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As with several S&A newsletters lately, lots of Extreme Value and 12% Letter stocks have continued making new highs. Wal-Mart made another new high yesterday. At around $75 today, Wal-Mart's share price is up about 55% from its August 2011 low of about $48.
I (Dan Ferris) could name plenty of other really great performers in the model portfolio of my two advisories. Sean told you about AB-InBev yesterday. It's up more than 80% since I recommended it a little more than two years ago. Constellation Brands has soared 66% in 16 months, with most of the gains arriving in the last four months. That's a long way to go in a short time.
I'm not bragging, though it'll sound that way to some folks. Most people see their stock holdings rise in a rallying market… and figure it confirms their genius. And they feel stupid when the market goes down. Bad idea. Better to assume the market doesn't know anything about you.
I don't believe anything the stock market says. When it says I'm stupid, I don't believe it. When it says I'm smart, I don't believe it. And when a whole bunch of my picks go straight up for months and months, I don't congratulate myself on my brilliance… Instead, I start thinking about selling.
I'm not saying anyone holding Wal-Mart, AB-InBev, or Constellation Brands should rush out and sell them. Nor am I predicting a market drop since guessing the day-to-day movements of the market is largely a fool's errand for investors. But one of the hardest lessons I've had to learn over the years is that you can't make money in stocks without ringing the register every now and then (though certainly not as often as most folks would like)... And the register doesn't ring as long as Mr. Market has your cash in his pocket.
But I will have some specific ideas about what to sell in upcoming issues and updates for Extreme Value and 12% Letter readers.
Several S&A editors have selling on their minds, too. Dr. David "Doc" Eifrig discussed the importance of having a plan to sell in the latest issue of his Retirement Millionaire (which subscribers received yesterday)…
And Porter and I (Sean Goldsmith) have been thinking about what to sell recently, too. We talked about dying companies last night at dinner...
Porter and I had dinner in New York City last night with a top hedge-fund manager and an executive at one of the biggest Wall Street banks. We ate at Adour in the St. Regis hotel (a wonderful French restaurant, should you need some place to dine in the city).
The hedge-fund manager brought up troubled computer manufacturer Hewlett-Packard.
"How much debt do you think HP has?" Porter asked. (Keep in mind, the company's market cap – the value of all its outstanding shares – is about $28 billion.)
"$20 billion?"
Porter pointed his thumb in the air… "higher."
HP has $29.7 billion of long- and short-term debt on its balance sheet and total liabilities of around $85.5 billion. It has so much debt because the company has made horrible acquisitions over the years (starting with the desktop-computer brand Compaq a decade ago and, more recently, the mobile-device-maker Palm). Hewlett-Packard borrowed tons of money to overpay for these companies. Now, it's left with garbage.
The company's single-largest asset is its $36.8 billion in goodwill. Goodwill is the premium over book value a company pays for an acquisition... HP conceivably overpaid for these acquisitions by $36.8 billion.
In addition to tons of debt and poor acquisitions, HP has gone through three CEOs in two years. Starting in 2010, longtime CEO Mark Hurd left following a sex scandal. Leo Apotheker replaced him. He was fired before his one-year anniversary last September. Now, former eBay CEO Meg Whitman holds the position. At a time when HP should have been developing strategies to regain market share and combat a falling market for PCs, it instead had to focus on shuffling executives.
HP also faces competition from Asia. Today, news came out that Lenovo bested HP to become the No. 1 PC maker for the first time in its history, according to research firm Gartner.
China-based Lenovo had a 15.7% share of global shipments in the third quarter, compared to 15.5% for HP.
A bigger question... Is it an achievement to be No. 1 in a declining industry? While Lenovo captured a bigger slice of the market, global shipments of PCs in the third quarter dropped over 8% from a year ago.
We like to short three types of companies... ones with an unsustainable debt load… ones in obsolete markets… and frauds.
HP has an unsustainable debt load. And whether or not you believe they'll eventually become "obsolete"… PCs have lost market share to tablets and mobile devices. We haven't discovered any fraud...
I also heard one of the craziest finance stories of my life at dinner. To be fair, the story was in the New York Post (a newspaper that's notorious for trading in rumor and gossip)... But one of our guests was friends with an involved party.
Elliott Associates is one of the largest hedge funds in the world. And it's known for being litigious. The fund's latest legal case is one of the most entertaining we've seen in the finance world...
Elliott CEO Paul Singer bought around $600 million in Argentine sovereign bonds as the country was headed into default in 2001. He paid around $0.15 on the dollar.
Singer has since won judgments saying Argentina owes him $1.6 billion, including interest. But Argentina won't pay.
NML Capital, a unit of Elliott, has been searching for years for assets it can seize to recoup its money. And the firm finally found something... Elliott seized an Argentine naval ship, complete with 70 sailors, off the coast of Ghana.
Now, the ship is being held captive in the port city of Tema, near Ghana's capital of Accra. NML told Argentina's lawyers it would accept $20 million in exchange for the ship. Argentina still won't pay.
The case has brought up many legal issues. Among them… can the courts tell sovereign nations what to do with their money? It's a complicated issue, which you can read about here.
We doubt the courts will side with Elliott... It's much easier to say no to a hedge fund than overrule international laws governing sovereign nations.
Yesterday, we discussed a way to gain exposure to the huge upside in the mining and natural resource sectors... without taking on as much risk.
Small mining stocks, in particular, are risky. Miners sell investors on the dream of huge resource discoveries and giant gains... But most of the companies fail. They stake a plot of land, raise capital, and quickly burn through the cash exploring and drilling for resources. Once the cash is gone, the party's over.
But we told you about another kind of company called a "royalty company" that invests capital in exploration companies in return for a percentage of that firm's future profits. Royalty companies only risk their invested capital... But their upside is unlimited.
As we showed you yesterday, the value of royalty company stocks can steadily rise over years. Some have returned thousands of percent to investors. Royal Gold, one of the best-known royalty companies, for example, went from a few cents a share to more than $90 a share today. That's a gain of hundreds of thousands of percent.
Now, no one can promise that kind of return in any investment… Royal Gold is one of Wall Street's great success stories... But the point is, royalty companies have just as much upside potential as a mining stock, but carry much less risk.
The trick to making big gains is to buy these companies when they're young and under the radar... when they're starting to put their capital to work. And Phase 1 editor Frank Curzio has found an outstanding early-stage royalty company. He's so excited about its potential… we've dubbed it "the next Royal Gold."
One of Frank's best contacts in the resource sector, an industry CEO, tipped him off to a tiny royalty company – it's trading for less than $1 a share – that has investments in some of the best resource projects in the world. Early investors in this company could make many times their initial investment.
We spoke with Frank on the phone this morning. He was telling me how enthusiastic he is about this opportunity. He said it could be one of the best-returning stocks he (or any S&A analyst for that matter) has ever recommended.
Frank is hosting one of his subscriber-only conference calls tonight with the CEO of the company… On the call, they'll discuss details of the company's business model and its huge upside potential…
New 52-week highs (as of 10/10/12): 1st United Bancorp (FUBC) and Wal-Mart (WMT).
Do you know where the mailbag is? feedback@stansberryresearch.com.
"I read your remarks about the false numbers being reported, if you think that is something look at the builders figures. I have been following lumber prices for 40 years and was in the construction business for over 30 years. If building is picking up how come lumber is going down. This means someone is lying." – Paid-up subscriber John Scholfield
"How do I find the 'mailbag'?" – Paid-up subscriber Shaw Skinner
Goldsmith comment: You found it!
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
October 11, 2012
What to sell... Talking stocks at the St. Regis... A hedge-fund pirate... A special conference call... Where's the mailbag?...