Over the last few days I’ve been getting a lot of questions from Gumshoe readers about the latest “World Dominator” pick from Dan Ferris over at Stansberry’s Extreme Value newsletter — they’ve apparently been hinting at it and teasing it to the subscribers of their other letters, and piquing the interest of my readers who were wondering what stock he would recommend (the recommendation apparently came out on Friday evening in his latest issue).
But they didn’t start to really actively tease the idea for the world at large until today, when I saw the ad campaign for “The Next World Dominator” come across the Gumshoe transom many, many times. And now that they’re promoting it more actively, they’re throwing a few clues into the ads to entice readers …. which means it’s time for your friendly neighborhood Gumshoe to turn on the Mighty, Mighty Thinkolator and see if we can name this one for you.
What is a “World Dominator?” Well, it’s basically the term Ferris has adopted for the bluest of the blue chips — the buy, hold and compound companies that he he thinks will be huge long-term winners. Here’s how they describe it in the ad:
“These companies are the best in the world at what they do. They are the safest, most profitable companies on the planet. They are No. 1 in their industries. And they consistently make their shareholders rich.
“Companies with “World Dominator” attributes are rare and hard to find. But when you can find them, and buy them at very cheap prices, the rewards are… well… pretty incredible.
“For example, in the past five years, Dan Ferris has identified 15 such World Dominator stocks.
“So far, readers could have made money on every single one of them.
“Some have made well over 100%. The AVERAGE gain among these 15 recommendations (13 are currently “open” positions, meaning Dan has not recommended selling) is an incredible 54%.”
Ferris teases and recommends “World Dominators” for both the less-expensive 12% Letter that he took over when Tom Dyson left to start the Palm Beach Letter, and for the “premium” Extreme Value newsletter that he has run for many years, though apparently the lists are different.
And the Stansberry folks tell us that he is so discriminating and value-focused that he finds a new “World Dominator” very rarely, no more than a few times a year, so it’s exciting that he’s located a new one for his subscribers (and, perhaps, for us).
And those of us who appreciate the big, stable, value companies get buttered up a bit by the copywriter, too:
“… one idea that is absolutely necessary to your investment success is a deep commitment to buying extremely high-quality businesses at good prices.
“You need to know how to spot great businesses. You need to know how to value them. You need the patience to hold them for years… to allow compounding to work its magic.
“When an investor makes this commitment to buy and own quality stocks (usually only after years of trying everything else), he reaches an important level.
“He graduates to a level of knowledge that most people never reach. He ‘joins the club.’ He joins wealthy, successful investors like Warren Buffett and his business partner Charlie Munger.”
Well, we’re probably not going to get into Charlie and Warren’s “club” in this lifetime, but hope springs eternal — so what is this next “World Dominator” that will join the ranks of Intel (INTC), Coca Cola (KO), ExxonMobil (XOM), Expeditors International (EXPD), Walmart (WMT), Microsoft (MSFT) and others that I can’t think of offhand? For that, we need a few more clues:
“In his latest Extreme Value issue, Dan revealed a controversial stock. He calls it one of the “most misunderstood” businesses in the world today.
“Because of this misunderstanding, this World Dominator is trading at a price that Dan says offers ‘an enormous margin of safety.’ He says this is the cheapest price for a World Dominator that he’s ever seen.
“This World Dominator is also a solid dividend-payer. Its dividend isn’t eye-popping right now, but Dan expects the payments to grow so much that in a few years, it will be regarded as one of the best income investments in the world.
“This company has all the financial attributes of a wonderful business… consistently thick profit margins… consistently high returns on invested capital… tremendous free cash flow generation… a fortress balance sheet… and it rewards shareholders with dividends and share buybacks.
“Dan believes you can safely put a significant portion of your portfolio into this one stock, and make 100% or more in the next few years, while locking in a tremendous dividend for many years to come.”
OK, so that’s all enticing … but not really very clue-y. Anything else to feed into the hungry maw of the Thinkolator?
“This company is one of the most innovative and secretive firms in the world….
“… several negative stories are swirling around the media right now….
“This company has become so successful, in such a short period of time, its competitors have actually taken them to court in a feeble attempt to ‘ban’ their products….
“Even the retailers who sell this company’s products know little about the inner workings of its business…”
But then we get into the meat of Ferris’ argument — that even on top of the “blue chip” attributes this company has in growth, balance sheet, brand, etc., there’s something going on in capital spending that augurs well for their future:
“Incredibly, this firm has increased its capital spending by nearly 300% in just three years and no one on Wall Street seems to have noticed.
“And based on this company’s financial history, Dan thinks this huge increase in spending means they are gearing up to make a big announcement.
“Here are a couple examples he dug up:
“In 2007, this company made a huge addition to its business, after increasing capital spending over the previous few years by a whopping 367%.
“It happened again in 2010.
“This company made another big change to their business after increasing capital spending over the previous spending few years by 216%. ”
And then the sum-up:
“This company is a stone-cold, cash-gushing World Dominator. We have no doubt it will be around for a long time. Your grandchildren’s grandchildren will probably use its products. And yet, the stock market is valuing this company as if it’s going out of business.”
So who is Ferris recommending as his latest “World Dominator” for Extreme Value? Thinkolator sez it’s … Apple (AAPL).
Never heard of it, right?
OK, so I should also note that this is somewhat self-serving — Apple is now my largest personal stock holding, and I even added a few shares to my account this week. My average cost, personally, is now very close to the current price after a series of buys over the last couple years. So I enjoy the fact that Ferris seems to be picking this as a long-term high-potential stock with great safety, a position I agree with.
Why am I sure the Thinkolator’s right on the match this time? Well, it ticks all the clues — Apple does have the strongest balance sheet of any large company in the world, with about $140 billion in net cash (market cap is down to about $410 million now, and they’re promising to return something like $100 billion to shareholders over the next two years through buybacks and dividends.
And they are controversial, the most widely-discussed stock on earth over the last few years, with plenty of negative sentiment about what Apple has to do to “save” the company every time they make an announcement or hint at future products. Even Dan’s boss, Porter Stansberry, wrote about why he’d pick Intel (INTC) over Apple back in February (Ferris has recommended Intel in the past as well, and I own it personally too).
They’re also one of the cheapest large stocks in the world, with a PE ratio of about 10 (both trailing and forecast — analysts don’t think they’ll grow earnings much, if at all, next year.) And they have now been paying a dividend for a year, with the most recent payout (which includes a 15% raise from last year) putting the annual yield at 2.8% — that’s already meaningful and a bit better than the market, after a few more years of dividend hikes (expected by Ferris, apparently, and I concur), the yield could be quite meaningful based on an initial purchase price in this neighborhood.
And yes, they are constantly in patent fights and have had one product “banned” in the US in their patent war with Samsung — though I’d say they’ve won more than they’ve lost in those fights over the last several years, particularly in slowing the advances of the competing tablets in those critical early years of the iPad.
When it comes to the capital spending, though, that’s the clincher for our match — 2007 and 2010 were the last years of major new category-defining products from Apple, and they did follow substantial increases in capital spending as the iPhone (2007) and iPad (2010) were announced. Those are both very high volume products with substantial and very precise manufacturing demands, and much of the capital spending went into equipment that Apple installed in the factories owned by their contractors to enable mass manufacture of these breakthrough products (increases don’t have to be for a new category of product — they needed to buy a lot of equipment for the iPhone 5, for example, because none of their manufacturers had the precision equipment to fashion those precise and perfect little beveled aluminum bodies until Apple bought them).
And capital spending has been increasing steadily since then, too — Apple has other capital requirements now beyond manufacturing, particularly since they’ve started to build out data centers to support their iTunes and cloud infrastructure, and that comes in as substantial capital expenditures, but the big wonder now, with capex well over two billion per quarter for each of the past four quarters and continuing the expansion we’ve seen for several years now, is whether they’re also tooling up for major new product releases.
That’s what Wall Street wants — we’ve been conditioned to expect market-defining product offerings from Apple that make consumers lust after something they never realized they needed, and now investors are conditioned to expect Apple to introduce “one more thing” every few years that creates a new market … especially now that their two leading profit drivers, iPad and iPhone, have now been around long enough that meaningful competition has come into the space and taken market share.
So investors are very focused on the next thing — whether it’s a relatively minor product, perhaps, like an iWatch that tells you what’s happening on your iPhone so you don’t have to take it out of your pocket or purse, or that real breakthrough in the living room (an Apple television) that Steve Jobs hinted at to his biographer and that everyone has been expecting for better than two years now.
I more or less agree with the pitch as framed by the Stansberry folks — I’m very happy to own a company with these characteristics even if they don’t grow earnings faster than the market over the next couple years (hugely powerful brand, great success in iterative new products like the iPad mini that prove they’re willing to innovate and not fear cannibalizing their core products, strong consumer focus globally, incredible financial flexibility and excellent profit margins and cash balances, etc.). There is obviously risk to the stock price if their products flop, and there’s always the risk of obsolescence with a tech-focused company, but I think we tend to overstate the risk for dominant companies — they have a lot to lose, but they are also very hard to beat unless they shoot themselves in the foot and fail to invest effectively in innovation and marketing (like Blackberry or Motorola, for example).
And though investors who love growth and investment and acquisition to juice market-beating returns, large buybacks and substantial dividends from what is a huge and mature company are probably a much safer bet … I’m glad Apple didn’t use their “extra” $100 billion to buy Netflix or Disney or Intel or any of the other massive or strategic large acquisitions they could have done, I think that continuing to focus on being Apple and creating innovative and user-centered products and rewarding shareholders directly is a far better way to go than massive, risky and dilutive acquisitions.
The nice thing? This is probably the most talked-about and most-covered stock in the investable universe, at least when it comes to individual US investors … so it’s almost impossible to imagine anything Dan Ferris says or anything I say having an impact on the stock price. And it’s not going to shoot up by 10% in a surprise move on a random day — the stock does move quite abruptly on news sometimes, particularly on earnings or product introductions, but we know when those things are coming and get a big lead-up to them with plenty of chatter on CNBC and in any other investment news source you might follow… if you’re interested, you can take your time, research it, and probably even build a position slowly if you want to. We even have folks “live blogging” their press conferences and developer presentations so investors and fanboys can follow the details slavishly in real time, but no one’s really expecting major product introductions from them until the Fall (next iPhone and iPad probably, who knows if there will be that “one more thing” that makes investors wet themselves and fanboys stand in line outside Apple stores for a weekend).
Interestingly, when I was in the waiting room at the doctor’s office this morning I ran across a recent issue of Kiplinger’s — and it included a recommendation from James Glassman of Apple as a “faith-based investment”. That’s not faith as in praying, but faith that companies that have been strong and powerful and innovative will continue to innovate, even if we’re not quite sure what it is they’ll do. Here’s an excerpt from that article just to give you a different perspective:
“Apple is a potential faith-based winner. A great brand? No doubt. Solid balance sheet? Yes, with $143 billion in cash and securities and no debt. History of growth? Yes, earnings increased every year from 2003 to 2012, and revenues over that time have gone from $6 billion to an expected $181 billion for the fiscal year that ends this September. Cheap? The shares, at $450, are down 36% from their 2012 high and trade at 11 times estimated earnings for the current fiscal year. After results for the January–March quarter were announced on April 23, analysts at numerous Wall Street firms cut their price targets on Apple’s stock. Clearly, analysts have little faith in Apple today, despite CEO Tim Cook’s announcement that the company will spend an additional $100 billion for dividends and stock buybacks through the end of 2015.
“Apple’s profits have soared 50-fold in a decade on the strength of the iPod, the iPhone and the iPad. What’s next? There’s talk of an iWatch, but frankly I haven’t the foggiest idea what Cook is cooking up. If I did, thousands of others would know, too, and Apple’s price would reflect that knowledge. What I do know is that Apple is going through a tough time, competition is rising, faith in its future is falling. It meets the tests for a good faith-based investment.”
Of course, in the very same magazine was a column on the “Winner’s Curse” from Anne Kates Smith — mentioning Apple as an example of the tendency of huge companies to lag after they reach the top. That might be more appropriate as a concern for Apple back when it was topping $700 a share, but it’s still vying for the title of largest company in the world today … here’s an excerpt from that one:
“Rob Arnott, CEO of investment firm Research Affiliates, thinks he sees the winner’s curse at work in a big way in the market’s biggest stocks. The largest stocks by market capitalization (price times shares outstanding) — or ‘top dogs,’ as Arnott calls them in a study he coauthored — ‘are usually priced to reflect a view that they will remain on top, but they often don’t….’
“Overall winners can turn into even bigger losers. The biggest stock in the U.S. market has trailed an index of 1,000 large stocks by an average of 5.4 points a year over subsequent ten-year periods. (We’ve had eight top dogs in the past 61 years, including AT&T and Microsoft; Apple became the biggest U.S. stock ever in August 2012, and has since tumbled more than 30%. This year, it has jockeyed for the top spot with Exxon.)”
But really, you know full well that there are a million opinions out there on Apple — the one that matters to your portfolio is, well, yours. What do you think? Ready to pick up some shares of this “World Dominator” recommended by Ferris? Let us know what you think with a comment below.
Disclosure: As noted above, I have a substantial position (for me, at least) in Apple shares. I also own shares of Expeditors International and Intel. I won’t trade any stock mentioned above for at least three days.