Nicholas Vardy has a splashy new ad out predicting that the Dow Jones Industrial Average will hit 15,014 by October of this year — which would be about a 17% gain from today’s price (the DOW is at 12,880 or so right now).
And naturally, he’s got the best way for you to profit from that surge — assuming, that is, that you’ve a hundred bucks to pony up for a subscription to The Alpha Investor Letter to get Vardy’s insights.
Here at Stock Gumshoe, we’re always happy to pick up a few investing ideas … but if you’re going to tease and taunt us, we’re going to want to toss your teases into the Thinkolator to find out some answers for free. That’s just how we’re wired. So what’s the story here?
Well, Vardy’s prediction of Dow 15,000 is based on the Consumer Confidence Index (CCI) — with the idea being that a reading below 50 on the Conference Board’s CCI is a solid indicator that the market will rise over the following year. There’s a certain logic to that — after all, when the CCI is very low and consumer feelings and outlook are in the doldrums, that would tend to mean that the market has probably been crushed. Consumers are conditioned to feel like the nightly news announcement of the Dow Jones at XX,000 is an indicator of how their economic lives are going … and, of course, though it is extremely hard to do for animals with herd instincts like us, the time you want to jump in with both feet and buy stocks is when everyone feels lousy and thinks the world is falling apart around us.
Here’s how it gets teased by Vardy’s publisher:
“I’m pleased to report that the moment we’ve BOTH been waiting for is here.
“That’s because right under the radar of 99% of investors, advisors, and analysts…
“An indicator that has never been wrong in its 44-year history is suddenly pointing to a massive bull run in the U.S. markets — starting right now.
“And if it’s right yet again, the Dow could be headed for 15,014 or MORE…
“By just October 31st of this year.
“But listen up: There’s a way you could outperform even this impressive bull run of nearly 23% — with one world-renowned analyst’s three targeted investments…
“Which could double your money in the next 12 months. Easily.”
And they include an excerpt from Vardy’s December letter that details the point:
“I believe that we may be at a tipping point in global financial markets. On the one hand, the mood is lousy. The Conference Board’s preliminary survey of consumer confidence came out on Oct. 26 at 39.8, posting one of the worst results in the survey’s 40-plus year history. The last time U.S. consumers last felt this down was in March of 2009.
“On the other hand, this survey result is good news for stocks. One year after reporting a survey reading at or below 50, the return on the S&P 500 was positive 100% of the time.”
The ad includes a chart of the CCI across history (the survey has been done since 1967), so you can see the half-dozen or so times that it has troughed down to 50 or below. I’ve copied the chart here from the same source just so you get the idea (you can see the bigger chart and a bit more background here if you like).
And yes, you generally do find that not only does consumer confidence improve dramatically a year after it hits a historic low in that sub-50 area, but the market does, on average, also go up. As Vardy’s ad puts it:
“Exactly one year after each of these 18 monthly ratings of 50 or lower…
“The U.S. blue chip stocks were UP an average of almost 23%.
“And sometimes a lot more.”
Of course, if the average is 23% and it’s “sometimes a lot more,” then the rules of mathematics tell us that it’s also “sometimes a lot less” — though it’s a tiny sample, so making a specific prediction off of this seems a little aggressive. The Dow is already up pretty markedly from October 31, which is the date Vardy pegs for his “a year from now” prognosticating … though this month the CCI also bumped down, so perhaps we’ll get another sub-50 reading before too long if there are a few bad months in the economy (or if the political posturing leading up to the election drives people to believe that we’re back in the stone age). The Dow was around 11,950 at the end of October last year when the CCI was bottoming (October was actually a great month for the market and Dow, in case you don’t remember, the Dow was up about 1,300 points from start to finish), so to gain 23% from that starting point (that’s Vardy’s average yearly gain after a sub-50 CCI) you’d need the Dow to hit 14,704 by Halloween.
To get to Dow 15,014 you need to start with probably a couple days before the end of October last year, when the Dow was in the 12,150 range before it dipped on the 31st. If you start with October 31′s close of 11,955 and add 23%, that’s 14,704. Getting to 14,704 from today’s price, which is a bit more relevant for those of us without time machines, would be a gain of about 14% if I’m getting my math right. Which would be a nice eight months, to be sure, and given the recent crazy volatility compared to the last 50 years, perhaps we should expect this indicator to foretell a more dramatic return this time around. Maybe.
But anyway, point taken: when consumer confidence craters, the market usually goes up in the following year. So what, then, are Vardy’s picks to do even better than this boost in the market for 2012?
Well, we do get a nice little pile of clues to sink our teeth into — he’s got three picks for this CCI rebound, here they are in order:
“CCI BULL-RUN PLAY #1: A NEW CONSUMER CREDIT HIGH-FLIER
“When The Crash took hold, America’s major credit-card issuing banks (Chase, Mellon, B of A, etc.) took an enormous bath…
“And a huge chunk of U.S. retirement assets went down the drain with them.
“But one mostly overlooked, international consumer-credit player not only hasn’t tanked — they’ve positively thrived since going public in March of 2008.
“In fact, because they’ve got NONE of the liabilities, regulatory hassles, or fiscal accountability of a bank…
“But still have ALL the lucrative benefits of being a major global consumer-credit player…
“They’ve managed to post a Compounded Annual Growth Rate (CAGR) of 13.6% per year over the last three years ….”
“According to Nick’s valuation, this firm’s shares are underpriced by 29% right now!
So … who dat? According to the careful cogitations of the Thinkolator, this must be Visa (V) … which goes to show you, the word “overlooked” doesn’t mean the same thing for everyone — V has been a stock market darling for much of the time since it went public in March 2008, though it had a few down times as well, and it’s huge and by far the biggest international payment network operator.
But there is some room for uncertainty, because they’ve posted a compound annual growth rate of far better than 13.6% per year over the last three years — you can make that number fit if you stretch things a little, like going three years out from their IPO, but for the last three full years (starting with January 2012 at roughly $55, ending this January at roughly $100) you’ve got a CAGR that looks much better at about 22%.
Still, I don’t recall another international credit card processor going public in March 2008, and Visa matches his predilection for large international stocks in this newsletter, so I’d be pretty confident in the Thinkolator’s output this time around — and yes, it does have plenty of regulatory hassles (particularly antitrust, given their duopoly with Mastercard), and the stock may have recently been “overlooked” compared to it’s faster-rising competitor Mastercard (MA) of late, but that shine from MA has been more recent, they’ve outperformed V lately largely because they fell harder in the financial crisis and they’ve been closing the gap. Both MA and V have excellent margins, though V’s are substantially better (perhaps because of their larger size, don’t know), and both are probably perfectly solid bets on the global growth of the cashless society — they carry effectively the same valuation (forward PE around 15 for both), neither one holds consumer debt (they’re just branded processing networks), and are both quite well known. You can argue that Visa is “discounted” compared to Mastercard using their trailing PE, since MA has a trailing PE of about 26 and V is around 20, though analysts have been guessing low on MA earnings of late and they’ve had V pegged pretty good, so who knows how that forward PE estimate will shake out in reality.
“CCI BULL-RUN PLAY #2: A NAME YOU’VE SEEN, UPSIDES YOU HAVEN’T
“I can’t say too much about this company in this forum.
“Its CEO (an “alpha investor” himself) has a habit of being very litigious about anyone appearing to leverage him or his company into exposure of any kind.
“I’m not talking about George Soros, Bill Gates, or the late Steve Jobs. And it’s not as famous a company as Microsoft or Apple or IBM or GE…
“But if you’ve been knocking around the money world for any length of time, you’d have more than an outside chance at recognizing what firm I’m talking about.
“What you surely don’t know, I’d wager, are all the reasons why Nick Vardy says this stock’s a screaming ‘buy’ right now…
“More so than at any other time over the last several years, in fact.
“There are two reasons why he believes this:
- “The firm just announced a major new stake in the booming sector of global consumer credit transaction processing. This acquisition should add millions (maybe even billions) to their bottom line.
- In just the last year — right under everyone’s radar — this company has shifted its primary focus from banking, retail, and service industries to commercial, industrial, and hard-goods production. They’ve quietly branched off into the lucrative rail, chemical, machine tool, and energy sectors.
“BOTH of these moves bode well for any short-term bull run in the U.S. And they bode spectacularly for a sustained development and growth climate globally.”
Well, this is not a great pile of clues, and those particular industries are broad enough to squeeze other possible answers in from companies that are run by well-known investors … but the Thinkolator says we’ve got at least a 90% chance of this being … Berkshire Hathaway (BRK.B, or BRK.A if you’re rolling in cash). Warren Buffett is certainly one of the “alpha investor” type folks that Vardy refers to, and Berkshire Hathaway has made big investments in recent years in the “rail, chemical, machine tool, and energy sectors” — though not all necessarily in this year (Berkshire Hathaway owns Burlington Northern Santa Fe railroad, several energy companies amalgamated into the MidAmerican Energy division as well as some oil stocks, the Lubrizol chemical company, and Iscar Metalworking Companies, Lubrizol is the only really recent buy of those). Berkshire also opened a position in Mastercard (MA) last year, though it’s a relatively small one still.
So you can call that a guess — and it’s a fine one in my book, I own Berkshire and have for years, and probably will for years to come — I bought the stock too high for my initial purchase a long time ago, then recently bought some more when it traded down dangerously close to book value last year, which probably won’t happen again absent a big shock to the system. You can certainly argue in favor of the shares even up here near $80, but I’d say it’s a no-brainer down around $70 or below, anything under 1.1X book value (and there’s always the “Buffett goes to the hospital” risk to the stock as well, beyond Berkshire’s substantial exposure to the US economy and housing/construction markets). Interestingly, if you want to check out another conglomerate that has invested in a few similar sectors Icahn Enterprise Partners (IEP) has gotten a bit less expensive lately — it’s an MLP and an odd one, with extremely volatile results thanks to their investments in Carl Icahn’s occasionally quixotic activist investments, but I’ve been finding my eye drawn to that one more recently (I don’t own it, and haven’t read the filings lately, so don’t assume I know what I’m talking about).
So anyway — that’s a “probably” but not a sure ID. What’s the last one?
“CCI BULL-RUN PLAY #3: THIS “GAMBLE” OF A PLAY IS NO CRAPSHOOT
“One of the biggest and highest-profile American businesses of the 1990s and 2000s was gambling.
“Emblematic of the industry’s success, the Las Vegas Strip got bigger, bolder, and brighter every year right up to The Crash…
“Since then, however, times have gotten quite a bit leaner in Sin City — and in other gambling-friendly American cities.
“But at least one U.S. company is still thriving in the ‘games of chance’ arena.
“In fact, they’ve posted some stunning share-price increases this year alone:
- A steady 30.7% gain from March 18th through May 2nd
- Another 26.8% from June 20th through August 1st
- Yet another run of 31.8% from August 8th to September 19th
- And a whopping 32% pop in a month — from October 3rd to November 3rd
“How’s that possible, you’re asking, when the whole U.S. hotel and casino industry is in the doldrums?
“Easy. This company’s also one of the biggest players in a new offshore gaming Mecca that’s a hop, skip, and a jump away from billions in disposal income in Asia.
“The market in this ‘New Vegas’ is already roughly four times the size of the old-school Sin City — and growing by leaps and bounds…
“This company’s one of the acknowledged front-runners in this exciting new gambling market that’s still in its infancy.”
Well, we can say “thanks” to Vardy and his folks for giving us those specific clues, because that lets the Thinkolator confirm without a doubt that this one is probably exactly what you’re thinking it’s going to be: Las Vegas Sands (LVS)
Yes, the stock has made all those nice runs of roughly a month or so, though it’s big moves were in 2009 and 2010 when it regained its mojo after nearly going bankrupt in the financial crisis, saw good milestones on their core properties in the Cotai Strip (that’s the “new Vegas” section of Macau) and their blockbuster new casino in Singapore, and enjoyed a huge share price recovery and several-hundred-percent gains.
But 2011 was actually, despite those numbers, pretty flat — the gains that Vardy’s ad teases were from about $36 to $48, then$37 to $49, then $37 to $48, then $38 to $48. So yes, every one of those 30%ish gains was followed by a retracement, the chart for 2011 looks like an EKG (for a somewhat sclerotic heart patient, I grant you).
So now, is LVS up to stay … or will it come back town by 15 or 20% as it has several times? Beats the heck out of me — it’s a great company riding an excellent long-term trend of casino building in Asia, with the kicker of their US casino properties, but they are also priced for really excellent growth and they will continue to face regulatory oversight risks wherever they go. The challenge most recently has been that although they’re doing an excellent job attracting gamblers to their glitzy locations in China and Singapore, they’re having a harder time turning those locations into profit centers when folks aren’t on the gaming floor — unlike Vegas, where big, fancy shows and five star restaurants and hotels are at least as profitable as the gambling, Asian gamblers are much less focused on the secondary delights of a dice-rolling town. LVS just cut off their deal with Cirque du Soleil in the Cotai Strip, for example, because the show was a flop that didn’t generate ticket sales (though some other over-the-top productions have done reasonably well, the general sense seems to be that it’s still all about the tables in Macau, not about the shows, or even the showgirls or buffets).
Both Wynn Resorts (WYNN) and Las Vegas Sands trade for a forward PE of about 17, and both are still expected by analysts to post huge growth numbers, in the 20%+ range, for the next several years, so it will probably be a bumpy ride but if the earnings growth continues to be there you can justify their fairly lofty valuations. I’m not trying to, but you can. Melco Crown (MPEL), the even-more-levered-to-Macau casino stock among US-listed companies, is slightly more expensive still.
So, there you have it — three potential picks for Vardy’s year of growth following the bottoming of the consumer confidence index, with promises that we might see some doubles in this list. They’re all very large companies and they’re all looking for global growth to help boost their performance … whether or not they’ll be able to outperform the market for you in what Vardy expects to be a year of another 15-20% gains from here, well, your guess is as good as mine. Probably better, actually, given that it’s your money you’re guessing with. If you’ve an opinion to share, or a better match for the spots where I had to resort to a guess above, feel free to share with the world using our little comment box below.
Disclosure: as noted above, I own shares of Berkshire Hathaway. You can’t have them. I won’t trade any of the stocks mentioned above for at least three days, per my own rules.