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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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Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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