In This Episode
In just a few days’ time, we will officially reach the 10-year anniversary of the bull market. With the S&P 500 up 340%, you’re probably not alone in wondering how close the party is to being over. That’s why, for this week’s episode of Stansberry Investor Hour, we bring in John Gillin, who left Wall Street after seven years to start his own hedge fund that beat the S&P 500 for every year it was operational. This year, John joined Stansberry Newswire, where he uses his expertise to make individual stock recommendations and provide analysis on what’s moving markets. While almost every pundit on TV says “stay long and strong!” we don’t think you’ll want to miss John’s insights on the latest tea leaves of economic growth. He’s joined by extreme Value editor Dan Ferris, who points out we hit rarefied territory of all-time highs in late January. Luckily, there’s a much more important indicator than P/E ratio in the stock market – and it’s much more encouraging.
To find out more about Dan’s latest research, simply visit www.investorhourvalue.com. But first, a warning — if you want to move on the special offer he’s making for Extreme Value, you’ll need to move before next week to potentially lock down Lifetime membership to his research.
NOTES & LINKS
• Podcast listeners interested in Dan Ferris’s time-sensitive offer can buy two years of access to Extreme Value – or secure Lifetime membership for just $1,500 – by going to www.investorhourvalue.com.
• Register for the 2018 Stansberry Conference in Las Vegas, Oct 1-2. Meet your favorite Stansberry editors and hear guest speakers like Dr. Lacy Hunt, Steve Forbes, Robert Kiyosaki, Penn Jillette, Dennis Gartman, Jim Grant, and many others.
Announcer: Broadcasting from Baltimore, Maryland, and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
John Gillin: Hey, everybody. Welcome back to another episode of the Stansberry Investor Hour. I'm John Gillin. I'm a cohost of the Stansberry Investors MarketCast, and I am a coeditor of the Stansberry NewsWire. Porter and Buck are out this week, and riding shotgun with me is my friend Dan Ferris. He's editor of Extreme Value here at Stansberry Research. Welcome, Dan.
Dan Ferris: Thank you, John. It's great to be here.
John Gillin: And we have got a lot to cover, my friend. A lot to cover. So let's begin with value and that age-old question what's it worth. So growing up in this business, I learned present value of future cash flows was key, and then we get to return on equity assets, return on investment capital, all the acronyms that we've all heard. So what I wanted to ask you to kick things off is U.S. stocks are a week away from a 10-year anniversary of a bull market, which is the longest on record. I think the S&P is up 340%. Pundits and everyone all over the TV is saying stay long and stay strong as the S&P is cheap at 17 times. Second quarter behind basically grew 24.6% but 2019 is slated to grow about 10. So first question I want to ask you is peak earnings, and talk to me on valuation.
Dan Ferris: Yeah, so peak earnings, who knows. But valuation is not hard to think about right now. Basically, we hit rarified territory all-time highs in late January if you base it on the most meaningful measures to me, which are price to sales and similar measures. There was an all-time-high hit December of 1999: It was like 2.25 sales on the S&P 500. And we eclipsed that late January of this year, I think it was January 26, it was like 2.4 times sales. And if you kind of do the historical work, which a guy named John Hussman has done, you realize that price earnings is not the right one to look at here because price to sales in similar measures correlate highly, highly negatively with the S&P 500. So when they're high, the future returns are really low, and when they're low, the future returns are really high. And that's where we are. You know we're up around 2.2 or 2.3 times sales right now in the S&P. It's really high. And future returns are going to be low from here over the next five or 10 years.
John Gillin: OK. So 2.3 at this point. What's the historical average just for listeners?
Dan Ferris: Average, I have no idea. I don't really care about averages – I care about the extremes. Look, if we're below two, if we're around 1.5 or two or something like that, I don't really care. But when you start getting above that and you hit these historical all-time-high extremes, something is up. That's extreme overvaluation and you will get low long-term returns from this point forward.
John Gillin: OK. So let's talk about this as we look at problems and tariffs, which I'm going to refer to as taxes. Emerging markets. Turkey really sucks. You know the T-shirts that I would print are return the pastor so I can buy some lunch. I can't believe that that's hanging out there. And then we got Italy, Spain, Hungary, Greece, Russia – the list goes on and on. So when you look at emerging markets valuation, do you hunt there? Is that compelling to you at all?
Dan Ferris: Sometimes we do. You know I asked a friend of mine who really knows Turkey quite well. He's based in London and he spent a lot of time in Turkey yesterday, and he said he was buying, he was trying to buy. So this kind of smells and feels to me like August 1998, you know the emerging markets long-term capital kind of blowup there, which actually in the shorter term was a great buying opportunity. And I remember being out to lunch that day, I think it was August 31, 1998, with Porter and Steve and they were both thinking man, what a great day to buy, and they were right.
John Gillin: And I did see that the country of Qatar put a $14 billion investment into Turkey because they don't have anything better to do with their money. Oh well. I wanted to ask you, which really has had me scratching my head of late, is buybacks and dividends. And historically buybacks are opportunistic. You miss a quarter but your thesis is intact, the company buys back stock. But now, it appears that companies are plowing in, they're price agnostic. We think about banks. Banks went through this stress test. It took them years to get over the hurdle, they're there, and they celebrate buy buying stock and dividend without really looking at price, looking at book value. I mean how would you use the cash? Does this make sense to you, or am I out on a limb here?
Dan Ferris: Well –
John Gillin: As of now.
Dan Ferris: It's not as easy to figure out as I used to think. But we know that corporations aren't any better at buying their own stock than anybody else over time. They will buy it, but most at the top and least at the bottom, so there's that. And we just eclipsed I think it was some huge number, I forget, I'm sorry, my mind is blanking out, but it was an all-time high of dividends and buybacks in the last quarter. And I think that was kind of pushed up more by the buybacks than the dividends. And I look at dividends differently. To me, that's money that the shareholders would rather have in their pockets from my perspective because it imposes a kind of discipline on the corporation. Once you get the money out of their pockets, then they have less capital to work with, maybe they'll be a little more careful with it. And it's historically a huge part of shareholder returns. So dividends don't bother me as much, but the buybacks, you just know they're wasting a lot of the money when valuations are this high, don't you? I mean, you just know it.
John Gillin: Yeah, there's has to be a better use. Hold onto it. Hold onto it. Make strategic acquisitions.
Dan Ferris: Or pay down debt, you know.
John Gillin: Yeah, yeah. The whole thing just gets me sideways. Speaking of sideways, let's have some fun with this. We'll call this one hot-pavement stocks. Tesla. You and I have talked about this before but kicking around the $420 LBO for those that don't know leverage buyout. And 420 and all the implications that has. And what really had me back on my heels is the Saudis are investing into 5% of the company in electric cars. Isn't that defeatist for their whole purpose of being in business?
Dan Ferris: Yeah.
John Gillin: And the valuation of $83 billion. So let's go back to Texas Utilities if you would and compare and contrast that for the audience.
Dan Ferris: Oh, Texas Utilities. Well, things are different now than they were in Texas Utilities days. That was a huge LBO a while back. And the high-deal den market is bigger now, so I think you could do this deal. You could do it if it were real. But the problem with it is not whether or not you could do it. It's whether or not it's real, and it looks like it's not and it looks like Elon Musk ought to be in a hell of a lot of trouble because you can't go throwing words around like financing secured. You know in the financial world, that phrase has a very specific meaning. And if you reverse the order of the words secure financing, well then that's an even more specific meaning. So we know the financing it doesn't seem like it's secured and it seems like it's just Elon Musk getting an eye and tweeting and talking and not making any sense and not saying anything that's true.
John Gillin: Getting eye, yes the 420. Got it, yeah. And for a company that –
Dan Ferris: Yeah, 420, right. That was exactly the number that I would expect from it. But I don't think it's real. I think he's just talking and I think he should get into a lot of trouble for this.
John Gillin: Well, stock is starting to roll over, and for a company that was down three-and-a-half billion in free cash flow last year, yeah, no one can make heads or tails of that. So I was at the Las Vegas convention, the Stansberry Research Alliance Convention last year when you spoke about Facebook. And it was an impression call and I want to take you back to that, and just tell the folks what you said. At the time, I wasn't quite sure where you were coming from, but you nailed it.
Dan Ferris: So at that time I called Facebook the biggest surveillance operation in human history, because that's what we're doing. You know we're just kind of surveilling ourselves. Two billion monthly active users surveilling themselves on Facebook. And I thought this isn't right because it's really a media company and the management is kind of clueless about the business they're actually in and the level of responsibility they actually have, and of course that has come to light. Although they're handling it a lot better than the Congress handled it. Zuckerberg made quick work of them for now. And so I just thought there was a lot of risk in the stock because at some point regulators are going to get a hold of this and say you guys are collecting too much of the wrong kind of information.
You're not asking people – you're just collecting it. And it looked like a really risky situation to me, and I coupled that with my thesis on all of these big tech stocks which is that they are great businesses. I mean, let's get it out there, Facebook is the most successful thing in human history. It's bigger than Catholicism. It's bigger than communism and capitalism and Islam and everything else. Two billion active users. But that doesn't mean there isn't a lot of risk in it and it doesn't mean the stock can't fall 20% in minutes, which it did a couple weeks ago. So that was what I said and it came true a little bit here.
John Gillin: So I wanted to segue into what we call the fangbats, which I can't even give you all the names in there but the Facebooks, the Amazons, Netflixes, Googles, Microsofts, and all the Chinese companies. So recently Tencent, they missed their first quarter in about 10 years and it really has tumbled China. And I wanted to spend a little time on China with 1.3 billion people, a burgeoning middle class which is bigger than our entire population. GDP is about 12 trillion a year and they're growing at 6.7%. The activity has slowed and you can see it through fixed-asset investment by the government and state as they're trying to deleverage and grow at the same time. So my question to you as a value guy, is that going to be possible. Is China going to continue to be able to grow 6 to 7% and do you see opportunities there longer term?
Dan Ferris: I'm not much of a macro guy, but I don't think it's difficult to realize that China and I think India too but really China for now is going to be a lot bigger economy in several years than it is now. It just will be. So to ignore it is to ignore a huge opportunity.
John Gillin: And our guys Sjug and Doc visited recently and just the cranes and the skyline – and something else I took away reading, per capita spend on secondary schooling is unlike anything else on the planet. So they are in it to win it.
Dan Ferris: Yeah.
John Gillin: And opportunities, opportunities. And the last few weeks of course have been difficult. Actually, 2018 has been difficult for Chinese stocks but we see it down the road, have to be there. So just for the audience and how your mind works and a conversation you and I had recently, you love Apple.
Dan Ferris: I still like Apple. [Laughs] I don't know if I love it, but I do like it other than the big giant tech companies that's for sure.
John Gillin: And when did you recommend Apple?
Dan Ferris: We actually started on Apple in 2013. Let me confirm that here – I have the numbers in front of me. Yeah, so June 2013 is when we first recommended Apple. Sixty-two bucks.
John Gillin: Sixty-two bucks, OK. Let's see where we are now. So I'm going to play devil's advocate. $1 trillion in market cap now, and we talked about this in market cast the other day. If you stacked dollar bills one on top of another, that would reach 68,600 miles into space or a quarter of the way to the moon. So walk me through how an Extreme Value guy still looks at Apple.
Dan Ferris: You know, what we do is we do something called expectations analysis and we did it when the stock was a bit lower than here, and we realized that the expectations baked into the share price were kind of really low single-digit growth for a long time and we didn't think that was going to happen, or zero growth, near-zero growth at one point. And so we stayed in it and we think it's a great business. It's got an installed base of well over a billion devices worldwide at this point and that kind of ropes the user into the IOS world and into iTunes and other services and things, so it's a really great business.
John Gillin: I'm going to give you a layup: Is Tim Cook the best CEO of all time?
Dan Ferris: [Laughs] I don't think it's – well it's a layup because I think the answer is probably no. [Laughs] He doesn't have to be. He just has to not screw it up I think, which I'm not saying that's easy but he doesn't have to be a great innovator. He's surrounded by those people, and they'll think up new products. And it's funny because the whole time we've been in Apple and before they said, "Who's going to buy the next iteration of the iPhone?" I mean they were saying that at like iPhone 4. [Laughs] So they keep getting people to buy these things and to pay more and more for them, so.
John Gillin: Thousand-dollar phones, trillion-dollar market cap.
Dan Ferris: I think it's the biggest luxury goods company.
John Gillin: Well said, well said. Well, I've read a lot of your missives over time and I want to talk about world dominators, and I love the term and I know you came up with that quite a few years ago. You've got two of the 10 all-time-highest-returning close positions, meaning bought and sold, of all time here at Stansberry Research. In particular, Constellation Brands (STZ), which was up over 630%, and PBH, which rallied 406%. Those are fantastic returns, I don't care who they are. That speaks to your work and how your mind works.
So a couple of ideas that I would like to kick around right now. One is a short, and if we could start with Interpublic Group, and I'll just introduce it quickly. IPG is an old-school advertising company. They think Mad Men, martinis, and steaks, but certainly without the misogyny. But that has become so antiquated. There was a line from an executive vice president of Ford that you quoted and you just said, "Look, gotta grab your attention in two seconds," and that's not what IPG goes. So just walk me through the short-piece thesis on that if you would.
John Gillin: OK. Here's how we look at it. For a long time, you could create kind of a mediocre product and you could hire Mad Men-type advertising people to tell a great story about it. And you could shove it down the distribution pipeline and get shelf space and all kind of things to make sure people bought it once you got them in the store. And that worked for a long time. But now, things are different because you can go to Amazon. More than half of all online product searches start at Amazon, not Google, and most of the rest are in Google. So you go to Amazon or Google and you don't look for brands anymore. You don't look for the one you've been told the story about necessarily. You look for the features and benefits that you are trying to get out of the product, and you let Google and Amazon tell you which brand you want. And it's just a whole different world than it was when you could tell stories about mediocre products and shove them down people's throats.
And so as you alluded, John, a bit part of that is the industrial advertising complex companies like Interpublic, which actually owns McCann Erickson, the company that featured heavily in the Mad Men TV series. And you know they're going to struggle with they've been making 30-second spots for decades and decades and they're great at that. And now as you said, you have to capture somebody's attention in two seconds and you have to do it online and you have to do it on their mobile device. It's a different world. And these guys, part of the thesis too is that it's been my experience you could buy a company that doesn't generate free cash flow, and if it starts to generate cash flow you get this big surge in the share price because all of a sudden it has a positive net present value that can be measured. And I think we've gone the other way here, these other companies have generated gobs of free cash flow for decades and they're going to slow way down with their free cash flow generation. They've already started doing so and that's going to hurt their share price quite a bit I believe over the next year or so.
John Gillin: And for the listeners, when you first brought it to our attention, I was looking at IWPP Group, which is the U.K.-based global advertiser, and they have subsequently forced the CEO out. Stock has cratered. There are plenty of shorts in that name as well, but another business that is just a second derivative really of what's going on at IPG, that these are both wonderful shorts at this point. So terrific call.
Dan Ferris: Yeah, I think all of these guys. Publicis, Omnicom Group, WPP, I think they're all going to lose half their market cap in the next year or so.
John Gillin: I am in agreement. But I wanted to move into a second idea in a company that has been a fantastic performer for you and that's ADP, the payment and data processor. I guess first question to start with is how do they fend off Fintech? How would they fend off a Square? I mean, I'm looking at all the financials, they look terrific, free cash flow, EBITDA earnings of $5.20 in '19. Everything makes sense to me, but that was the first question that jumped out at me when I was looking at ADP.
Dan Ferris: Well, ADP of course you know they process about a sixth of the company's paychecks – that's their main business. And they have quite a good mote because it's kind of a pain in the neck to switch providers, so you'd just rather stick with the one you have as long as they're not costing you too much. And they've been in this business for a long time and I don't know, I don't see it changing a whole heck of a lot. The banking system, I don't know if it will necessarily change a whole heck of a lot. You will need – there has to be a target account. As long as you need a target account, you will need some type of service to segregate taxes and health insurance payments and all that stuff, and that's the main service they provide. So they get to hold money.
The reason that we recommended because it was in the financial crisis and it was dirt cheap and it was a great business, but we've held onto it and I continue to hold onto it because I think at this point it's like a trillion six of funds go through that company in a year. The customer funds, the client funds that they pay out on behalf of their clients, and they hold them out for a night or two and earn interest on them. And interest rates start creeping up here, which they have, and if they creep up even more, you can drop tens or perhaps under certain circumstances even hundreds of millions of free cash flow to the bottom line with not one penny of expense or investment. And that's pretty cool, man.
John Gillin: And I love the term mote. And just thinking and sadly for me I've been banking at Wells Fargo and I'm not a fan, but the effort to move is just kind of overwhelming so you stay. And with ADP, which is a gold-plated business, why would anybody move? And Bill Ackman owns a piece of this?
Dan Ferris: Yeah. I haven't heard anything about his involvement lately in ADP. I think they're still holding it though. I don't worry about it much. [Laughs]
John Gillin: Yeah, there was something I read. He's had a little bit of a tough go, but he will have a resurgence I am convinced. But yeah, I love that idea, love that idea. So here's a question for you, little more general and back to things that you look at. In 1997 there were 7,600 public companies; there are now 3,600. Certainly, a lot of monopolies, which has forced passive investing to a degree and we get some crowded trades. Do you still have plenty to choose from? I don't think Wall Street is putting in the financial resources to really dig into things which gives you and other folks here at Stansberry Research great opportunities. But do you feel like the playing field is a little too skinny at this point, or are you still seeing plenty of opportunities?
Dan Ferris: In terms of the number of companies, there's plenty, there's plenty. In terms of the number of companies that are undervalued in any given time, at this point in August of 2018, it's slim pickings. [Laughs] So the number of companies, to me, it's fine. There are plenty of great businesses out there I'd love to own but it's hard to get them cheap enough.
John Gillin: Yeah. I think certainly the financials have cleaned up over time. Back in 2000 it was a joke to be investing in a lot of the so-called internet companies, which had to go away. So certainly –
Dan Ferris: Right. Well, John, hypothetically, right, hypothetically you're alluding to a good point there, which is would you rather have a good market with however many, 8,000 companies where 4,000 are crap and 4,000 are good, or would you rather just have the 4,000 good ones?
John Gillin: Bingo. Yeah, I'd like to be in a clean, level playing field, absolutely. Well that brings us to another topic, the most important topic. We are launching a new extreme-value investors campaign. So we've talked some specifics and I wanted to get a little more general. And what really intrigues me is tell me about your price-implied expectations, capital-efficient stocks, your research reports and what this new campaign is about, if you would.
Dan Ferris: Well, the price-implied expectations that's something that we found a couple years ago in a book called Expectations Investing by Alfred Rappaport and Michael Mauboussin. I love Mauboussin's work. I recommend people read a lot of his stuff; he's really a smart guy. And basically, John, the normal way people value companies – the normal way value investors value companies is they look at the present value of future cash flows. You mentioned it at the start of the program.
John Gillin: I was clear point.
Dan Ferris: It's a little perilous because you have to predict the future cash flows. You have to predict the future revenues and predict the future margins and everything. And it just gets to be a big prediction exercise and you can't hope to be good at that you know. But what you can do, what Mauboussin suggested, is that you assess the expectations baked into the current share price. In other words, engineer the future inputs to equal the current share price and make a decision. Is it too pessimistic? Is it too optimistic or is it somewhere in between? If it's too pessimistic and it's a good business, you buy it. And that's what we do in Extreme Value these days.
John Gillin: And you have got a new recommendation that we're not going to speak about on this call but it could be the first 20-bagger in Stansberry history. And I believe you were quoted as saying, "If I had to put every penny in my life savings into one company this would be my number-one recommendation for 20 years."
Dan Ferris: Right. I mean I wouldn't recommend anyone do that and there's no gun to my head, but if there were a gun to my head, that is true. That is what I would do.
John Gillin: Well I love the conviction. And having read the report, I am loving that. Going to be an owner at some point. So the offer here for Stansberry Investor Hour listeners is two years of Extreme Value for only $1,000 or a lifetime of Extreme Value for only $1,500. Now I walked on Wall Street for 20 years and good research is very expensive and getting even more so and it's extremely rare. So, folks, go get this. Dan will see the opportunities before most of us will. His writing style is provocative. You come away from it informed, and he looks at every different angle and bases his opinions on facts, decades of experience, and as we spoke about Constellation Brands, Prestige Brands – you know, finding 400, 600% returns is just extraordinary. So hats off to you, my friend, and look forward to many, many moons of great ideas.
Dan Ferris: Well, John, I'll tell you what, if I get my way, Extreme Value, will be every bit as expensive as the Wall Street stuff at some point here.
John Gillin: Yes, as it should be.
Dan Ferris: So you better grab it.
John Gillin: I certainly agree. So how our listeners can sign up, it is www.investorhourvalue.com. Let me repeat that, www.investorhourvalue.com. And you can get online quickly and once again, the Extreme Value for only $1,000 for two years or a lifetime at $1,500. Once again, one of the great bargains that I've seen. So, Dan, as we kind of come to a close, finish things up, anything else you want to touch on? Anything keeping you up at night? Want to talk about bitcoin?
Dan Ferris: You know, the only thing that keeps me up at night is the search for ideas. It's just we're at the end of, well I don't know if we're at the end, but we're 10 years into a huge bull market. We've seen all-time-high valuations on the S&P in January of this year and we're still near that level. And it's tough – it's tough to find things. We really, really are working hard. But at some point, gosh, I feel like I'm going to run out of ideas here. It never happens but that's how it feels; that's the thing that keeps me up at night the most.
John Gillin: Yeah. Well I do feel like the U.S. market has put in yeomen's work, the earnings power is tremendous. We're going to be in a low-interest-rate environment. I'm not concerned about currencies per se. A strong dollar is actually healthy at this point. So if we get into some trade battles and air pockets where really great stocks are put on sale, therein lies the opportunity for people like yourself.
Dan Ferris: Yeah.
John Gillin: And to point out to folks. And it's back to working with an expert, someone who's had a lens on specific stocks for years, and when that green light goes on, you've have to be with Dan to get those opportunities, because I can speak from experience, I'm not going to find it myself.
Dan Ferris: Actually, John, I will leave you with one more thought if you want.
John Gillin: Please.
Dan Ferris: I was looking at something yesterday and there are apparently really huge short positions in futures and bonds and in gold. And of course, everybody wants to be long stocks. And when I think about everybody wanting to be long stocks and short bonds and short gold, things usually turn out a lot different than the way everybody expects. So I would imagine those three things will turn out differently than the market currently expects, and I'll just leave it at that.
John Gillin: No, no. A moment on gold where it has been such, with a strong dollar, it makes book sense that gold has had problems, but that is not going to slow down for instance in Indian wedding season where just an enormous amount of demand for gold. And at some point, with consternation around trade tariffs, everybody else that we've spoken about, emerging markets, gold – you have to have exposure. So back to an Extreme Value person like yourself going to find great opportunities in gold. So please, everybody, tune into that.
So that's going to conclude another episode of the Stansberry Investor Hour. Porter and Buck will be back at full strength next week. Be sure to check out our recently revamped website. You can listen to all of our episodes. You can see the show transcripts, and we do get a lot of e-mails about that, and where you can enter your email to make sure you get all the latest updates. Just go to the same address, it's investorhour.com.
And one other thing I wanted to mention is Investors MarketCast, which we host every Monday morning, be sure to check us out on that. And that's Stansberry MarketCast, and it's just a financial update from the week before and what we're thinking going into the next week. I think the timing is real good. So you know what they say: Love us or hate us, just don't ignore us, and thanks very much for listening. See you all next week. And, Dan, as always, a pleasure. I got my learn on once again, and you're the man.
Dan Ferris: Thank you, John. It was great to be here. I hope we can do it again soon.
John Gillin: Take care of yourself.
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