Where is the money going?... 70 million shares of Microsoft... New high for cigarettes... The market finally likes dividends and emerging markets... Making $1 billion in seven months... San Fran real estate frenzy... How to use trailing stops...
In yesterday's Digest, we discussed the downfall of the popular momentum stories – Amazon, Tesla, Twitter, etc.
Clearly, the market has begun to shun these expensive stocks, where valuation is no reflection of fundamentals (like Twitter's peak valuation of 1,154 times forward earnings).
But where is the money going? It's tough to find value in U.S. markets, which are trading at all-time highs. So investors are getting defensive... They're buying stocks with fair valuations and strong dividends.
Jeff Ubben, founder of hedge fund ValueAct Capital, is buying Microsoft (MSFT)... Lots of it.
Ubben purchased around $2 billion of Microsoft stock – about 1% of the company – last spring. He bought another $115 million or so last week. Ubben's firm now owns 69.7 million shares.
The S&P 500 trades at an average price-to-earnings (P/E) ratio of 18, with an average dividend yield of 2%. Compare that with a conservative 15 times earnings for Microsoft, which pays a 2.8% dividend.
Blue-chip cigarette giant Altria Group (MO) hit a new high yesterday...
Altria sells popular brands like Marlboro and Black & Mild. It trades for 18.7 times earnings and yields 4.8%. It's not as cheap as Microsoft... But cigarettes are one of the most inelastic products in the world.
In the December 2013 issue of Stansberry's Investment Advisory, Porter and his analysts ran a study on how various stocks and sectors have performed during quantitative easing and tapering since 2008.
Tobacco was the best-performing sector when the Federal Reserve was tapering bond purchases... It lost an average of 4% (the overall market was down an average 16% during those periods). And nearly one-third of the companies in the sector actually showed gains during tapering (compared with just 6% of utility companies, for example).
From that issue...
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Financial research firm Bespoke Investment Group recently published a study showing how well dividend stocks are holding up versus the rest of the market.
When the study was published last week, the Russell 1,000 index was down 2% since March 5 – the same day momentum stocks began their decline. During that time frame, the 300 non-dividend-paying stocks in the Russell 1,000 fell 7%. Meanwhile, the top 300 dividend-payers actually rose 2%.
Money has also rotated into emerging markets...
When the Federal Reserve began to taper its bond purchases in January, money fled from emerging markets (which were already cheap) and into U.S. stocks.
Chinese stocks were trading for eight times earnings... Russia was trading for five times earnings (and yielding 5%). Russian stocks got even cheaper as the crisis in Ukraine escalated.
We discussed what happened to Indian stocks in the May 5 Digest... The market had fallen around 80%... Interest rates were high, India's currency was plunging, and the country was dealing with inflation. But there were also hundreds of companies trading at half their liquidation value.
Eventually, these stocks became too cheap to ignore... As Arjun Divecha – head of asset-management firm GMO's Emerging Markets Equity team – said at the Grant's Interest Rate Observer conference in New York last month... He has made the most money when things go from "truly awful to merely bad." (Regular Digest readers will recognize that sounds a lot like Steve Sjuggerud's "bad to less bad" theory.)
Divecha urged readers to buy Chinese banks and Brazilian utilities... The audience literally laughed when he presented some of his ideas – a wonderful sign for the contrarian.
But emerging markets have turned up... Steve Sjuggerud's True Wealth recommendation – the Market Vectors India Small Cap Fund (SCIF) – hit a new high today... True Wealth subscribers are up 27% since buying shares in January.
Seven months ago, asset-management firm Carlyle Group paid around $500 million to purchase nearly 50% of headphone maker Beats Electronics.
This week, rumors swirled that consumer-products giant Apple would acquire Beats for $3.2 billion. We're not commenting on the motives behind Apple's alleged acquisition or the benefit to the brand... But should the deal go through, Carlyle will earn more than $1.5 billion on its $500 million investment – a $1 billion profit in seven months.
No, that kind of return isn't normal... Even for the world's best investors. It's what happens in the frenzy of a bubble... Unlimited and cheap capital is available to acquire companies...
And it's not just in the world of private equity... Consider the state of San Francisco real estate...
From San Francisco news station KPIX 5... A home in the Glen Park neighborhood in San Francisco sold for $2.1 million – $600,000 above the asking price. Realtor Arrian Binnings told the station that wasn't even the highest offer. Binnings said most homes in the area are selling for 12% over asking price.
If you're looking to buy an asset that hasn't been warped by floods of capital, consider platinum...
S&A Resource Report editor Matt Badiali made the case for the precious metal in today's Growth Stock Wire...
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But Matt's sources tell him something could further disrupt the supply of platinum, which would send prices even higher...
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Still, Matt doesn't think you should buy now. Be sure to read his essay for the details.
New 52-week highs (as of 5/13/14): Brookfield Asset Management (BAM), C&J Energy Services (CJES), Callon Petroleum (CPE), McDonald's (MCD), Mandalay Resources (MND.TO), Altria Group (MO), Pepsico (PEP), Market Vectors India Small Cap Fund (SCIF), ProShares Ultra S&P 500 Fund (SSO), Targa Resources (TRGP), Travelers (TRV), Union Pacific (UNP), U.S. Commodity Index Fund (USCI), and Alleghany (Y).
In today's mailbag, the return of the trailing stop question... Have stops saved you in the past? Let us know here... feedback@stansberryresearch.com.
"I understand that stop losses are designed to limit the ... losses. You are very specific with the stops of the positions that are in the 'red.' But shouldn't we protect the profits in the other positions by raising the stop losses? Can you comment on that?" – Paid-up subscriber Julio
Goldsmith comment: Yes, that's why we typically recommend using trailing stops. You raise the stop as the stock rises in price. For example, if you set a 20% trailing stop on a $10 stock, you would sell when the stock hits $8. Should the stock rise to $20, you move the stop with it... And you would now close your position if shares fell below $16. You would lock in at least a 60% gain.
Of course, we never recommend entering your stops in the market. It's like playing poker with your cards facing up. So we recommend trying our corporate affiliate, TradeStops, which will track your stop losses and notify you when it's time to sell. Learn more about TradeStops by clicking here.
Regards,
Sean Goldsmith
New York, New York
May 14, 2014
What the smartest man in real estate likes (and hates) today...
One real estate guru recently offered his opinion on the commercial and residential real estate markets at a conference.
We were there... and in today's Digest Premium, we're sharing his thoughts...
To subscribe to Digest Premium and access today's analysis, click here.
What the smartest man in real estate likes (and hates) today...
"I have never, not once in my entire life, been more impressed by any other capital manager than I was by Jonathan Gray. If you know me at all, that should mean something to you."
That's what Porter had to say about Jonathan Gray, global head of real estate for private-equity behemoth Blackstone Group after hearing him present at the Grant's Interest Rate Observer conference in New York City this year.
Porter wrote an entire Digest about Gray and the publicly traded mortgage REIT he developed that pays investors a 7% dividend. Porter calls it "the highest-quality 7% yield available anywhere."
In addition to telling attendees about the Blackstone Mortgage Trust (BXMT), Gray also discussed the real estate market.
Gray said he thinks everyone will be surprised how much real estate owners will be able to increase rent in the future...
The reason for that (on the commercial side) is that commercial inventory is running at around half of historical levels.
Gray said multiples might look high now, but that's based on depressed income.
Also, today there's the widest spread in history between cap rates on suburban office space (9%) and urban office space (New York City is 4%). Gray noted that more people are looking for work in cities today, so the spread is somewhat justified. Though there are still opportunities.
He also gave a good rule of thumb for real estate investors... Never pay more than replacement cost for properties. Gray gets worried when he sees "lots of capital or lots of cranes."
Gray also discussed the residential real estate market. (Blackstone owns around 43,000 single-family homes.) He noted Blackstone purchased most of its houses for around $150,000. These homes used to cost $300,000. That leaves a lot of margin for error.
Like commercial real estate, Gray is also bullish on the future of residential real estate... "Almost everyone in this room is going to be surprised at the strength in residential real estate," he said.
But he's not bullish on every sector. Gray believes retail real estate is highly risky today, especially older, lower-class malls. Digest readers won't be surprised at that assessment... Porter's lead research analyst Bryan Beach discussed the death of malls – and rise of online retail – in the March 28 Digest Premium.
– Sean Goldsmith
What the smartest man in real estate likes (and hates) today...
One real estate guru recently offered his opinion on the commercial and residential real estate markets at a conference.
We were there... and in today's Digest Premium, we're sharing his thoughts...
To continue reading, scroll down or click here.