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Stansberry Research: A stock that still makes us smile

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From Porter Stansberry, Editor, Stansberry’s Investment Advisory:

It’s time to revisit – and re-recommend – an “old faithful.”

This stock should be a mainstay in your portfolio. It will provide ballast and stability when the market gets choppy. And given a recent decline in the share price, this stock should do well from here even if a market correction takes longer to show up than we expect.

Plus, it’s a perfect example of how capital efficiency produces excellent returns over the long run…

As we wrote when we first recommended this stock, “The longer you hold this stock, the more rapidly your wealth will compound, and you’ll never have to sell – ever.”

And as we promised in that original write-up, “When you learn the name of this stock, I promise you’ll smile.”

But we don’t want you to skip ahead. So before we divulge exactly which stock we’re re-recommending, let’s revisit the original rationale for investing in this company. Obviously, the numbers have changed, but the point remains the same. As the original issue said:

This is a slow-growth business. That, surely, will turn off most investors. Most people simply don’t understand the impact of even slow growth over time in businesses that are extremely capital efficient…

In almost every year, the company’s dividends are larger than its capital expenditures. This company rewards shareholders, not its managers…

It’s the impact of these reinvested dividends and the consistent decrease in shares outstanding that most investors do not figure into their future total return equation. And over the last 10 years, the company’s annual capital spending has remained essentially unchanged. Meanwhile, cash profits and dividends nearly doubled.

This is the beauty of capital-efficient businesses: As sales and profits grow, capital investments don’t. Thus, the amount of money that’s available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales.

Thanks to share-count reductions, sales growth, and the company’s incredible capital efficiency, it is able to increase its annual free cash flow per share by 15%.

There aren’t many businesses that you can realistically expect to make you 20 times your money. There are even fewer businesses that you can expect to hold safely for 20 years. But in this case, you can.

We think that captures the company today… and wouldn’t change a word of the original.

And we’d like to go even further in showing the power of capital efficiency by comparing the long-term results of two actual companies. The first company is the one described above. That’s Company A. The second one, Company B, is a business we have highlighted many times in the past for how not to operate. Company B is highly capital inefficient.

Over the past 25 years through 2017, both companies grew sales by more than 130%… or by a nearly identical 3.4% per year on average. (We call this average yearly growth calculation the “compound annual growth rate,” or “CAGR” for short.)

But that’s where the similarities end.

Given its capital efficiency, Company A took this somewhat modest 3.4% revenue growth and created a much better return on its invested capital for shareholders. Through a combination of improved operating margins, a 42% reduction in the share count, and virtually no increase in capital spending levels, Company A grew its per-share free cash flow by 15.5% per year. In other words, from just 133% growth in revenues, Company A’s superior business model generated 3,571% growth in FCF per share.

Meanwhile, Company B’s capital-intensive business generated far lower returns from the same revenue growth. Over the same 25-year period, with the same level of revenue growth, Company B’s free cash flow per share actually declined 16%.

Longtime subscribers can probably guess Company A… And Company B? You may have a good guess here as well. It’s industrial conglomerate General Electric (GE).

Below are more details on the 25-year comparison.

company-a-vs-ge-25-years-later

Both companies returned considerable capital back to shareholders. They both paid a growing dividend and bought back stock to reduce the number of shares outstanding. But Company A grew its dividend by more than 880%, while GE’s grew about one-fourth as fast.

And more important, Company A’s asset-light, capital-efficient business ensured its FCF could easily cover its large dividend. That’s not true at GE. Prior to recent dividend cuts, GE paid an annual dividend of $0.84 per share… But FCF per share – after accounting for bloated capital expenditures – amounts to only $0.42 per share.

Worse, its per-share FCF still falls short of GE’s new, lower annual dividend of $0.48 per share. This is worrisome and ultimately unsustainable.

Company A’s business is exceedingly sustainable. It’s one of the most sustainable on the planet. And that’s not just because of the capital efficiency. It’s also a result of the enduring nature of the products it sells.

Our grandparents enjoyed Company A’s same product 50 years ago that our great-grandkids will enjoy 50 years from now. And that makes it a must-have in your portfolio… especially after the recent sell-off in the shares.

To be sure, Company A’s stock has done great since we first recommended it. Subscribers who bought the stock in 2007 have enjoyed gains of nearly 170% (and even higher if dividends were reinvested)… far better than the roughly 100% gains the S&P 500 Index produced (including dividends) over that time.

So given that huge return – and even with the stock’s recent decline – Company A must be far more expensive today than it was when we recommended it in 2007, right? Well, no, it’s not. You see, Company A kept growing earnings and FCF over the past decade. So even though the stock price has risen substantially, its valuation (or price relative to its earnings or free cash flow) has not.

Company A’s current valuation level relative to its FCF is nearly identical to its valuation back in 2007.

So why have the shares dropped of late? Why are we getting this chance to buy back in at an attractive price? Put simply, the stock market is concerned about rising costs and shifting consumer behavior.

We find both concerns shortsighted.

Whenever it’s faced cost pressure, Company A has always passed through price increases eventually. Consumers choose products based on brands they love and trust, not based on price. That’s why the penetration of private-label offerings in this industry is less than 4%, among the lowest in all categories.

Similarly, fads come and go. But this product is forever. Company A will continue to sell it to a growing number of global consumers. So when the stock market provides an opportunity like this, we need to take it.

We recommend you BUY shares of Company A today. And to quote our original recommendation… “Expect to hold this stock for an exceptionally long period of time.”

Regards,

Porter

Crux note: If you’re dying to learn the identity of Company A  and why it will serve your portfolio faithfully  you must subscribe to Stansberry’s Investment Advisory. As of today, the stock is still trading below its buy-up-to price. 

In the latest issue, Porter also recommends a familiar “Global Elite” business that will act as a safe haven in your portfolio during the turbulent times ahead.

To sign up for a risk-free trial to Porter’s flagship newsletter, click here.


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Inside the dismantling of General Electric

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Starved for cash, an iconic American company takes apart the legacy it spent a century building.


From CNN Money:

GE is slowly dismantling an empire.

It was once a sprawling corporation that included NBC, Universal Studios, a giant appliance company and even one of America’s biggest banks.

But now the iconic company founded by Thomas Edison is making itself smaller and smaller. And that shrinking has gained urgency in recent months as GE races to raise cash, chip away at a mountain of debt, and plug a huge hole in its pension fund.

No business is too sacred for the chopping block, especially because GE’s stock price has been cut in half over the past two years. Even businesses central to its vaunted history — the 111-year-old railroad division and Edison’s light-bulb unit — are up for grabs.

“This is a slow-motion break-up of the company,” said Robert McCarthy, an analyst at Stifel.

In the 1980s and 1990s, legendary CEO Jack Welch turned GE into the biggest and most complex conglomerate on the planet. Now the new boss, John Flannery, is trying to fix the company by doing the exact opposite.

“Our objectives are to run the businesses well, make the portfolio stronger, simpler and continue to work as hard as we can to earn back your trust and to deliver for you,” Flannery told disappointed shareholders last month.

The sell-off amounts to a rejection of the conglomerate model itself. GE wants to focus its attention on what it believes it does best: making power plants, jet engines and health care products like MRI machines.

Continue reading at CNN Money…


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A tremendous opportunity at the cross section of two markets

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From Zach Scheidt, Editor, The Daily Edge:

Pop quiz – can you name this stock?

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I’ll give you a couple hints…

  • This stock is in the red-hot retail industry.
  • The company reported tremendous earnings this week.
  • Strength is being driven by the vibrant U.S. housing market.

Did you get it?

The company is Restoration Hardware (RH), a home furnishing store that has been knocking it out of the park thanks to a convergence of two major trends in the U.S. economy.

If you bought the stock at the beginning of last year, you’d be up 500% on your investment today.

And the best news is that for RH — and so many other retailers in this industry — the fun is just getting started!

Have Money, Will Spend…

This is a great time to be selling luxury products to American consumers.

Ironically, as I write this alert, I’m sitting in my local Starbucks next to a table full of nine different “entrepreneurs” discussing their business of selling luxury health products to consumers in our community.

With unemployment levels at extreme lows, wages ticking steadily higher, and inflation readings well within a “normal” range, Americans just have money to spend!

That’s exactly why the consumer discretionary sector of the stock market has been so strong, and why retail stocks like Restoration Hardware are on the move.

Across the board, I’m seeing strength in restaurant stocks, apparel stocks, athletic gear stocks, discount retail stocks, and even auto stocks!

Essentially any investment tied to consumer spending has a very good chance of producing significant gains this year.

Hopefully you’ve already been paying attention to this area and making money on your investments. After all, we’ve been pounding the table about retail stocks for months here at The Daily Edge.

Fortunately, even if you’ve missed out on this ramp in consumer spending so far, there’s still time for you to cash in.

Because today, there’s an additional trend that’s helping to push a specific group of retail stocks even higher.

Compound Your Gains with a Vibrant Real Estate Market

Are you in the market to purchase a new home?

Even if you’re not personally looking for a home to purchase, chances are good that you know someone who is. Perhaps even your children or grandchildren are getting ready to make their first real estate purchase.

The housing market in the U.S. has been on fire lately. And that’s not about to change any time soon.

Demographic trends are pointing to strong demand for new homes as young families start to move out of rental properties and invest in their own homes. With so many of these families delaying purchases following the financial crisis 10 years ago, there’s now a tremendous amount of pent up demand.

Think about your experience the first time you bought a home…

If your family is anything like mine, you probably spent the first year making multiple trips to Home Depot (HD) or Lowe’s (LOW), buying furniture and having it delivered, and stocking up on everything from dishes and kitchen appliances to decorative items.

My wife still insists that these are not discretionary purchases, but actual necessities to make our house a real “home.”

Just over the past month, we’ve started to see investors take a renewed interest in home builder stocks. For a while, these investors were more focused on higher interest rates (and the potential for mortgages to become too expensive) than they were on the supply and demand dynamics in the housing market.

That’s now looking like a big mistake as homebuilder stocks rally.

Which is why I’m still very bullish on these stocks, as well as the retail stocks that will increase sales as more homeowners start furnishing their new digs.

Here’s How to Play It…

We’ve got an abundance of opportunity tied to both the expanding retail market and the recovering housing market.

Today, you can tap into both of these trends by investing in stocks like Restoration Hardware that fit both the retail market and benefit from purchases that new homeowners are making.

Home remodel stores like Home Depot (HD) and Lowe’s (LOW) are in a great environment right now. Not only are people buying tools and fixtures, but more discretionary items like plants, grills, and even luxury appliances are flying off shelves.

When it comes to stocking cabinets and shelves, stocks like Williams Sonoma (WSM)have been booking profits and trading higher. I’d recommend buying any pullback in home decor stocks like this.

And finally, home furnishing stocks offer great value. You may not think of La-Z-Boy (LZB) as a cutting edge retailer, but the company has new product lines that are in line with consumers’ evolving tastes.

Don’t forget the widescreen TVs these new homeowners will be purchasing to watch sports this fall. Shares of Best Buy Inc. (BBY) have been trending higher, and there are plenty of other consumer electronic choices to consider for your investment portfolio.

In short, there are tremendous opportunities in the cross section between the retail and home buying markets. Picking a handful of stocks in these areas can go far in helping you to build your wealth as the U.S. economy grows.

Here’s to growing and protecting your wealth!

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Zach

Crux note: It’s so easy, an eight-year-old can do it…

That’s the “social experiment” posed by one market trader… and the claim he’s set out to prove in this presentation. 

No buying stocks… No options trading… But this financial maneuver is good for thousands of dollars in gains. Click here to learn more.


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Edwards Lifesciences’ stock chart flashing a bullish pattern

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With U.S. stocks on the climb thanks to bullish institutional buyers, CNBC’s Jim Cramer figured investors would start to get hesitant about buying into a market that’s heating up.

But after consulting technician Rob Moreno, the “Mad Money” host concluded that that would be a mistake.

“There’s a lot to like about this environment, and more importantly, there are plenty of stocks that still haven’t really run very much,” Cramer said. “That’s right, we’ve got a bunch of laggard stocks that could soon break out to higher levels.”

One stock that exemplified this theory was that of Edwards Lifesciences, a Cramer-fave medical equipment maker that specializes in artificial heart valves and blood pressure monitors.

Shares of Edwards hit a fresh 52-week high Tuesday, closing at $148.52 a share after several months of up-and-down trading. The company’s April earnings report missed expectations.

But Moreno, the publisher of RightViewTrading.com and Cramer’s colleague at RealMoney.com, spotted some signs of life in the health care play.

Turning to the stock’s daily chart, Moreno noticed that “while it’s been consolidating, it’s also made an inverse head-and-shoulders pattern,” Cramer said.

“For those of you who don’t remember, an inverse head-and-shoulders is not an upside down bottle of shampoo,” the “Mad Money” host continued. “It’s a formation that looks … a little like an upside-down person — a head between two shoulders — and the important thing is that this one is one of the most reliably bullish patterns in the book.”

To ascertain how far Edwards’ stock could still run, Moreno measured the distance between its lowest lows (the “head”) and the “neckline,” or the line connecting the two “shoulders.”

For Edwards, the distance came out to roughly $23, meaning that once its stock broke out above the “neckline,” it could still rise by $23 a share.

To Cramer’s delight, shares of Edwards broke above the “neckline” level Monday, rallying another 1.54 percent in Tuesday’s trading session.

Better yet, Moreno pointed out that its moving average convergence-divergence indicator, which helps technicians spot changes in stocks’ trajectories before they happen, is on the rise, maintaining the bullish crossover it made in late May.

“You may think this stock is getting away from you, … [but] based on the inverse head-and-shoulders pattern, Moreno thinks this thing could be headed to $166 before it runs out of steam,” Cramer said. “After marking time for a couple of months, this looks like the next leg of Edwards’ long-term rally happening right here, right now.”



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