These two stocks will far outpace the market’s average return
From Porter Stansberry:
We produce an immense amount of content…
We publish dozens of research advisories. We offer short-term trading recommendations. We produce in-depth and detailed fundamental analysis of hundreds of companies every year. We publish thousands and thousands of charts. We design and track entire model portfolios, showing subscribers exactly how to allocate and build a good portfolio – down to the number of shares to buy of each position.
And, of course, we publish thousands of words – daily – about the market’s general level and the potential risks facing investors.
In addition to all of this content, I (Porter) also record a weekly hour-long podcast. I generally write a book or two each year. And as you know, because you’re reading it, I write the Friday Digest. Plus, we produce conferences, “meet-ups,” investment tours, risk-management software tools, etc., etc., etc.
But why? Why do we publish so much information about such a huge range of investment possibilities?
Because we serve hundreds of thousands of subscribers from around the world, each following his or her own strategies and each with different needs. Our subscribers range from the world’s most successful billionaire-investors to retired schoolteachers on tight budgets.
But what content should you consume? Out of everything we publish, what are the two or three things that you simply can’t afford to miss? And how, in the least amount of time, can you get the most powerful information that we publish?
As you know, my goal with this weekly essay is to simply try my best to give you the information I’d most want if our roles were reversed. And today I’m going to show you exactly how I would use our newsletters if I were you.
(By the way, even if you’ve never sent us any feedback before, I’m begging you to please let me know what you think about my approach and how it differs with how you use our work. Knowing more about how people use our content helps us refine and develop our products, making them more useful to you. Please send us a short note: firstname.lastname@example.org)
As an investor, my No. 1 goal is to own (buy shares) of a company that relentlessly grows its sales, profits, and cash distributions – forever…
To beat the stock market over time, this company must be extremely capital-efficient. (In other words, it must be able to grow without huge, ongoing capital expenditures.) And it must have a unique brand and product – a “moat” to protect it from competition. I would prefer that the equity price of this business remains stable, so that the volatility doesn’t scare me to death (or cause me to stop out).
Owning a great business for the long term can be a life-changing experience. Seeing the impact, over 15 years or 20 years, of ever-increasing dividends will make you a believer in capitalism (and common stocks).
My greatest fear for our subscribers is that they won’t get to experience these incredible results because they’re not patient enough or because they get stopped out too quickly.
We build a powerful financial model to find opportunities to buy into great companies for the very long term…
We call it the “Magic Stock” formula because it identifies a small number of companies that have unusual characteristics: a great brand, a great business (good operating profits), a capital-efficient model, and… most unusually… a very low-volatility stock price.
Buying the companies this model highlights when they’re trading at a reasonable price (less than 12 years of cash profits) produces outstanding returns (about 7.5 percentage points better than the S&P 500 annually) with much less volatility. Modern financial theory says that results like this – better returns, with less volatility – aren’t possible. But we’ve done extensive back testing on this model, and we know it works.
I believe this is the most valuable information we publish. You’ll find the current results from our Magic Stock model on our website. It’s on the subscribers-only page devoted to my Stansberry’s Investment Advisory newsletter. And you have to be a lifetime subscriber of my newsletter to access this model.
Looking at the results of our “Magic Stock” model, no stocks currently meet all of our criteria. That’s not surprising: Nine years into one of the most powerful bull markets in history isn’t the best time to buy a great business and hold it for 20 years. Virtually all of the stocks that qualify for the model are currently too expensive to buy for the long term.
But there are some exceptions.
For example, telecom giant Verizon (VZ) is trading at for a little more than seven times cash earnings, making it cheap enough to buy. But it doesn’t qualify because wireless telephony and fiber-optic networks are not capital-efficient. Verizon only returns about 8% of its revenues to shareholders each year, which isn’t enough to qualify as a Magic Stock. And I don’t think that’s likely to change.
But right now, two companies are cheap enough to buy for the long term and qualify as capital-efficient…
Our model currently highlights both Apple (AAPL) and Disney (DIS) as great long-term opportunities today. They’re both trading for a little more than 10 times cash earnings (which we measure using earnings before interest, taxes, depreciation, and amortization, or “EBITDA”).
Apple has 27% operating margins. Disney has 25% operating margins. These are both fantastic businesses. Both have brands of extraordinary value, brands that will last several lifetimes.
Why aren’t they officially Magic Stocks?
The only reason these stocks aren’t official Magic Stock opportunities is because their shares have been unusually volatile over the past 12 months. Their so-called “beta” (a statistical measure of relative volatility) is just above our threshold. But given the quality of these companies, that wouldn’t dissuade me from buying them.
I’d use a “hard” stop loss (that’s a fixed price, not a trailing stop loss that readjusts every time the stock hits a new high). And I’d count any dividends I receive against that hard stop, lowering it to zero over time. That would make it unlikely for me stop out, even in the event of a big market correction. I’d only want to sell if something catastrophic happened to the company, like a major scandal or legal crisis.
Here’s a prediction…
Both Apple and Disney will far outpace the market’s average return over the next decade, with far less volatility than the market as a whole. I’d expect the return from an investment in these stocks to be at least double the market’s average return over 10 years. Having that information and understanding why it’s likely to be correct is, by far, the most valuable service we can provide to you.
Of course, Magic Stock opportunities are rare…
We normally only see three or four opportunities like this each year. So… where else will you find truly world-class investment ideas across all of our content? I took an informal poll among our top analysts and several professional investors who I know use our work.
They all said exactly the same thing: Stansberry Credit Opportunities and “your insurance work.”
The best business in the world…
As you may know, we urge our subscribers to invest in property and casualty (P&C) insurance companies because these companies can be extraordinarily capital-efficient. After all, they get paid – in cash – up front. Losses on insurance contracts, if any, are always paid out later. It’s why we often call P&C insurance “the best business in the world.”
Not many businesses can offer such appealing economics. The trick, of course, is solid underwriting: Losses that aren’t taken lead to big profits; losses in excess of premiums lead to huge losses.
That’s why there’s a huge difference between an average P&C company and the best. Markets like these with tremendous “delta” between average and elite are prime hunting grounds for analysts seeking outstanding investments.
Even better, most investors can’t tell the differences in these businesses because analyzing these companies isn’t easy. Even gaining access to the most important “core” numbers in these companies requires a lot of skill and hard work. You can’t just punch up an insurance company’s “float” on a Bloomberg terminal. You have to crunch the numbers yourself.
We analyze the entire P&C industry for our subscribers.
We publish our analysis quarterly because that’s when the companies release the data we need to analyze them. You’ll find our analysis in the Insurance Value Monitor, where we rank the top 48 companies and disclose all of the key data points.
(Once again, you can find this information by looking on our website, on the Stansberry’s Investment Advisory subscribers-only page in the “Extra Features” section under the portfolio. And again, you have to be a lifetime subscriber to my newsletter have access to this information. If you aren’t, here’s a link to find out more about what we offer.)
High-quality P&C companies should be the foundation of every portfolio…
But… does our approach work? Since 2012, our P&C insurance recommendations in Stansberry’s Investment Advisory have outperformed the stock market, with average annualized gains of 18.5%. We’ve only seen a loss on one of our recommendations. And that was our fault: We stopped out when holding on would have led to 19% annualized gains. That’s part of the reason we no longer recommend trailing stops on these picks.
Beyond the profits… we’ve also seen a strong correlation between our model and the resulting share price performance, with our higher-ranked stocks far outperforming the lowest ranked. That’s exactly why we never recommended the popular, hedge-fund backed reinsurance companies (Greenlight Re, Third Point Re) that have seen horrible results. These firms were always among the lowest-ranked in our model. Based on our actual results over the past five years (not back testing), we have immense faith in our model.
I’d urge every subscriber to read the latest issue of my newsletter (“The Lunch that Launched an Investment Mania”) for a full review of our insurance methodology. I don’t believe there’s a better, safer way to invest in common stocks than using our research and buying P&C insurance companies. This is the one sector of the market I will personally teach my children to invest in. Horse, meet water.
Knowing our dear subscribers, I can already anticipate the feedback…
Experience has taught me the response I can expect to get over the next few days. It will go something like this…
Porter, I appreciate you’re constant prodding to get us to do the right things with our money. I recognize the value of the recommendations you’re offering from your “Magic Stock” model and your excellent insurance ideas. But here’s the thing.
Making double-digit returns, even if they’re extremely reliable and even if they feature good dividends, just isn’t what I’m looking for. I can do that kind of investing without any help. What I’m paying for are the big wins. Like the picks I get from David Lashmet in Stansberry Venture Technology.
You see… I’m not really looking for a sure thing that grows slowly. I’ve got a small portfolio (only $100,000). For this to pay off, I need doubles and triples. Where are best ideas that can double in 12 months? That’s all I want to read about.
There’s a reason those folks still have small portfolios. Not even the very best investors in the world can grow a portfolio by 18.5% a year over the long term. There’s one exception: Warren Buffett’s long-term return is currently 19.1%.
Here’s my point: If your investment plan is to double your portfolio in 12 months, you’re going to be disappointed.
Yes, David Lashmet is a world-class biotech analyst. And yes, about half of the stocks he recommends double… often in less than a year. And yes, putting some of your portfolio into these outstanding investments will help your overall return. But few people want to take risks like that with serious amounts of capital.
That’s why I believe the most valuable information we publish is the research on the safest ways to grow your wealth at market-beating rates. Essentially, none of our insurance picks lost money (except when we ignored the model) and the returns were almost 20% a year. I don’t think there’s a better, safer way to grow your capital. Meanwhile, most readers ignore this research simply because they don’t think insurance sounds exciting or they don’t think they will generate big enough returns, fast enough. They’re making a huge mistake.
How big of a mistake are you making?
If you invested in our insurance stocks and you didn’t trade them… if you just held them, and you continued to earn 18.5% a year, as we have so far… your $100,000 portfolio would be worth more than $500,000 by Year 10. And worth almost $3 million by Year 20. The only person I know who ever became a billionaire by investing only in common stocks started with $50,000 and bought 12 P&C stocks. He held for 40 years. This approach might be boring. But it works.
But nevertheless, I will bow to the inevitable. I know many of our dear subscribers will not ever follow our best advice. They don’t want to invest. They want to gamble. If that’s you, if you’re not reading for an education or to build your retirement, if you’re just reading for a thrill, what should you focus on in that case?
Strangely enough, I believe our best speculative advice is currently found in Stansberry’s Credit Opportunities.
Doesn’t that service cover bonds? Yes, it does.
And to cover the bond market thoroughly, we built a model to identify outliers. Doing so requires us to maintain a database of the 6,000 or so separate corporate bonds that trade regularly. We spend a fortune buying data and maintaining this database. It allows us to assign our own credit rating to every tradable bond in the U.S. We can then find situations where our rating is higher than Moody’s and S&P’s. Out of 6,000 bond issues, we can then do a “deep dive” on the five or six situations that look promising. This approach has led to fantastic results, with annualized returns (around 33%) that far outpace the return of stocks (around 17%) and a nearly 90% win rate on our closed positions.
Regardless of the results, buying bonds isn’t a thrill. They’re much safer than stocks. But… using the database we built to understand the bond market… we discovered an incredible way to speculate in stocks.
The idea is pretty simple: Sometimes we know a stock is likely to fall because the company’s bonds trade at a big discount from par. Take a look at Tesla (TSLA), for example. The company has a large outstanding bond that matures in 2025 and pays a 5.3% annual coupon. It was downgraded by Moody’s in March and briefly traded below $900. (Par value is $1,000.)
Today these bonds still trade below par ($920), which means bond investors believe there’s a risk that this bond will default. And if the bond defaults, then the shares probably aren’t worth anything. The bond market is telling us that there’s financial risk in Tesla’s stock. And that’s a good reason to avoid owning the shares.
But sometimes, the opposite occurs…
Sometimes a company’s stock falls by a lot (more than 50%) but the company’s bond prices don’t budge. What’s the bond market telling us then? It’s signaling that nothing is wrong, financially, with a company. The stock market might not like a company’s prospects, but we know nothing is wrong with the balance sheet.
We kept seeing this pattern in the bonds we’re recommending.
Yes, our bonds did well. But buying the stock of these companies often produced truly extraordinary returns.
As an example, the first bond we ever recommended in Stansberry’s Credit Opportunities was a Natural Resource Partners $300 million bond with a 9.125% coupon that matured in October 2018. We bought the bond for $675 and sold it about 14 months later for more than $1,000 (above par). We made more than 70% in just over a year on a bond we knew was 100% safe. That’s a great investment.
But… you know what did even better? The company’s stock. The stock was trading for around $15 a share (adjusted for subsequent reverse split). A little over a year later it was trading for more than $40 a share. That’s a 186% gain in little over a year.
Yes, the stock was risky. That’s why I said this approach is for speculators, not investors.
As we kept seeing the stocks of our bond recommendations produce huge returns – we started studying these stocks a lot more carefully…
We noticed a definite pattern. What happens is, the company experiences a big problem and the stock craters. Over a six-month period, shares fall by 50% or more. Most of the time in these situations, the bonds fall, too. Not as much as the stock, but a lot. They’re usually down 25% or 35%. But sometimes… rarely… the bonds hardly move at all. We started tracking every 50% fall in a stock that didn’t coincide with a significant decline in the bonds. And what we found blew us away…
On average, those stocks came back, all the way to where they started falling. That is, within about 24 months the stocks were up about 123%, on average.
We called these setups ‘Golden Triangles’…
That’s because their share and bond prices make a distinctive shape. The share price falls steeply, while the bond price hardly moves. Then, the stock price rises steeply, close to the pre-fall price. It forms a complete triangle at about the 24-month mark..
“Why not recommend some of these stocks to our subscribers?” we thought. So we unveiled the model and our research to subscribers at last year’s Alliance Conference. And we presented the idea to an audience of mostly professional investors at Grant’s spring conference in New York a few months ago. How has this strategy performed? It’s doing so well it’s hard to believe.
We’ve recommended five stocks in Stansberry’s Credit Opportunities since February. They’re up 40% on average, in less than 90 days. Only one stock has gone down. (And it’s down just 8%.) So, we’ve got an 80% win rate. And the average return is about four times better what you’d normally make in stocks in a year… in only 90 days.
So… if you want to speculate… I recommend buying the “Golden Triangle” stocks we recommend in Stansberry’s Credit Opportunities. I’ve never seen a better model for finding beaten up stocks that are likely to rebound, massively, in the short term. And… the actual track record has so far been just as good as our back testing suggested it would be. If you’d like to learn more about subscribing to Stansberry’s Credit Opportunities, click here.