Why This Company Will Become Porter's Best Recommendation of All Time
A truly magical business... Why American Express will become my best recommendation of all time... How we quantify a 'great business'... What you're missing in Stansberry Data...
Last week, I (Porter) stuck my neck out...
I tried to explain why Warren Buffett's Berkshire Hathaway (BRK) isn't beating the market anymore. (It has underperformed the S&P 500 Index over the last 10 years.)
As expected, plenty of folks shot the messenger. Here's a real quote from a paid-up subscriber: "Beating up on a couple of guys like Warren and Charlie in their 90's is fun for you eh Porter?"
No, it's not.
It's sad – no, it's devastating – that Berkshire has moved so far away from its original strategy of buying the world's best businesses. Watching Berkshire provide financial support for banks and brokers, shove billions of dollars into a railroad, and become the country's largest regulated utility is heartbreaking.
It's like discovering that Niki Taylor (my favorite 1990s supermodel) is now waiting tables at Waffle House. Sure, someone needs to pour coffee at 3 a.m., just like someone's capital needs to support the railroad. But did it have to be Berkshire's?
In today's Friday Digest, I'd like to show you the flipside...
While you may not have access to unlimited millions in insurance float, you can still put your capital to work in the same way Buffett did for decades. In short, if you can understand the mistakes he's making now, you can avoid them. And I hope I can convince you to strictly limit your major, long-term investments to only the world's best businesses.
You don't need to make dozens of great investments. You don't have to publish a newsletter every month with a new investment idea. You don't have to manage a mutual fund or meet the diversification standards of some regulatory body. Like Berkshire, you're free to invest in only a few, truly great businesses.
In today's Digest, I'm going to show you how to do exactly that.
If you truly want to build wealth in the stock market, the strategy I outline below unquestionably offers the best chance at massive success. The irony is that this is always the easiest (and cheapest) way to invest.
Let's start with an example...
A few years ago, we noticed that one of the world's truly great businesses – credit-card firm American Express (AXP) – was selling at an incredibly low price.
In fact, relative to its earnings, American Express shares had almost never been cheaper. It was trading at the same valuation – about seven times earnings before interest, taxes, depreciation, and amortization (EBITDA) – as it did following the financial crisis. It hadn't been cheaper at any point in at least 30 years.
I'm certain we weren't the only investors who noticed American Express was down 50% from its highs. Likewise, I'm certain we weren't the only investors who noticed that the stock was incredibly cheap. But there's a big difference between knowing the price of something and knowing its value.
And I'd argue that we've turned understanding a company's real value into an art form. Here are our best secrets...
Great businesses have a few obvious characteristics...
The most important characteristic of all great businesses is their ability to generate large amounts of cash profits on precious little capital.
In this way, the world's best businesses are extremely "capital efficient." They produce a lot of capital but require very little to operate and grow. American Express is one of the most capital-efficient, capital-compounding machines that has ever existed.
When we recommended it to readers of my Investment Advisory in August 2016, it was producing almost $10 billion in free cash flow. That's cash profits after all capital expenditures. That's "owner earnings," or money that can be distributed to owners without hurting the future growth of the business. These profits equaled almost half of American Express' entire capital base ("net tangible assets").
That means after all capital investments, taxes, and overhead, AmEx was generating almost a 50% return on its net capital base each year. Imagine a mutual fund or a hedge fund that could produce the same results!
How are returns like this possible?
The secret behind American Express' incredible financial dominance isn't hard to understand...
For more than 100 years, the company has focused on creating a unique brand. It calls its strategy "PSS," which stands for Prestige, Service, Security. Back in the 1800s, providing these things to wealthy customers meant building the country's fastest and safest horseback courier network.
Another time, it meant safely shipping a huge quantity of gold to Paris to give thousands of stranded Americans a way home from Europe at the onset of World War I.
For many years, it meant providing traveler's checks that couldn't be stolen or lost. Today, of course, it means a credit-card network that delivers valuable benefits and services to its cardmembers.
This heritage and these advertising campaigns, which have explained the company's purpose to generations of Americans, created a brand estimated to be worth $19 billion.
This unique and incredibly powerful brand enables AmEx to exercise a tremendous amount of power in its core business. Unlike its competitors, American Express has three income streams, instead of only one.
The company earns processing fees (like Visa) when you use its cards. It collects interest (like Capital One) when its members exercise the optional credit function on their accounts. And unlike almost any other credit-card company in the world, it charges its cardholders an annual fee for the privilege of carrying one of its cards.
Back in 2015, the market was concerned about rising losses at consumer-lending companies...
Losses were rising at firms like Capital One (COF). But we weren't worried about American Express. We knew that more half of its revenues come from network-access fees, not lending. Moreover, we also knew that nobody has fewer weak customers and more elite customers than American Express. More than 70% of its customers have a FICO score above 720. Only 8% have a FICO score below 660. (For reference, 21% of Capital One's customers have a FICO score below 660.)
The market was also worried about long-term 'secular' changes to payment technology. Emerging competitors like PayPal (PYPL) and new technologies like Apple Pay threatened to erode American Express' "closed loop" payment network. Again, we weren't worried.
American Express has never been interested in having the most customers... It only strives to serve the best customers. There was no doubt in my mind that whatever technology emerged as the winner in payments, one would be branded American Express. That's the one that I (and many other affluent customers) would use.
In other words, I knew the market was greatly overvaluing the "conduit" of payment technology and undervaluing the incredible value of American Express' "content" – its long and valuable tradition of PSS.
After studying the company intensely for months, we recommended shares in my Investment Advisory...
Assuming we're smart enough to hold on to this stock for several decades, there's no question that this recommendation – along with candy maker Hershey (HSY) – will become a gigantic home run, becoming the biggest total and annualized returns in the history of my newsletter.
I know that's going to happen because I know that AmEx is by far the best company I've ever recommended at that cheap of a price.
I bring this example up for two reasons...
First, the next time you're tempted to buy a stock, ask yourself how the price you're going to pay and the value you're going to get compares with buying Hershey or American Express below 10 times EBITDA. When you start making these kinds of comparisons, you will start making vastly better decisions about where to make your largest and most important investments.
Thinking about this example makes me wonder why Buffett didn't buy a lot more American Express back in 2015 and 2016. Even better, why didn't he buy a lot more back in 2009 and 2010? He obviously understands the business.
Liquidity, right? Well, American Express is an $80 billion corporation. It trades almost 4 million shares a day on average. That's about $400 million a day in stock. It would have taken Buffett a few days to buy $1 billion worth, or a few weeks to buy $10 billion worth. Buffett likes to complain it requires huge investments to "move the needle" for Berkshire. That's true. But why not buy tens of billions more of one of capitalism's greatest businesses?
After all, Berkshire already owns 17% of AmEx. Why not make it 50% or 100%? Wouldn't you rather own 100% of American Express than 100% of the Burlington Northern Santa Fe railroad? The answer is obvious.
You might wonder something...
Knowing that I believe in making large long-term investments in world-class companies like American Express, why don't we publish an advisory that only tracks the world's very best companies?
Well, we do.
It's called Stansberry Data. Most subscribers have never heard of it. Even the subscribers who know it exists probably don't understand it. The purpose of our Stansberry Data product is to closely follow the highest-quality businesses in the world across of variety of sectors and industries.
We track a variety of the world's best businesses in six different "monitors." We have the Global Elite Monitor, Trophy Asset Monitor, Global Oil Value Monitor, Insurance Value Monitor, and the Capital Efficiency Monitor.
These were built using models that we've developed and tested over 15 years and back-tested using decades of data. They measure the quality of the leading companies' actual results and their current prices. In short, these monitors make it possible for you to see at a glance when one of the world's best companies is trading at an attractive price.
We use this data, of course, to populate our investment newsletters with actual recommendations. But you really don't need to consult all of these monitors. And you really don't need to read any of our newsletters.
You see, there's only one monitor should read every time it comes out.
And there's only one kind of stock you should really ever buy.
You'll notice that I listed only five monitors above. But I said we publish six of them...
A few years ago, I asked my team to build a model...
I wanted something that would show us only the absolute best, most elite businesses in the world. I wanted investments that were of such high quality and so cheap that they were certain to outperform the market over time. We worked on this model for a long time and tested it using decades of data.
This model – our Magic Stock Monitor – only flags world-class businesses. These companies own one of the world's best brands (as measured by Interbrand)... they have operating margins in excess of 15%... rising sales... a base of loyal investors (which means the stock isn't volatile)... and shares are cheap, with an EBITDA below 12.
Every year, only a handful of stocks – about four a year, on average – meet the criteria of our Magic Stock formula. But these stocks produce incredible returns. Back-testing shows that these portfolios beat the market by seven and a half percentage points a year, with about 30% less volatility. Ultimately, our Magic Stock Monitor led us to American Express.
That brings me to the second reason I wanted to tell you about investments like American Express...
You see, right now, one of the world's all-time greatest businesses is trading at an incredibly attractive price. This is a company that Buffett has owned several times over the years (and should have kept). You could put 100% of your portfolio into this company right now and be virtually guaranteed to beat the market for the next 10, 20, even 30 years. Nothing would be easier.
Much like the situation with American Express, the market badly misunderstands the source of this company's incredible profit margins, and many investors doubt this company's ability to remain dominant. They're making a big mistake. It's not the conduit this company uses. It's the content this company creates. It's truly magical.
Anyone who bothers to watch our Magic Stock Monitor has surely already seen this opportunity. I hope you'll appreciate it. And I hope you take advantage of it. By the way, if you want access to our Stansberry Data suite of monitors, all you have to do is become a lifetime subscriber of Stansberry's Investment Advisory. It's a far cheaper way for you to receive my research. And even though you'll be paying us less, we'll provide you with a lot more in return for your trust and commitment.
Like American Express, we're trying to build a PSS business here. And we need lifetime subscribers to do it. Join today. Learn more here.
New 52-week highs (as of 3/8/18): Amazon (AMZN), First Trust Nasdaq Cybersecurity Fund (CIBR),
I'd love to hear what you think about today's Digest. Please, take a few moments to send your thoughts to feedback@stansberryresearch.com. I look forward to sharing some of my favorite e-mails next week.
Regards,
Porter Stansberry
Baltimore, Maryland
March 9, 2018