accountant ("CPA"). And as a CPA, I'm naturally a "numbers guy." I don't have an entrepreneurial bone in my body.

So it fascinates me how Porter approaches every investment pitch with that type of mindset... He would always ask us, "Would you want to own 100% of this business for the rest of your life?" That's how an entrepreneur thinks.

I'm convinced that Porter's appreciation of "capital efficiency" is due in large part to this thinking. (As regular readers know, capital-efficient businesses grow rapidly without needing to invest in capital expenditures – like new buildings, factories, and equipment. These types of expenditures drain valuable cash and lower returns on investment.)

In 2012, we sat down to build the 'Capital Efficiency Monitor' for Stansberry's Investment Advisory...

Porter and I came into this process from different angles...

By looking only at the "statement of cash flows" in a company's financial statements, I could see if it was a capital-efficient business by the amount of cash it generates from its operations. I'd also pore over common metrics – like a company's return on invested capital and how well it generated shareholder returns (stock buybacks, dividends, etc.).

Porter appreciated all those financial metrics as well. But to serial entrepreneurs like him, capital efficiency isn't just a bunch of numbers on a page. It hits much closer to home...

It's cash in your personal bank account.

Porter also asks questions like, "How much cash do I need to spend to grow this business?" and, "How much will it cost me to bring in and satisfy one new customer?" The less cash it takes a business to do these things, the more capital-efficient it is.

As a business, Stansberry Research is incredibly capital-efficient... If we doubled our subscriber base overnight, we wouldn't have to make significant cash investments to fulfill those obligations.

We already have our team of dozens of analysts and editors in place. There would be no factories to buy. No inventory to sell. We would just need to send twice as many e-mails.

I was familiar with the power of capital efficiency from working in the software industry...

Before coming to Stansberry Research, I worked in accounting and finance at a publicly traded software company – including four years as the company's controller. Then, I started a small accounting and finance consulting practice that catered only to software clients.

Software companies are highly capital-efficient, like our publishing business... The cost to produce each software sale is extremely low.

Software is just computer code... so the cost of producing another copy of a program is next to nothing. It's roughly the same whether you produce a single copy or 1 million copies.

Accounting geeks can appreciate the power of the capital-efficient software model by looking at financial statements...

The average gross margins of all software companies in the benchmark S&P 500 Index equaled 81% last year. That's almost double the 45% average for all other industries.

So, not surprisingly, software has become one of the most popular corners of the market...

In 2018, Savneet Singh – one of the most successful young entrepreneurs you'll ever meet – explained in an interview why he and a group of investors decided to focus solely on the software industry. As he explained on The Investor's Field Guide podcast with Patrick O'Shaughnessy...

I was running a technology business that had heavy bets on software. My friends were all software investors, and we started saying, "Well, what if you created the 'Berkshire Hathaway of Software?'"

As Singh continued in the podcast...

We were like, "Wow! If Warren Buffett was 30 years old, [software] is all he'd be investing in. It is a business that clearly has a moat... Because your average customer lasts 50 years... you can raise prices every year and no one's going anywhere. And you have the ability to reinvest for growth. That sounds like an amazing place to be."

Singh was running another business – a gold-trading platform – when he realized how important software purchases were to his company's success. The software industry is no longer a mystery... The entire market knows all about the sector's thick profits.

As a result, investors have been bidding up the shares of software companies...

Over the past 15 years, software companies have returned 20% per year, on average. The overall market produced an annual return of around 9% over the same span.

Most investors would be ecstatic if they made twice the returns of the overall market for a decade and a half.

But the thing is, you could have done even better with a small sector of the software industry. It's a lesson that Porter learned firsthand while building another business about five years ago. This was back when I still had a front-row seat while sharing Porter's office...

While starting up OneBlade, Porter discovered one of the world's most capital-efficient companies...

And more important, he later turned it into an incredibly profitable recommendation for Stansberry's Investment Advisory subscribers. (We'll get to that part of the story in a bit.)

As many of you know, Porter launched OneBlade in 2015 to complete his quest to make the world's finest shaving razor. I remember sitting in the old bedroom-turned-office back in 2014 and 2015, listening to Porter on calls with OneBlade CEO Tod Barrett as they started to build out the tech infrastructure to operate the company's online store...

They needed to pay for servers... a data center... an inventory-management system... and a payment-processing system. Plus, they had to hire enough folks to run everything.

The estimated costs? $250,000 and six months' worth of in-depth planning. It would be a tremendous investment for the young startup... especially after already spending about $1 million and looking through nearly 100 different prototypes to make the actual product.

But after doing some research, Porter and Tod discovered a better – and much cheaper – alternative. They found a company that would handle all the headaches for them... Even better, this company would do everything for a relatively small, recurring subscription fee.

I'm talking about e-commerce software pioneer Shopify (SHOP)...

Porter was so impressed with the company's offerings that he asked me to start reviewing the company as a potential recommendation in Stansberry's Investment Advisory.

It was immediately clear what Porter, as a business owner, found so compelling about Shopify... Instead of the huge investments Porter and Tod had been mulling before, Shopify's software offered an innovative and relatively new model that solved OneBlade's online-store problem.

OneBlade didn't need to buy any servers or software licenses. And it didn't need to hire any new employees. The best part? Shopify would have everything up and running in just six weeks.

You see, Shopify operated its business using the Software-as-a-Service ("SaaS") model...

The secret to the SaaS model is "cloud computing" – or using the Internet to access its software. We take it for granted today, but it was still a pretty new idea in the early 2010s.

Porter didn't know much about how Shopify operated at the time... but he knew its SaaS software solved a major problem he faced... And Porter realized that if this solution worked for OneBlade, it could work for hundreds of thousands of small businesses across America, too.

As I researched the business, I immediately liked the numbers. I also believed Shopify had a cool product. And during a conversation with Tod, he assured me... "Bryan, this product isn't just 'cool.' It changes everything."

Given my background in software, it's ironic that Porter, a financial-research publisher, and Tod, a product-development guy at heart, needed to fully convince me about the power of Shopify's SaaS business model...

But all my previous experience came with the much older, traditional, 'perpetual license' software model...

Under the perpetual license model, the customer buys the software and pays a large, upfront, one-time license fee. Customers must also shell out thousands of dollars more to buy servers or computers to store and run the software.

In addition to the license and hardware costs, customers must also pay for the software installation... and to train their employees to use it. These extra fees are known collectively as "professional services."

And the costs don't end there... On top of the license, hardware, and professional-services fees, customers also need to pay for "maintenance."

New software rarely works perfectly when it's first released... Maintenance fees cover the cost of troubleshooting the software – things like customer support calls and bug fixes. These fees also give customers the right to receive future software updates and upgrades.

You can see how this all adds up... As I said earlier, for OneBlade, Porter and Tod figured out that these costs added up to $250,000 up front – not including the maintenance.

Buying and installing new software under the perpetual license model is an expensive and time-consuming process. But that's the way the software industry operated for decades.

The SaaS model changed all that...

SaaS customers rent the software, paying only small recurring fees as they use it.

While working as the controller of the software company, I spent most of my time properly applying revenue rules under perpetual license agreements... This task involved extensive knowledge of a rule book that rivaled the size of a phone book. At that point, "the cloud" was still in its infancy... and most software applications weren't ready for the SaaS model.

And since my employers and clients weren't dealing with the cloud, it wasn't until I started studying capital efficiency with Porter that I first thought about software as a customer.

Watching the OneBlade launch was a fascinating case study. That's when a light bulb switched on, and I began to fully appreciate the SaaS model...

Buying under the SaaS model saves precious cash for software customers... as well as the time and back-office headaches of installing and maintaining the software. Instead, these companies can focus on building their businesses and keeping their own customers happy.

The SaaS model is a much more capital-efficient model for customers...

That capital efficiency translates into fast growth and big profits. And it's why investments in pure SaaS companies vastly outperform investments in traditional software companies...

About 400 software companies trade on the public markets in North America. But only around 70 of them are pure SaaS companies that have gone public since 2004.

If you invested in nothing but these pure SaaS companies when they went public, your annual returns would have crushed the return of not only the overall market, but all other software companies.

Since their initial public offerings, SaaS companies returned an astounding 56% per year on average. That's nearly three times higher than the broader software sector... and six times higher than the overall market. No other sector produced results anywhere near that.

Even among the stellar collection of SaaS companies, Shopify is an outlier...

Right after OneBlade signed on as a Shopify customer in March 2016, thanks in part to my deep dive for Porter, we recommended buying SHOP shares in Stansberry's Investment Advisory.

We made the recommendation long before it became a darling of Wall Street and newsletter pundits in recent years. We hit our trailing stop loss after 18 months... booking an incredible 256% gain.

But in hindsight, we wish we would have held on...

Shopify has continued to soar. The stock is now up more than 1,500% since our initial recommendation! That's a compounded annualized return of more than 100%.

SaaS companies like Shopify are no longer a secret...

Legions of professional money managers have finally figured out what Singh and Porter learned simply from running their own businesses...

SaaS is the most capital-efficient sector of the already capital-efficient software space.

The secret of the massive success of the SaaS model is that it isn't just capital-efficient for software vendors... It's also the most capital-efficient way for customers to access and use software.

These days, the market doesn't really have a SaaS "bargain bin"...

Most SaaS companies are growing fast and rarely look cheap. They typically trade for more than 10 times sales – compared with less than four times sales for the S&P 500. (Shopify traded at about 10 times sales when we recommended it... and now, it trades for a whopping 38 times sales.)

Buying into the hottest sector of an 11-year bull market isn't a recipe for success. And at this point, if you blindly buy an SaaS business, you could get burned... Hypergrowth is likely in the rear-view mirror for stocks that have already run up five or 10 times.

That's why I've focused on finding 'uncovered' SaaS opportunities for the past year...

In my Stansberry Venture Value service, I'm looking for SaaS businesses that the market is currently missing for one reason or another.

Like all my Venture Value recommendations, these companies are tiny. There's almost no analyst coverage... and no chance of showing up on an institutional investor's Bloomberg terminal.

So far, my team and I have already uncovered three of these "hidden" SaaS opportunities... They're the type of early stage companies that could easily grow 10-fold in a few years – especially considering the impressive track record of this world-class business model.

If that sounds like something you would be interested in, I hope you'll take the next step...

Stansberry Research publisher Brett Aitken just put together an urgent presentation to explain why this is the most lucrative stock strategy we've seen at our company. And even better, he has arranged a special, limited-time offer for anyone who wants to access this research right now...

Today, you can get your hands on all my research in Venture Value – including a brand-new special report with all the details about the three SaaS companies I mentioned above – for more than 65% off the regular price. Get the full story right here.

New 52-week highs (as of 1/27/20): Becton Dickinson (BDX), DB Gold Double Long ETN (DGP), Quest Diagnostics (DGX), SPDR Gold Shares (GLD), Lennar (LEN), and Lundin Gold (LUG.TO).

In today's mailbag, paid-up subscribers compare the "Wuhan virus" to influenza in America... continue the conversation about English speakers in Singapore... and discuss Ten Stock Trader editor Greg Diamond's breakdown of the current market environment in yesterday's Digest. As always, you can e-mail us at feedback@stansberryresearch.com.

"With all the excitement about the deaths from coronavirus, chew on this: 80,000 Americans died from the flu [in the 2017-2018 flu season]. Influenza was deadlier [that] season than it has been for at least four decades. Where is the uproar?" – Paid-up subscriber IJ K.

"I was born here in Singapore. I would like to add to what Kim [Iskyan] has written... Not only is English one of the four official languages, it is also the working language for business and government. Hence everything is in English at the pharmacy.

"In schools not only do we learn English as a subject, it is also the language of instruction. English is the language we commonly use when we want to communicate with someone who may be from the same or different ethnic group. Very often in informal social settings we may use English with various expressions borrowed from the other languages. This code switching is sometimes not easy to understand." – Paid-up subscriber Grace C.

"Thanks again, Greg. I like keeping an eye on these 'rhymes.' Personally, I as well think it is not wise to ignore them." – Paid-up subscriber Tony C.

Regards,

Bryan Beach
Roswell, Georgia
January 28, 2020