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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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Is weed the new bitcoin? (Yes, but that’s a good thing)

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From Richard Smith, Founder, TradeStops:

“Is weed the new bitcoin?”

This was the question posed by Bloomberg in September, when medical marijuana stock Tilray (NASDAQ: TLRY) had one of the wildest one-day price moves anyone has ever seen.

On the wild day in question, TLRY almost doubled on billions of dollars in volume before losing all of the gains in an hour. It then finished 40% above the opening price.

It was all the emotions of a mania, a collapse and a recovery compressed in a single day’s trading.

As of this writing, Tilray has a market cap above $13 billion. A few months ago, it had a market cap above $26 billion. And a few months before that the stock didn’t even exist.

The company had its IPO in July around $23 per share. It then proceeded to run up more than 1,200% in a matter of months and then got cut in half, but still stands tall as a multibillion market cap enterprise.

There is another marijuana-related stock, Pyxus International (NYSE: PYX), that spent the past 145 years being a North Carolina-based tobacco company called Alliance One International. Alliance One changed its name to Pyxus and emphasized a new focus on cannabis; the share price doubled in three days.

No wonder pot stocks are being compared to bitcoin and cryptocurrencies. The absolute wildness in the marijuana space is comparable to what happened with crypto in late 2017.

But is the enthusiasm justified, or is it just speculators getting out of control? Consider the view of Bill Newlands, president of Constellation Brands.

Constellation Brands, founded in 1945, is a big, serious company in a boring sector — consumer staples. It has a huge market cap at $42 billion and focuses on an established industry, beverages and spirits. If you’ve ever had a Corona or a Robert Mondavi wine, you’ve used Constellation’s products.

That matters because Constellation Brands — this big, serious consumer staples company — decided they believed enough in the future of cannabis to invest $200 million into Canopy Growth Corp. (NYSE: CGC), a budding pot stock. Then, they decided $200 million wasn’t a big enough investment and put in $4 billion more.

That’s no small bet, even for a consumer staples giant. Newlands said the global cannabis market “could be a $200 billion business in very short order.”

Coca-Cola is also looking at pot-related products. They are “closely watching” the cannabis drinks sector, reports the Financial Times.

Then too, the Canada division of Walmart — yes, Walmart! — is investigating the possibility of cannabis-related products. Nothing has been decided yet, but they are fact-finding and taking a hard look.

So yes, the action around pot stocks is, from a certain perspective, completely crazy. But it is also based on an intense jockeying for position in a new market space that could literally be worth hundreds of billions in revenues in just a few short years. And real players are sitting up and taking notice.

Why is this happening?

Because Canada has opened the floodgates. In the United States, those floodgates are still partially closed but they are slowly opening here, too.

On June 19, Canadian Prime Minister Justin Trudeau tweeted the following:

It’s been too easy for our kids to get marijuana — and for criminals to reap the profits. Today, we change that. Our plan to legalize & regulate marijuana just passed the Senate.

That was months ago. On Oct. 17, Canada’s big legalization rollout will go into effect.

This will make Canada only the second country in the world — and the first wealthy G7 nation — to officially legalize marijuana on the nationwide level, paving the way for a commercial market. The first country to do it was Uruguay, back in 2013.

Meanwhile, in the United States, marijuana is still illegal at the federal level. But nine U.S. states and the District of Columbia have legalized it for recreational use and another 30 U.S. states have legalized it for medical use. And there are more legalization measures coming to the ballot box.

It’s estimated that legal weed is a $9 billion business in the U.S. alone, even with its current limited status. When the U.S. finally goes all the way — and that is just a matter of time now, given dramatic shifts in voter sentiment — that number will explode.

And then the marijuana industry will inevitably go global — a phenomenon that has already begun. For example, in the United Kingdom, medical cannabis prescriptions will become legal as of Nov.1.

So, “Is weed the new bitcoin?” In a manner of speaking, yes.

But that is because bitcoin is a real and transformative thing, not a temporary fad like Beanie Babies or Cabbage Patch Kids.

It’s a wild time right now because cryptocurrencies like bitcoin are at the forefront of “Internet 3.0” and the transformation of the technology landscape, while the commercially regulated cannabis industry is in the process of going from non-existent to hundreds of billions in revenue in record time (likely a short number of years).

This means a whole lot of volatility could continue to swamp the cannabis space. Pot stocks could continue to show aggressive trading patterns.

But there will also be real opportunity in this space, and in a strange way even the possibility of safe-haven investments. That’s because, in the event of a world gripped by fear and uncertainty, investors might flock to the handful of industries still showing rapid growth (especially with FANG cooling off).

Here’s a list of a handful of marijuana-related stocks you can track in TradeStops.

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There is a lot to keep an eye on in this industry — plenty of peril, but plenty of serious opportunity, too. We’ll continue to dig into this exciting new industry and share what we find.

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Richard

Crux note: Volatile assets like cryptocurrency and pot stocks can be extremely difficult for self-directed investors to navigate… 

That’s where TradeStops comes in…. Dr. Richard Smith’s investment tools take the guesswork out of the equation by telling you when to sell a losing stock – meaning you can make more money while taking less risk.

Richard’s philosophy is to cut your losses and let your winners ride… And his results speak for itself. You can discover why one satisfied investor called TradeStops his “safety net” right here.


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Investors have spoken… It’s time for more risk

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From Dr. David Eifrig’s Health & Wealth Bulletin:

All eyes have been on the 10-year U.S. Treasury yield over the past couple of days.

It recently broke out above 3.2% to a new seven-year high, causing a lot of reaction from the financial media… both positive and negative. The 10-year yield is significant for a couple different reasons…

First, as we talked about back in July, the spread between the 10-year Treasury yield and the two-year Treasury yield are recession predictors.

Second, the 10-year Treasury yield is the benchmark that guides other interest rates. It affects rates on everything from auto loans to home mortgages to consumer and business loans.

Finally, the 10-year yield is a signal of investor confidence. When investors are scared of owning stocks and corporate bonds, they tend to put their money in risk-free assets like government bonds. And as demand increases for government bonds, prices rise – which drives yields lower (bond prices and yields move in opposite directions).

When investors are optimistic about stocks, they don’t want to have their money in boring government bonds. Demand for Treasuries falls, and prices fall – which means yields shoot up.

That’s what we’re seeing today with the 10-year Treasury breaking out to multiyear highs. It shows investors want more risk. They don’t want to settle for 2%-3% returns in Treasuries. They want to chase the higher returns they can get in the stock and corporate bond markets.

The chart below shows how much money flows in to and out of U.S. Treasuries on a weekly basis…

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Last week, investors pulled $1.6 billion from U.S. Treasuries and $1.1 billion the week before. That’s nearly $3 billion, by far the largest two-week outflow since the start of 2018. And according to EPFR Global, investors put $1.2 billion into U.S. stocks last week.

The message is clear… Investors don’t care about risk-free assets. They want higher returns. And they think the stock market will deliver it to them.

As yields on Treasuries creep higher to 3.5%, 4%, or even 5%, we may start to see some more folks shift their money back in to these assets. Earning 5% risk-free is hard to turn down. But we may be awhile away from that.

For now, folks want to own stocks. That’s bad and good…

It’s bad because this is what happens at the end of every bull market. Investors see their friends making tons of money in the stock market and can’t stand to sit on the sidelines anymore. They pull money from safe assets and from their savings accounts to plow into equities. This of course, creates a bubble… and we all know how it turns out from there. (Not well.)

We start to see headlines from financial-media sites such as CNBC like this…

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And this from Bloomberg…

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If you’ve been following Stansberry Research for long, you know that my colleague Steve Sjuggerud has been pounding the table for folks to buy stocks now because of the “Melt Up” that you see above.

The Melt Up is where we’ll see one final surge in the market before it collapses. According to Steve, folks who are invested before the market takes off could make 100% to 500%, if not 1,000% gains.

And that’s the good news from folks preferring riskier assets like stocks – massive returns in a short period of time.

Since everyone is demanding higher returns, their money goes into the stock market, which pushes stock prices higher and higher.

The even better news… We’re getting close to Steve’s Melt Up, but we’re not there yet.

Folks are getting more bullish, but we’re not at an extreme level of bullishness yet. We hear warnings all the time because of high stock valuations… or warnings about rising interest rates.

This isn’t typical top-of-the-market or Melt Up behavior.

Steve firmly believes that the real Melt Up has not started yet and there are still incredible gains to come.

That’s why, on October 24, Steve will show you how to cash in on the Melt Up, discuss when the bull market will end, and give away his No. 1 recommendation right now.

Don’t miss out on this opportunity… Click here to claim your spot.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team


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An important ‘test’ for the market

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From Justin Brill, Editor, Stansberry Digest:

The broad-market sell-off continued today…

All three major U.S. indexes closed sharply lower again.

The benchmark S&P 500 Index fell 2.1%… the Dow fell 2.1%… and the tech-heavy Nasdaq fell “just” 1.3%.

More important, as you can see in the following chart, today’s decline pushed the S&P 500 below its 200-day moving average (“DMA”) for the first time since April…

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As longtime readers may recall, the 200-DMA is considered a rough gauge of the market’s long-term trend. During bull markets, stocks tend to spend most of their time trading above the 200-DMA. During bear markets, they spend most of their time trading below it.

The S&P tested this level three different times following February’s “volatility panic,” but it never broke solidly below it. In fact, outside of a few days early this year and two days during the “Brexit” panic in June 2016, the S&P 500 has not broken below this level in a meaningful way since the broad market correction in early 2016.

Seeing this support level fail again today is concerning…

But it could simply be another “false” breakdown like those we’ve seen several times over the past couple years.

Why do we say that? Take another look at the chart above…

At the bottom, you’ll see the S&P’s relative strength index (“RSI”). This is a simple momentum indicator with values ranging from 0 to 100. Values below 30 indicate an asset is “oversold” and may be due for rally. Values above 70 indicate an asset is “overbought” and may be due for a correction, or at least a pause.

As you can see in the earlier chart, stocks are now extremely oversold. In fact, they’re now stretched to the downside to nearly the same degree that they were stretched to the upside back in late January.

This is a bullish sign.

Of course, this doesn’t necessarily mean stocks will head higher tomorrow. It’s common to see a “divergence” form – where stocks go on to make a new extreme that isn’t confirmed by a new extreme in the RSI – before a significant reversal begins. But this reliable indicator says at least a short-term bottom is near.

As always, no single indicator is foolproof. So make sure you continue to follow your trailing stops, just in case. But history is clear: Anyone who panics and sells stocks now is likely going to regret it.

Of course, this isn’t the only reason we remain cautiously bullish today…

As regular Digest readers have no doubt become sick of hearing, all of the reliable long-term indicators of stock market, credit market, and economic health we follow remain positive today.

While a broad market correction of 10% or more is always a possibility, these measures tell us the chances of a true bear market or a recession are still extremely low.

So-called “seasonality” could now provide a tailwind as well. As Morgan Stanley analysts explained in a research note today, we’re now entering an historically bullish time for stocks…

Seasonality is about to get ‘helpful’: October is technically a positive month for risk assets, but with some fascinating bifurcation: it often starts badly, but ends strong.

From 1998-2017, the average return over the first 10 days of October was -0.4%. The rest of the month? +2.0%.

Finally, we’ll also note that third-quarter earnings season is about to kick off in earnest tomorrow. And analysts are expecting strong sales and profit growth for the third straight quarter.

In other words, if you want to profit from the ‘Melt Up,’ you must be prepared for more volatility…

Of course, for most investors, this is easier said than done. You’re likely to panic and sell too early… or worse, hang on too long.

That’s why we’re preparing a special event this month…

On Wednesday, October 24, Steve Sjuggerud will sit down with some of the biggest names in finance – in front of a live studio audience – to discuss exactly what you should do with your money during the final stage of this long bull market.

We guarantee this event will be unlike anything you’ve seen from us before. Whether you’re currently leaning bullish or bearish, you don’t want to miss it. You’ll even get the name and ticker symbol of one of Steve’s favorite Melt Up recommendations – a stock that he believes could soar as much as 1,000% in the coming months – just for tuning in. Reserve your spot for free by clicking here.

Regards,

Justin


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