The teaser pitches from Dan Ferris tend to get a lot of attention from Gumshoe readers, both because there aren’t all that many of them and because the big Stansberry marketing machine sometimes pushes them pretty hard… and I have a lot of sympathy with Ferris’ general “value investing” strategy, and do sometimes find his commentary to be convincing, including occasional presentations at investing conferences and in his podcast. I’m sure we disagree on a bunch of things, but I have ended up buying a few of the stocks he has teased over the years.
Will I be doing so again today? Let’s see what he’s hinting at in ads for his Extreme Value newsletter (currently “on sale” for $999, renews at $1,500/yr, no refunds).
Ferris is a Graham-reading “value investment” guy, to be sure, and he makes a point of saying that he holds out for prices that include a margin of safety, and hates buying what’s popular. Here’s a little taste of how he promotes himself:
“I look at The REAL value of a stock versus its CURRENT value.
“There are hundreds of ways to do this…
“And similar strategies are extremely sought after by savvy investors.
“Legendary hedge fund manager, Seth Klarman, wrote a book on the subject that sells for $1,050 on Amazon. And it doesn’t even give you actionable advice… it talks about theory alone.”
Seth Klarman is the manager of Baupost, a hugely successful hedge fund, and he is one of the more widely-followed “value” gurus out there — though his book is quoted at those crazy prices just because it has a fad following among people with too much money on their hands, and was out of print. You can find pirated copies of it online, I’m sure, and the occasional library will still have a copy (most of them have been stolen), but I wouldn’t bother — it’s somewhat interesting, but it’s also mostly about having discipline and a process, and it’s 30 years old now. Do read up on and listen to Klarman speak if you get a chance, and read his annual reports or other letters to Baupost investors when those get leaked to the public, but don’t kill yourself to spend a thousand bucks for (a probably stolen or photocopied facsimile of) the book.
And, of course, Ferris isn’t just following the same value precepts as Klarman…
“Our proprietary method is a unique way to not just determine the real value of any business, but determine exactly how large of a safety net we have.
“And I never go near any investment that doesn’t present a huge, glaringly obvious safety net.”
Which leads into the bait…
“And right now, we’re seeing what’s likely the single best Margin of Safety set up of the past 24 years…. on a single stock… that could make you 16.5 times your money…
“The reason why involves a business model that’s made Stansberry readers an absolute fortune over the years…”
He implies that this industry will get through COVID just fine…
“COVID-19 is perhaps the most economically devastating event since World War II, and I don’t know when or if we’ll ever see something like this again.
“The damage this virus has done is far from over…
“If you don’t put a plan in place immediately, you’re almost certain to face tremendous financial hardships…
“People will get sick, businesses will fold, and entire industries will crumble.
“But unlike other businesses, like meat packers and metal refiners, the business I want to tell you about can keep functioning at full capacity during the pandemic.
“And if you can take a stake immediately, I believe you could see up to 1,550% over the long term.”
So what, then, is the industry? What’s the stock?
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“… there’s a reason that even Porter calls companies in this industry, ‘the most powerful businesses on Earth.’
“Because when purchased at the right time, and at the right price… there’s nothing like it.
“For example, coming out of the dot-com crash, this same stock surged more than 693%.
“And since the financial crisis of 2008, it’s gone up another 479%.
“It’s because, frankly, there’s almost no better business model in the world.
“Most companies like this get paid to use other people’s money.”
And since this is value investing, we’ve got to squeeze in a reference to Warren Buffett…
“… in 1951, when Warren Buffett was still a student at Columbia University, he put more than half his net worth into a single stock in this sector.”
So what’s that industry? Ferris is referring to insurance — a boring industry, for sure, but one that tends to be adored by those with a value investing bent… both because Warren Buffett has built Berkshire Hathaway mostly on the back of insurance companies, and because it’s one of the few businesses where you get to invest other peoples’ money and reap the returns for yourself (and sometimes even have them pay you for the privilege).
So we’ve got a couple clues about the specific stock he’s hinting at, including those returns following the last couple market crashes. What other hints does Ferris drop in his ad?
He refers to employee ownership, which is a nice endorsement…
“And at this company we’re talking about today, 60% of employees are shareholders.
“In other words: They have SKIN in the game.”
And then he makes a somewhat odd reference, which also counts as a clue…
“It’s obvious to me that they take things VERY seriously. It’s reflected in their revenue.
“They bring in an unheard of 21.6% of their market cap annually.”
What? Why would it be “unheard of” to have revenue be about a fifth of the market cap? That’s just a little strange… and doesn’t seem like it could be from the magical influence of having employees be shareholders. More on that…
“In fact, there’s only 17 other stocks, in the ENTIRE stock market, that trade around the same market cap and bring in the same massive amount of revenue.”
OK, so maybe it’s technically a little bit unusual for a company to trade at exactly this price/sales ratio at this specific market cap, but that’s just an accident of nature. Roughly a third of all companies are valued at less than 6X sales, for a variety of reasons — maybe they’re not growing as fast as average, or just have a business that has lower margins than some. Heck, about 20% of companies trade for something well below 2X sales, including some hugely important large cap firms — that measure by itself doesn’t really tell you much.
But there’s a good hint hiding in there — Ferris then gives examples of the peer-sized companies, including IR, CBOE, GDDY and CTLT, so we now know that this is a company that’s somehow in the insurance business, with a market cap somewhere in or near the $10-15 billion neighborhood when it comes to market cap… and trading at something probably in the range of 4-6X sales.
“It’s not just the industries that make these businesses successful… It’s the combination of the incredible revenues, putting other people’s money to work, and having a massively incentivized staff.
“And to make things even better, I estimate the company we’re talking about today has a REAL value that’s priced 40% higher than its current share price…
“Which gives us an enormous margin of safety.”
OK, that’s more of an inducement than a hint. What else does Ferris say? The urgency of a “value” pick is often hard to really emphasize, and that hurts marketing (newsletters need to convey some urgency, otherwise you’re not going to pull out your credit card — and if you pause to think it over, a marketing pitch usually loses it fizzle quickly), so his “urgency” here is that the stock could rise out of his “buy range” before you have a chance to get in…
“Keep in mind, this business is trading very close to the maximum price I recommend you pay. As of today, it’s within a few dollars.
“So if you’re interested, I urge you act quickly, but do not chase this stock, as risk and valuation move in the same direction.”
And, he says, he’s not letting the secret out anywhere else… so it’s probably a stock he hasn’t writtena bout publicly…
“If you’re thinking I might divulge more details of this opportunity in an interview… the Stansberry Digest… or my weekly podcast… that simply won’t happen until it’s too late for you to get into this stock.”
That’s about it, though, that’s what we get for clues… so what’s the stock? Thinkolator sez this is… Brown