The Golden Triangle: ‘The single greatest investment strategy we’ve ever found’
From Bryan Beach, analyst, Stansberry’s Investment Advisory:
Nothing makes me happier than proving Porter wrong…
Back in September, Porter and I (Bryan Beach) took the stage at our annual Alliance Meeting in Las Vegas.
I was about to share a list of seven troubled businesses. But I wasn’t going to recommend shorting or even avoiding them. Instead, I was going to tell the audience that these stocks would dramatically beat the market in the coming years.
Porter heckled me in front of the entire audience. And for good reason… these were terrible companies I would typically never recommend to anyone.
So why would I make an exception this time… in front of hundreds of our most loyal subscribers, no less?
Months earlier, Porter had asked our team to do the impossible…
He asked us to build a model that could find cheap, out-of-favor stocks that reliably “rebound” 100% or more in a short period of time.
We sat down and got to work. We spent all year trying to spot these opportunities. And we finally did it… almost by accident.
As we were conducting our research, we noticed something unusual…
We found an unusual chart pattern in a certain group of stocks – a group that we had initially ignored in our research. These charts all formed the same familiar triangle shape. We started calling this unusual pattern the “Golden Triangle.”
So our team began back-testing…
We looked at hundreds of these Golden Triangle situations. These weren’t companies you’d be excited to plow money into. They weren’t high-quality, blue-chip stocks like Microsoft (MSFT) or McDonald’s (MCD). Many of these companies had a black eye in one way or another. They faced legitimate headwinds and had well-publicized bad news.
But this same group of troubled stocks was also generating billions of dollars in free cash flow. And what we found was incredible: Two years after the Golden Triangle appeared, the average stock had gained 131%. (If you had held on even longer, you’d be sitting on average gains of 215% today… without a single losing trade.)
We quickly realized we had stumbled upon what Porter called “the single greatest investment strategy I have ever seen.”
I was thrilled to present this preliminary research to Alliance members…
There was just one problem… When we screened for current Golden Triangle opportunities in September, the results were worse than we had expected.
At the time, there were 55 such setups… And each was as troubled – or even more so – than those we saw in our back-testing. Worse, there were more retail companies on the list than almost any other industry.
As longtime readers know, we’ve been writing about the “death of retail” since 2013. That’s when we first covered the mass closures in locations of Sears (SHLD) and JC Penney’s (JCP) retail stores.
We recommended shorting JC Penney in August 2013. We shorted Simon Property Group (SPG) – the world’s largest mall operator – a year later. And in 2016, we shorted Simon’s primary competitor, GGP (GGP).
As you can see, we’ve been covering this story for years… and have told subscribers to stay away from all but the very best businesses in this industry.
But it was ultimately the retail sector that convinced me we were on to something big. You see, around the same time we stumbled upon the Golden Triangle, an important shift was already underway…
When we first started talking about the death of retail, it was a truly ‘contrarian’ idea…
If you’ve been reading our work for any amount of time, you know that contrarian investing is one of our main focuses at Stansberry Research. At times, betting against the crowd can make you very wealthy.
Back in 2013, almost no one was even talking about problems in retailers… And the market shrugged off any concerns.
But early this year, that began to change. Stories about retail troubles began to appear all over the place. It was a hot topic on CNBC and other traditional media outlets.
And on Saturday, April 8, it became official.
That’s the day that Wikipedia published an entry on the “retail apocalypse.”
The death of retail had gone mainstream.
Why is this important?
This event might appear insignificant. But when an idea is so pervasive that someone creates a Wikipedia entry on it, it’s no longer contrarian. It’s about as mainstream as you can get.
And once an investment thesis goes mainstream, the market tends to overreact. Folks bid up the prices of “hot” stocks and sectors to astronomical valuations. Meanwhile, stocks in hated industries (like retail) are ignored or heavily shorted. Their share prices plummet.
That’s exactly what happened. The SPDR S&P Retail Fund (XRT) – an exchange-traded fund that holds a basket of popular retail stocks – fell 20% from December through August. Suddenly, everyone hated retail.
While our long-term thesis hasn’t changed, we knew what we had to do… We knew the contrarian thing to do would be to look for bullish opportunities in the retail “dustbin.”
Which brings me back to my Vegas presentation…
When I stood on stage, I presented the crowd with a list of seven retail companies our Golden Triangle strategy had identified. And as someone who has been following the death of retail for years, I groaned at the companies on this list…
As most readers know, JC Penney sells cheap clothes in dying shopping malls. But the rest weren’t much better…
Tailored Brands (TLRD) sells Men’s Wearhouse suits in mall parking lots. L Brands (LB) sells Victoria Secret, whose stores are all located, again, in these dying malls. Same with Foot Locker (FL), whose primary business is selling Nike products… and Amazon is closing in fast.
Supervalu (SVU) and Ingles Markets (IMKTA) are low-margin supermarkets. Guess who they’re competing with? You guessed it: Amazon.
And Mattel’s (MAT) fortunes historically rely on the Barbie doll. I have young daughters. We don’t have a single Barbie doll in our house.
Granted, I hadn’t done a deep dive into every company on that list, but…
Suffice it to say, I wasn’t particularly excited about any of these names…
Porter was even less impressed. As he explained in Friday’s Digest, he refused to even consider JC Penney. But he didn’t like any of these stocks. In fact, he even teased me about it on stage in front of Alliance members…
So hang on… You have a slide with a bunch of names that we don’t like. And there’s no slide with the names that we do like?
But the numbers didn’t lie: These Golden Triangle companies had generated more than $1.6 billion in free cash flow during their struggles.
Despite my reservations about these businesses, our research was clear. This group of stocks was likely to dramatically outperform the market on average over the next couple years.
So… how have these companies performed so far?
It’s been 10 weeks since that presentation. Let’s take a look at those Golden Triangle stocks again…
As you can see, five of the seven companies are already big winners. In total, this group of retail victims is up 18% on average in 10 weeks – a period during which the benchmark S&P 500 Index is up just 7%.
But even the two “losers” in the group – JC Penney and Supervalu – are deceptive…
From the time of our presentation in late September through early November, JC Penney was down nearly 40%. But, as you can see, it has fought its way almost all the way back. Same thing with Supervalu… Just a few weeks ago it was down 32% since Vegas. But it is now only down 11%.
Remember, this is after just 10 weeks…
Our back-testing shows it generally takes two years for these stories to fully play out. And as I mentioned earlier, the hundreds of stocks we tested ended up doubling or tripling on average from the point of maximum pessimism.
History suggests that even L Brands – up 45% already – could still have plenty of room to run.
A few months from now, all seven could be showing healthy returns… And I look forward to telling Porter, “I told you so.”
(As a quick aside, newsletter legend Jim Grant read an earlier piece I wrote on this strategy. A few months ago, Porter called Jim’s biannual Grant’s Interest Rate Observer conference “the most exclusive investment-group meeting in the world.” Well, Jim was so intrigued by this investment strategy that he has asked me to present at the Grant’s Interest Rate Observer conference this upcoming April.)
Today, our Golden Triangle list features more than 60 companies…
These are businesses across more than a dozen different sectors – including retail, telecommunications, energy, health care, and more.
You may be familiar with a few companies on the list… But for the most part, they aren’t household names. You won’t see their CEOs on CNBC every week, or read about them on the front page of the Wall Street Journal.
That’s exactly the point.
While the herd of stock market investors searches for the next Alphabet (GOOGL) or Facebook (FB), these Golden Triangle companies are flying completely under the radar. They’ve been left for dead.
You can sign up and get our latest research on this strategy, and exactly how to apply it to your portfolio with our Stansberry Big Trade service. Get all the details on how to sign up right here.