Why we still recommend stocks...

Why we still recommend stocks... This 'disappearing middle class' stock keeps hitting new highs... The selloff in Wal-Mart...

 If you've been with us for long, you know we're cautious about the market today...

Porter believes problems in the credit markets – particularly problems in high-yield – or "junk" – bonds related to emerging markets and the oil and gas sector – are likely to spread... and could cause substantial declines in stocks and other assets.

 Given this stance, one of the most common questions we get these days is why we continue to own stocks.

If we believe further declines are likely, wouldn't it be better to sell our remaining positions? Wouldn't it make more sense to move entirely to cash right now, rather than let our stop losses tell us when to sell... at potentially lower prices?

Surprisingly, the answer is no...

 First, while risk is high today, it's impossible to know exactly when the market will roll over. It's possible the market could continue higher for some time before these problems begin to "matter."

Rather than selling everything, we prefer to adjust our positions more gradually. Assuming you're already holding a good amount of cash, we recommend staying long your highest-quality stocks, while hedging your "long" positions with a small number of short sales.

If the market continues higher, you'll still have exposure to the upside. If the market declines instead, your trailing stops will naturally move you to higher levels of cash, which can then be moved into additional short positions or other bear market opportunities.

In the October 2 Digest, Porter compared this approach to an engineer driving a train...

You're never going to sell precisely at the top. And you're never going to buy precisely at the bottom. You should handle your portfolio like an engineer handles a train. Most of the time, stocks go up. As a rule, your portfolio should be mostly "long." You should mainly be a buyer of stocks and bonds.>

From time to time, of course, financial assets go down. Sometimes, they go down a lot. When that happens, it's awfully nice if your train is stopped (if you're in cash). It's even better if your train is in reverse (if you're "short" stocks on a net basis).

What you shouldn't do, though, is constantly stop and start your train... or even throw it from forward into reverse.

 The second reason we don't recommend moving entirely to cash is that some high-quality stocks can actually do well during market turmoil. Porter's classic recommendation of capital-efficient candy maker Hershey (HSY) is a great example...

Longtime readers know Porter recommended Hershey in December 2007, just months before the financial crisis began.

On paper, this was arguably one of the worst times in history to recommend buying stocks. The U.S. stock market plunged 50% over the next 15 months. Many stocks fell even more. But not Hershey...

Despite the crash in stocks in 2008, Stansberry's Investment Advisory subscribers never stopped out of Hershey. They're now up more than 160% and are still holding shares, collecting dividends, and compounding their money in one of the world's greatest businesses. Had they sold shares during the crisis, they likely would've missed out on this opportunity.

 While the recent correction has been relatively mild compared to the 2008 decline, Stansberry's Investment Advisory subscribers are seeing a similar situation play out today...

Porter and his team recommended shares of soft-drink company National Beverage (FIZZ) in October 2014. Most folks have never heard of the company, but you've likely tried one or more of its products. It manufactures and distributes a variety of products, including the sparkling-water brand LaCroix, low-cost soda brands Faygo and Shasta, and a number of generic store brands.

Porter's team recommended the stock to benefit from two big trends...

First is the booming sparkling-water business. As Porter's team explained in the October 2014 issue...

Water is split into three market segments. The low-margin "bulk still" market makes up 10% of water sales. Think office water coolers. "Bottled still" water comprises a huge 80% of U.S. water sales. That's the middle of the market. Pepsi's Aquafina and Coke's Dasani are the big players there. But the real money is made in the high-margin "sparkling water" segment, where LaCroix is a key player.

Not only is sparkling water where the margins are, it also happens to be the only water segment that is consistently growing. Sales of sparkling water rose 16% in 2013 and will be up another 12% in 2014.

Soda sales are declining and sparkling water sales are on a tear. They're growing at double-digit rates. And that trend should continue as Americans gravitate toward healthier food and drink choices.

On the other hand, the company's range of low-cost and generic beverage products is a classic "boring" business that cranks out consistent cash year after year. More from the issue...

National Beverage's Faygo and Shasta soda businesses are classic orphans. They don't have the glamour or prestige of cola titans Coke or Pepsi. You probably walk past cans of the stuff in your grocery store week after week without noticing. Still, they've been generating hundreds of millions of dollars in sales for generations.

The business of making cheap soda isn't exciting. This part of National Beverage grows about 2%-4% per year and manages to pass on cost increases to customers. That has been the case over the last two decades for both National Beverage and its rival midsize soda-maker, Cott Corp.

Nothing is really going to change with Faygo and Shasta over the next 10 years. They aren't going to overtake Coca-Cola Classic... but the same folks mindlessly grabbing six-packs today will still be buying them for family reunions and neighborhood block parties a decade from now. The business will be about the same in 10 years as it is today... only bigger. That's a good, stable orphan brand.

These brands may never overtake Coke or Pepsi, but they are likely to benefit from another huge trend we've been following: the "disappearing middle class." We explained this trend in the July 8, 2014 Digest.

 The company is positioned to benefit from both of these trends... Or as the Stansberry's Investment Advisory team put it: "It has a line for everybody... drinks for rich people and drinks for poor people."

Readers who took their advice are up nearly 75% so far, and shares just hit a new all-time high this week.

 Another Stansberry's Investment Advisory made headlines this week as well. Shares of retail giant Wal-Mart (WMT) plunged more than 10% yesterday, triggering its trailing stop loss.

Stansberry's Investment Advisory analysts Bryan Beach and Mike DiBiase shared their thoughts on the news with us in a private e-mail this morning...

Yesterday, we stopped out of Wal-Mart when its shares dropped 10% to near $60, its largest one-day decline since 1988. We recommended Wal-Mart back in 2010 as a "no-risk" investment. At the time, it was perhaps the cheapest high-quality business we had ever recommended. Since then, we've collected nearly $9 a share in dividends, and we'll book a gain of 32% by following our stop loss strategy, after shares fell 33% since January.

Wednesday morning, Wal-Mart unveiled a new three-year plan that calls for heavy investment in people and technology to help improve its online retail presence. Amazon and small-store retailers like Stansberry's Investment Advisory portfolio-holding Dollar General (DG) have hurt Wal-Mart's superstore strategy, and the company now finds itself playing catch up.

As a result of the massive new investments, Bryan and Mike explained that Wal-Mart expects its profits to drop between 7% and 12% this year and another 6% to 12% next year before improving in the third year of the plan...

Wal-Mart had already announced it was spending an additional $1 billion on wage increases (increasing the minimum wage it pays its employees from $7.25 per hour to $10 per hour) and on training earlier this year.

Also, as part of the three-year plan announcement, it also announced a new $20 billion share-repurchase program over the next two years. So we could see the company start to snap up its shares at a discount in the next few years.

Wal-Mart is still a colossus that churns out mountains of cash. The recent selloff has pushed the stock down to valuation levels (multiples of cash profits) close to where we first recommended it. It's definitely cheap now by historical standards… It's far less volatile than the overall market. Plus, its dividend yield is now 3.3%, pretty good for a low-risk stock like Wal-Mart.

But we'll follow our stops and watch the turnaround from the sidelines. If the company's valuation remains at today's level, don't be surprised if you find Wal-Mart back in our model portfolio at some point.

 New 52-week highs (as of 10/14/15): Activision Blizzard (ATVI).

 In the mailbag, two more subscribers check in from the Alliance meeting in Las Vegas. We had a great time, and we'd love to hear from more of the 600-plus folks in attendance. As always, send your e-mails to feedback@stansberryresearch.com.

 "Hello Porter, to further your request for feedback on this week's conference in Las Vegas, I offer my humble 2 cents. The purpose of my attending this week's conference was to learn from you and your experts as to what you see truly taking place in the world today; the facts and data, not the Fox news drama segments. I need these facts and data in order to make appropriate choices in today's economic minefield.

"With this in mind, I found your presentation to be direct, factual and incredibly informative. This is exactly what I came to Vegas to learn. Thank you. Entertainment and pitches for other products are not what I took the time to come to the conference for, and perhaps these presentations could be left for the evening over a glass of wine. Thank you for your ongoing service through a time which may be viewed in the future as one of the most volatile periods of the century." – Paid-up subscriber Tim

 "Excellent conference. Great tips on what to buy and what to avoid. Good overview of general long term market trends. I do wish the feedback on the mobi app would have worked so we could post some questions to the speakers via wi-fi. And some of the presentations sounded a little more like advertisements than presentations, but other than that, very good. But maybe that paid some of the bills and keep the conference costs to attendees down." – Paid-up subscriber Derrick Warfel

Regards,

Justin Brill
Las Vegas, Nevada
October 15, 2015