Thu, Aug 6, 2015

Why Tesla is plunging (again)...

Why Tesla is plunging (again)... Why our analysts disagree... What they agree on today... One of the biggest opportunities in the world... Where to find high-quality companies at great prices... 'I've never been so sure of a 500% gain'...

It's been far too long since we've commented on electric carmaker Tesla (TSLA)...

We've explained our bearish stance on the company several times (most recently in the May 7 Digest). As we noted, Tesla outperformed analyst expectations by losing only $45 million in the first quarter.

The company reported earnings last night after market close, and the numbers weren't great (again)...

Despite rising revenues and car deliveries, Tesla lost $184 million in the second quarter – nearly three times worse than the same quarter a year ago, and more than four times worse than the first quarter's numbers.

It also lowered its year-end sales target from the 55,000 vehicles it previously estimated to between 50,000 and 55,000 vehicles.

One of the biggest questions surrounding Tesla's earnings announcement was an update on the release of the company's new Model X SUV.

Founder and CEO Elon Musk said deliveries will begin on September 30, but on the call noted that the company has experienced some difficulties thus far...

Some things are definitely a lot more challenging than others. And the Model X is I think a particularly challenging car to build. Maybe the hardest car to build in the world. I'm not sure what would be harder... Our biggest challenges are with the second row seat, which is, it's an amazing seat, like a sculptural work of art, but a very tricky thing to get right.

Tesla expects the Model X to provide the boost required to push the company's sales into the now-lowered estimates. But Musk explained that the company depends on thousands of suppliers... and any unexpected challenges could hurt the highly anticipated launch of the Model X.

The market punished Tesla, sending shares down as much as 13% today.

Still, the company remains popular among investors, despite continuing to lose money and a CEO who thinks the stock is overvalued. Today, Tesla's market cap is around half that of luxury car manufacturer BMW, which sells around 70 times more vehicles.

From a valuation standpoint, Tesla is one of the most absurd stocks in the market.

It trades at a price-to-book ratio of more than 40 times, and a forward price-to-earnings ratio of nearly 75 times. (The company doesn't have a trailing price-to-earnings ratio because, well, it doesn't have any earnings yet.)

And it trades for an enterprise value of 1,770 times its earnings before interest, taxes, depreciation, and amortization (EBITDA).

To put that last statistic into perspective, here's what Porter has to say about the EV/EBITDA ratio, from the July 25, 2014 Digest...

EV/EBITDA is a measure of how much the market is willing to pay for each dollar of earnings. A good rule of thumb is that less than 10 is cheap and more than 20 is pricey.

Switching gears, we move from a "market darling" to one of the most hated sectors in the market today.

But first, a quick reminder...

Longtime Digest readers know one of the things we're most proud of here at Stansberry Research is the independence and quality of our research.

Unlike many other research firms and banks, we are not beholden to advertisers or the companies we're analyzing. We work only for you, the subscriber. We've hired some of the best analysts in the world, and we allow them to share their true opinions.

But this means our analysts sometimes have differing opinions... and this can be confusing for new readers.

Often what seems like a conflict may simply be a difference of time frame or strategy. (For example, some of our trading services may take shorter-term positions that appear to contradict recommendations in our advisories with longer-term investment focuses.)

But sometimes our analysts disagree even on individual stocks. And while it may occasionally be difficult to balance these opposing views, it ultimately allows us to provide you with the best research possible.

On the other hand, when several of our analysts agree on an idea... it means you should pay close attention.

And that's exactly what's happening today in the resource sector... in gold stocks in particular...

Porter laid out his bullish case in the July 24 Digest.

In short, he believes we're approaching a "reversion to the mean" in asset prices. He expects a "substantial" correction in U.S. stocks and a "dramatic" reversal in gold. As he wrote...

I believe that some combination of rising interest rates, rising defaults in the corporate bond market, and global currency/trade wars will likely cause the U.S. stock market to decline substantially. No, I don't know the exact timing of such a move. But I believe it will happen within the next few months. Downward reversion to the mean will play a role.

Likewise, I notice that the gold and precious-metals sector is in the midst of a three-year decline. I see that junior mining stocks have declined every year since 2011. Most of the best names in the space are down more than 80%.

I'm 100% certain that eventually, this downward trend will reverse. And I know that when that occurs, the resulting price increases will be dramatic. I believe average gains in excess of 250% are likely.

Porter recommends taking a small portion of your portfolio and slowly building a position in the highest-quality gold companies...

Sell about 10% of your existing portfolio. Take profits from things like biotech and airlines – industries that have enjoyed huge runs higher. With this 10% of your portfolio, identify eight to 10 gold stocks that you're certain will be in business five years from now.

Focus on high-quality business models (like royalty companies) and companies with high-quality balance sheets. Focus on great management teams. Buy these eight to 10 names on days when gold gets kicked lower and the stocks sell off even more. Learn to enter "stink bids" – limit orders that are 5%-7% below the market price. You'll be surprised how often those bids will get filled in a weak market.

Build this portfolio patiently over the next six months. Be a buyer this fall when other investors are selling for tax-loss reasons. That'll be the bottom.

Our colleague Steve Sjuggerud is getting bullish on gold and gold stocks, too...

Steve has made a fortune for his subscribers by recommending cheap and hated assets. And right now, Steve says gold and gold stocks are both. As he noted in today's DailyWealth...

Nobody is expecting a crisis (similar to the one Greece just had) in the U.S., so the prices of classic "hard assets" – like gold and gold miners – are attractively priced today.

The price of gold – astonishingly – is at a five-year low. Compare that with stocks, which have run up for six consecutive years.

And gold is HATED today. According to my friend Jason Goepfert (who runs SentimenTrader.com), gold sentiment today is lower than it was in February 2001 – when gold was around $260 an ounce.

As Steve pointed out, gold is even more hated today than it was in 2001... just before it started a 10-year, 700%-plus rally. But as hated as gold is, the sentiment toward gold stocks could be even worse. More from Steve...

"Prices of many mining companies have fallen by over 90%," my friend and successful natural resources financier Jeff Phillips reminded me over lunch this month in San Diego.

Jeff is using the massive bust in small-cap mining companies as a buying opportunity...

"I don't know if the new bull market in resources starts six months or 12 months from now," he said. "But the prices right now for quality assets are incredible. You don't have to buy lower-quality assets that are cheap... Why do that when you can buy high-quality companies at great prices today? I'm buying."

Steve's investment philosophy is to wait for an uptrend to start before buying. So unlike Porter, he's not buying just yet. But he expects to buy "heavily" soon...

The great part about holding gold and gold miners is that your downside risk will be limited. With gold at a five-year low and the shares of mining companies down by 85%, you will hardly be buying at the top when the time comes!

Once the uptrend kicks in, I suggest you buy these "crisis hedges" heavily.

And if our colleague Jeff Clark is correct, that uptrend could be starting soon.

In today's Growth Stock Wire, Jeff explained why the "smart money" says gold is headed higher from here...

Commercial traders are the so-called "smart money." They're merchants, miners, explorers, or bankers in the gold business. They use futures contracts to hedge their exposure to gold and protect themselves from adverse downside moves.

Each week, the Commitment of Traders (COT) report shows the positions (long or short) of the largest commercial gold traders. The short position in gold is almost always a positive number – meaning that commercial traders are usually short the metal. That makes sense since most commercial short positions are hedges against a future decline in price.

For example, if a major gold producer wants to lock in a guaranteed price on its gold production, it will short gold in the futures market – thereby hedging its bet. When gold is trading at a relatively high level and commercial traders expect it to be lower in the near future, the COT short index often hits near 300,000 contracts. However, when gold is trading low and commercial traders expect the price to increase, the COT short interest often drops to less than 100,000 contracts.

Last Friday's COT report showed the "smart money" was short just 14,000 contracts. This is an extreme that has marked at least a short-term bottom in gold over the past few years. History shows a double-digit rally is likely here.

But Jeff is also seeing signs that a long-term bottom in gold and gold stocks could finally be approaching. As he noted to his Stansberry Short Report subscribers last week...

We've seen plenty of short-term and intermediate-term bottoms for the gold sector over the past few years. Those bottoms were always good for at least a 15%-20% move higher in the sector.

But the conditions for a longer-term bull market in the gold sector haven't been in place since 2011. So each rally phase was really just an opportunity for traders to jump in and out of the sector with fast trades.

Now, it looks like gold stocks finally have the potential for a longer-term bull market.

In particular, Jeff pointed out the extreme relationship between gold stocks and the broad market today...

Consider this... while the S&P 500 has rallied sharply over the past few years, gold stocks have declined. Now we've reached the point where, relative to the S&P 500, gold stocks are as undervalued as they were in 2002 – at the beginning of the previous gold-stock bull market.

Take a look at this chart comparing the Gold Bugs Index ("HUI") with the S&P 500 ("SPX")...

A declining chart means gold stocks are underperforming the S&P 500. A rising chart means gold stocks are outperforming. Gold stocks have been underperforming the broad stock market for the past few years.

But now, the relationship is hitting an extreme level.

The ratio has now dropped below the 2008 bottom... and it's nearing the all-time extreme in 2000 that marked a major bull market high in stocks, and a major bear market low in gold stocks. Jeff believes we could be seeing the same thing today.

At the same time, Jeff says gold stocks are hitting a rare "oversold" extreme...

We're also seeing extreme oversold conditions on the Gold Miners Bullish Percent Index ("BPGDM"). Take a look...

The BPGDM displays the percentage of gold stocks that are in a bullish "point and figure formation" on the charts. (Point-and-figure charting is an old method of establishing short-term trends for a stock.)

BPGDM hitting zero means there aren't any gold stocks trading in a bullish formation. That's a rare condition that has only happened a few times over the past decade.

Taken together, Jeff says these signs suggest we're on the verge of a major, long-term bull market in the gold sector.

So... what should you do?

First, as Porter suggests, become familiar with the sector. Learn about the best companies and top management teams.

Consider slowly building positions in the stocks you'd like to own. If you're conservative, start slow or wait for a defined uptrend to increase your positions, like Steve suggests.

This conservative strategy is likely to double your money over the next several years with relatively low risk. And for most folks, this is plenty.

But if you're in a position to take a little more risk, we believe junior resource stocks are offering the kind of opportunity that only comes along once in a decade or more.

We've explained the explosive upside potential of these stocks many times, so we won't rehash it here.

But if you like the idea of starting with a small investment, and potentially increasing it by 10-, 20-, or even 30-fold... you owe it to yourself to learn more about the best junior gold companies now, before the next rally begins.

And no one in the world knows more about this sector than Doug Casey and our friends at Casey Research. Click here to take advantage of a special offer on their flagship junior resource advisory, International Speculator.

Great Minds Wanted, Wicked Pens Adored

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The ideal candidate for both roles is excellent at conducting research and performing relevant industry analysis, has a keen mind, is intensely curious, lives and breathes the world's markets, and writes great stories. Formal experience is preferred but may not matter, depending on the candidate.

If you've ever wanted to make a living reading, writing, and thinking, please send us:

•	A basic resume. Tell us what you've done before. We admire people who aren't afraid of hard work or odd jobs.

•	A writing sample. Tell us about an investment opportunity. We're interested in the fundamentals of your best idea, not something based solely on charts.

For more information on the Tech Analyst position, click here.

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New 52-week highs (as of 8/5/15): Acadia Healthcare (ACHC), American Financial Group (AFG), Activision Blizzard (ATVI), Becton Dickinson (BDX), Chubb (CB), SPDR S&P International Health Care Sector Fund (IRY), Constellation Brands (STZ), and short position in Viacom (VIAB).

In the mailbag, a question about our resource recommendations. Send your e-mails to feedback@stansberryresearch.com.

"Why do I need Doug Casey when I have an Alliance membership and Resource Report? Do I assume your analyst is second rate or not?" – Paid-up subscriber Dr. Ron Ceurvels

Brill comment: The short answer is these publications have a different research focus...

Matt Badiali and the Stansberry Resource Report team seek out the highest-quality investments available across the resource market. They focus primarily on large-cap natural resource companies. They examine everything from oil and gas to mining to agriculture, and employ several strategies to help new resource investors protect capital and book gains in the sector.

While they will occasionally recommend promising small-cap stocks, none of our analysts focus exclusively on the speculative, early-stage junior resource stocks with explosive upside potential like Doug Casey does in International Speculator. And as we explained in today's Digest, Doug and his team are EXTREMELY bullish on a specific group of gold stocks today. You can learn more about the opportunity to make several times your investment by clicking here.

Regards,

Justin Brill
Baltimore, Maryland
August 6, 2015

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