Stock Gumshoe

So here we go again — I’ve already had a few readers trying to beat me to the punch and figure out the other four “secret societies” teased by the Porter Stansberry Investment Advisory, and this particular one, secret society #2, was suggested by a couple readers. Of course, they didn’t all agree on what the stock is, but we’ve got it figured out now.

This one is called “The Mt. Kisco Society,” and this is what we’re told by way of some clues:

The company is run by one of the 25 richest men in America.

“Mt. Kisco” is where he works.

They own casinos in Vegas and Atlantic City, and the Vegas one is the tallest building west of the Mississippi. (So clearly, anyone who has been to Las Vegas in the last ten years knows that one)

They also own real estate in Florida, Mass., and NY, a Martha’s Vineyard hotel, and a home furnishings business.

And the tempting part of our teaser: “over the past 4 years, the ‘Society’s’ investors have made more than 18-times the stock market as a whole … It simply doesn’t get better than this in the investment world.”

So what’s the Mount Kisco society?

Thanks to some ideas sent in by readers, and an extra tumbler of scotch thrown into the Thinkitationizer, the Gumshoe is pleased to inform you that this holding company is …

Icahn Enterprise Partners (IEP)

Yep, that Icahn — Carl Icahn. Probably most investors have heard of this guy, if only because he is an expert at using the press to amplify his relatively small positions in big companies to pressure management to return cash to shareholders … just ask the folks at Time Warner or Motorola, they’ll probably make a face when you mention his name.

But we certainly can’t deny that he’s been successful, whether you think he’s a greenmailer or a savvy shareholder-friendly investor. He is one of the 25 richest folks, thanks to roughly $13 billion. Can you believe $13 billion only makes the top 25? This is one crazy world.

Icahn Enterprises Partners is a new name for what used to be Icahn’s real estate holding company, American Real Estate Partners — and yes, it is a partnership, just like the newly listed Blackstone or any of a number of other MLPs or LPs, which means that, depending on your situation, there may be some additional tax complication to take into account (and a few forms, like K-1s, that might not be familiar to you).

So, just to sort out the details:

The big tower in Vegas is, of course, the Stratosphere hotel and casino. Can’t say it’s one of my Vegas favorites, but it takes all kinds (and hey, they’re running a 007 special right now — 2 for 1 martinis! Can you imagine James Bond using a martini coupon?).

The Mt. Kisco digs are Icahn’s offices in that bucolic Westchester village, where I think he still owns an office park.

IEP is a bit smaller than Leucadia but certainly still sizable, a bit over $7 billion, and it has had a remarkable growth in book value of something like tenfold over the last fifteen years or so. It is still primarily real estate-related, but since Icahn essentially rolled his hedge fund management company into the partnership it is more diversified now than it was before it changed names and reorganized, which officially went through about two weeks ago.

And just as with Blackstone, you would only buy this one if you really wanted Carl Icahn to decide everything that happens to your money — he owns something like 90% of the shares and I would imagine that he is as happy to hear your opinion about IEP management as Dick Parsons was to hear how Icahn felt about Time Warner’s decisionmaking. I’m not sure how the dividends work on this one — it has a very low dividend (much lower than Blackstone’s mininum 5% or so), but must somehow spin off earnings to shareholders due to the LP status — there may be special dividends that I’m unaware of, which would certainly be worth investigating if you want to join Carl on his wild ride. My guess is that, because of the significant reorganization when Icahn essentially sold his management firm to his real estate partnership, figuring out what’s really going on with the company might take a little longer than usual.

full disclosure: I own both partnership units and options in Blackstone, but not any other company mentioned here.

This is a follow-up to our look at the “Pasadena Secret Investment Society,” which teased us with five other holding companies that the Porter Stansberry Investment Advisory thinks are great investments.

In the words of Stansberry & Associates, “If you’d like to make a small fortune in America today, we believe the only safe and easy way to do it is to invest in these 5 opportunities that I call ‘Secret Societies.’”

Whether or not that’s true, or the real reasons why Porter believes it to be true, that you’ll have to get from them — I think it’s about $75 a year for the subscription.

But if you just want the names of these investments so you can check them out on your own dime, well, you’ve come to the right place. The Gumshoe is happy to oblige (or at least, try to oblige … we’ll see if we make it through all five).

The first one of these societies is called (by Stansberry, probably not by anyone else) the Brigham Street Society.

Why’s that? Well, they’re apparently housed in a mansion on Brigham St. in Salt Lake City, UT.

They were founded by two Harvard Business School grads in 1978, and are famously secretive .. though they’ve got a lot to crow about, with, as reported by Stansberry, a 32% annual return. That beats Buffett handily, though over a considerably shorter period of time.

They’ve had 808% gains over the past ten years. OK, that’s pretty good, too.

And finally, a more interesting clue: “The ‘Brigham St. Society’ focuses on debt convertibles, bankruptcies, spin-offs, and other sophisticated strategies… Plus, they own wineries, casinos, timberland, and banks.”

OK, so with that collection of investments, and accounting for the fact that this corporation is among the more publicity-shy in the world, this just about has to be ….

Leucadia Corp (LUK)

I don’t even know why these guys bother having a public company — I doubt they need the hassle of filing anymore, and they have the only corporate website I’ve ever seen that makes Berkshire Hathaway’s look flashy — all you’ll find is their SEC filings and, in Buffett fashion, the letters from the Chairman and President (Ian Cumming and Joseph Steinberg, the two Harvard grads in question).

I’ve actually held shares in Leucadia in the past, though I don’t currently. They are quite frequently overlooked because they try very hard to be overlooked, but though they don’t have quite the overwhelming cash generation machine that Berkshire has in Geico and their other insurance operations, they do have a fascinating mix of businesses and have been, many times, referred to as the “next Berkshire.”

Unlike Berkshire, which has had a good year, Leucadia has had a spectacular year — their shares have nearly doubled since January. Aside from making me gnash my teeth, since I sold quite a while ago, that means they look pretty pricey based on current reported earnings — the PE is 95. A bit steep for a bunch of real estate, some wineries, an odd telecom company — perhaps it has helped that they also own a bunch of copper mining and oil drilling holdings, and the Hard Rock Cafe Casino in Biloxi that was recently rebuilt (and had to be built twice before opening, thanks to Katrina).

Oh, and in case you’re curious about that “Brigham St.” business, and note that the Salt Lake address for Leucadia is actually “South Temple St.”, have no fear — S. Temple has often been popularly referred to as “Brigham St.” in Salt Lake for a long time, an honorific for, of course, everyone’s favorite football factory founder, Brigham Young (just kidding).

But of course, LUK doesn’t care so much about the earnings they report, the consistency of reported earnings, or how much people like them — they care about growing their book value over time and making money without getting noticed. This is pretty clear from the first page of their letters to shareholders every year — it’s just a chart of the growth in book value of Leucadia shares, much like Buffett’s letters (and LUK’s letters are great, too, if you enjoy Warren’s you might like these as well — they can provide some good insight into the minds of a couple brilliant investors).

And just a quick note on their annual returns — the growth in book value has indeed been spectacular, at about 32% annual compound growth … but they started off with an odd year in 1978, so if you start from 1979 the compound annual returns have been a much more Buffett-like 25%. Still nothign to sneeze at.

Barron’s did notice them back in August, which helped boost the shares when they mentinoed LUK as one of the possible beneficiaries of the credit squeeze — companies like Leucadia and Berkshire that have big cash hoards, the theory goes, can swoop down and buy up debt and equity cheap when the market panics.

I have no idea whether or not they did so. I would say that LUK has had fairly consistent growth without getting much attention, but that they have definitely gotten some attention this year, and the shares may well be worthwhile but are not cheap. Using their metric, LUK is trading at about 2.5X book value now … that compares with more like 1.6X book for Berkshire. LUK does, unlike Berkshire, pay a dividend, though it’s so small as to be negligible.

So, I’ve got nothing bad to say about LUK, other than the fact that I liked it more at $25 than at $50 — and I suspect I won’t have much negative to say about any of these successful holding companies we’re going to look at for this teaser (assuming I can figure the other four out when I get to them). The only qualm I have, for active investors who like to know what’s happening to their money, is that you’ll have to be satisfied with a pretty tight-lipped management team, and at this valuation you’ll need to have a fair amount of faith that they will be able to continue their outsize investment performance.

And I’m willing to bet, without even having looked for the others yet, that this is by far the most secretive of Stansberry’s “secret societies.”

This one comes in from Stansberry and Associates, as an ad for Porter Stansberry’s Investment Advisory — if you subscribe, they’ll send you the special report: “Part D Compensation”— Monthly Checks for the Next 9 Years.

Now, Stansberry and his folks love to come up with new terms and phrases to describe the investment strategies they’re recommending –whether that’s the 801-K plan or the USG-4 Stock Tipsheet … and the Part D Compensation plan is really not too different.

Part D exists, of course, but — as they do clearly state in the ad — it’s a part of Medicare that now covers prescription drugs. So calling this “Part D Compensation” is just a cute way of saying that they think this Medicare program is going to help pharmaceutical companies make money, and if they make money then their stockholders will make money. The “monthly checks” part is just the fact that most big pharmaceutical companies have pretty decent dividends, and while they pay them quarterly the fact that there are staggered reporting periods among the various companies means you’ve got a good chance of getting a monthly dividend check of some kind.

So the “Part D Compensation Plan” is just to buy four pharmaceutical stocks, and watch your “550% … or more” returns pile up over nine years (that’s Part D’s authorized lifespan, so far) … but you could probably figure out that much on your own — the letter didn’t seem particularly designed to mislead, and “Part D” is not a totally invented term. The real question is, what are the four pharmaceutical companies Stansberry is talking about here … that’s the question for me, at least — the question for you will be, “are they worth my money?”

He provides a few hints to get us on our way, a kind gesture toward those among us who prefer not to pay and just want to find the name of an investment idea. So let’s take a look, shall we?

“Part D Compensation” Company #1 clues:

15 years of annual dividend increases
“Makes 8 of the top 20 drugs used by seniors (source: Families USA 2006 Study)”
Pay dividends in February, May, August, and November.
Dividends total about $7 billion.

“A recent Business Week article said money from the new “Part D” Plan now accounts for about 20% of this company’s U.S. sales. By 2008, “Part D” will account for more than 40% of U.S. sales.”

Provided shareholders with 438% returns “During a recent 5-year stretch.”

That enough for you? The Gumshoe’s Cognitationizer takes a brief spin around the block and returns to answer that this is …

Pfizer (PFE)

If you don’t know that Pfizer has had a rough couple of years, you haven’t been paying attention, the shares have been bouncing up and down around $25 since 2005’s significant fall from the mid-30s, and it’s no longer considered a growth darling. But maybe it should be?

They do have 8 of the top 20 drugs for seniors — if you count different dosages as different drugs. That would be Aricept, Celebrex, Lipitor (2 dosages), Norvasc (2 dosages), Xalatan, and Zoloft. And they do pay their dividends on that schedule — though with their huge reliance on some drugs that will come off patent in the relatively near future, including especially Lipitor, which accounts for the lion’s (and the witch’s, and the wardrobe’s) share of their sales, there’s some fear that maybe that dividend won’t rise forever.

It does seem remarkable to me that you can buy Pfizer, the poster child for solid pharma growth for years, at a near-5% yield and a PE near 10, but investors are terrified of what happens when Teva or someone like that starts churning out generic Lipitor. Though they do have $14 billion in net cash on their books (seriously — with a B), so perhaps they’ll be able to develop or buy some new high margin drugs.

“Part D Compensation” Company #2

“The company makes 2 of the 10 best-selling prescription drugs for seniors.”

Ten dividend raises in ten years (total div. payout of $29.95 over that time).

“Money Magazine recently reported [that] this company is ‘benefiting from an increase in prescription volumes, stemming from increased coverage from the new Medicare Plan D, implemented on Jan. 1.’”

464% gains “over a recent five year stretch” — notice how they’re not saying “the last five years” for any of these?

Last dividend payout was June 6.

So … again not too tough, the Cognitationizer doesn’t even have to leave the house for this one — this second Part D company is …

Merck (MRK)

And if you didn’t hear about their problems you’re REALLY not paying attention — they’ll probably be fighting off lawsuits over Vioxx until my granchildren are old and gray. And my oldest child is not yet 4.

That said, they sure did have a nice recovery after they started winning a few of those lawsuits in the last year or so, and they did come out with the cervical cancer vaccine and they have some other stuff in the pipeline that investors seem to like. The dividend is much lower than Pfizer’s, and the valuation significantly cheaper — but they don’t have all their eggs in the expring patent basket for Lipitor like Pfizer is. Like most all of the big pharmas Merck has a challenge to keep their pipeline robust enough to continue churning out billion dollar drugs, and I can’t say that I have any idea how they’re doing on that front. Still, unlike many Pharmas this has been a Wall Street darling for a couple years.

“Part D Compensation” Company #3

Makes a best-selling blood pressure drug

“Plus, the company makes some of the most popular over-the-counter antacid, decongestant, and pain-relief medications.”

Second-biggest generic manufacturer in the world.

Raise dividend five times in seven years (100% gains during that time).

One annual dividend, payable in February.

This one took a few moments in the Thinkolator (wore out the Cognitationizer — don’t usually have to find four stocks in one email) … but I do believe we’ve got it. This company is …

Novartis (NVS)

The big swiss drugmaker is indeed the second-biggest generics company, too (depending on who you ask), thanks to their Sandoz division that has bought up a bunch of manufacturers over the years. They also sell Diovan, their biggest current drug, which is indeed a blood pressure medication.

They’ve also got plenty of over the counter drugs, including Gas-X, Theraflu, Lamisil, Maalox and lots of other stuff I’ve taken or heard of.

This one was pegged as a top drug stock for 2007 by a lot of analysts over the winter, since they were expecting approvals for some potentially big drugs and their biggest drug, Diovan, won’t expire for at least five years or so. That’s not how the ticker has worked so far, they’re down a few bucks from where the shares stood in January, but I don’t know of any of the big “issues” for Novartis the way I do for Merck and Pfizer (that’s not saying much — I’ve never really done much research on NVS). The yield is pretty low, and the valuation is comparable to Merck’s (if you believe the analyst numbers for next year) at a forward PE of around 15.

Honestly, I haven’t looked at big pharma companies in a long time, and I’m actually getting a little tempted here — some skeletons in a few of these closets, but man oh man a few of these fellas look downright cheap!

“Part D Compensation” Company #4

This one has increased dividends annually for 44 years

Got it yet? There aren’t many of those … not even many companies that have been around that long, in all honesty.

But to be sporting, let’s look at the other clues:

“It makes many of the best-selling prescription and brand-name medications in America”

“15 different products that bring in more than $1 billion a year”

“If there’s one “Part D Compensation” company you want to buy and hold for the next nine years and beyond, this is it” Porter here is talking about

Johnson and Johnson (JNJ)

Man, it would be nice if these were my Johnson ancestors. I’d even take the SC Johnson folks. But no, just some poor Swedish farmers … curses.

But really, do you need me to say anything about J&J? They have raised the dividend for 44 straight years, which is pretty remarkable (almost as good as P&G’s 50 years), and they do have a solid OTC and prescription business, though folks aren’t all that optimistic about their pipeline at the moment. If you like JNJ, I don’t know that it’s ever been this cheap, at least in my memory, at a forward PE of 14, and the yield is a nothing-to-sneeze-at 2.7%

So … these are the four “Part D Compensation Plan” stocks from Porter Stansberry … they all look fairly compelling on the face of it, but since analysts and investors are valuing all of these with a keen eye on potential blockbusters in the pipeline, and current blockbusters about to lose patent protection, it would probably be a fine idea to look into those details on all of them before thinking about investing.

It used to be that big pharma stocks were the best reliable growth companies you could buy … if that’s still true in the long run, and we’re all worrying about the wrong things, then these might all be screaming bargains right now (big “If,” though). I don’t ever remember forcing myself to think about big pharma as a contrarian play, but that might be what we’re starting to look at here.

Let us know what you think of these big boys … and if you’re an expert in all these confusing pipelines or patent expirations, or understand what any of these strange chemical names mean, by all means, share!