I haven’t looked at Eifrig’s Income Intelligence in a long time, so it caught my eye when I saw the latest pitch for this Stansberry newsletter that is promising big gains in the very near future because a pick of theirs is likely to be added to the S&P 500.
So let’s take a look and see whether the Thinkolator can ID that stock, shall we? This offer, like so many others in recent years, is both high-priced and completely nonrefundable, and I’m sure a great many of you are unwilling or unable to cough up the $1,200 lifetime subscription fee (plus $99 annual “maintenance” fee) that is required. And, of course, wouldn’t commit that kind of money just out of curiosity about this “secret” stock.
This service from Eifrig has generally been a lower-risk dividend-stock service, though it also recommends other income investments, and it was the service that older subscribers to the cheaper 12% Letter were funneled into many years ago when that letter went defunct — it was from the 12% Letter that we first heard the pitches for “World Dominators” many years ago, and this pitch brings back that term… here’s a taste:
“Our Income Intelligence has pointed us to an elite World Dominating business that’s been quietly churning out billions of dollars in payouts to shareholders for the past 10 years.
“I call this company a sleeping giant because it’s big, safe, and currently pays a huge dividend.”
So that seems reassuring — “safe” is a trigger word for many investors now, in what feel like quite uncertain times, so I’m sure that stood out for some of you.
But it’s not just that this is a good and high-yielding company, apparently, it’s that this stock also has a hidden catalyst that has historically provided a nice pop for stocks. More from David Eifrig:
“… my team and I have been tracking a world-dominating stock that isn’t part of the S&P 500 Index… despite being a well-known, Fortune 500 company.
And based on our research, I can tell you with total confidence.
This stock will be added to the S&P 500 Index – and soon.based on our research, I can tell you with total confidence.
“This stock will be added to the S&P 500 Index – and soon.
“Which presents a HUGE opportunity for you – IF you can get in first.”
OK, so that’s the basic backdrop — it’s a big, safe, dividend paying company that’s not in the S&P 500 — but Dr. David Eifrig is convinced that it will soon be added to that index. What other clues do we get about which specific company it might be?
“… this company dominates its industry.
“It’s THE best of its class in the world.
“Right now it pays a whopping 6%+ annual dividend — about triple what the average S&P stock pays. And the CEO has the ear of all the major players on Wall Street… not to mention the President of the United States.”
OK, so that narrows it down a bit and might allow us to guess. Any other clues?
Thankfully, yes… here you go:
“This one company… along with the other 127 firms I’ve been tracking have one thing in common:
“They’re all MLPs – Master Limited Partnerships….
“… thanks to the recent change in U.S. tax law, more and more of these MLPs are restructuring.”
MLPs can’t be in the S&P 500, which is restricted to just corporations, so it’s that conversion that triggers the possible addition to the widely-followed index… and therefore causes a substantial increase in demand for the stock because of all the index funds and closet indexers that follow the S&P 500.
The ad thinks it’s likely to jump right away, then continue to do well for a longer period of time — here’s how they put it:
“The moment their press release hits the newswire, its stock is likely to jump 10% to 20%. And as more money continues to funnel in, it could easily double or triple.
“But if you want to take full advantage of this opportunity, you must take a position before the announcement – which my team expects any day.”
We get a couple examples of other stocks this has happened to recently…
“… on February 6th, a former MLP called Ares suddenly popped and gained as much as 12% in a single day… then went on to gain another 15% in 4 weeks….
“The same thing happened for a second company, called KKR. They announced in early May… and now their stock is up 20%.”
And then we get one more little clue…
“… the company in question is MUCH bigger than KKR or Ares.”
So we feed that into the Mighty, Mighty Thinkolator for you, set the switch to “pulse” and crunch it up a few times — In the Fortune 500, MLP, 6% yield, and a near-certain answer comes tumbling out the other end: This must be Blackstone Group (BX).
Blackstone is a gigantic publicly traded partnership, an asset manager that’s nominally a private equity firm but really has the scale and influence of a major investment bank. It dominates large swathes of the investing world, particularly in real estate, and has been publicly traded as a partnership for just over 10 years. During that time the returns have been almost entirely in the form of dividends unless you happened to get in and out nimbly (holding the stock and taking the dividends in cash would mean you had doubled your money since inception, only a little worse than the 130% gain from the S&P 500 over that time), but that’s pretty much as it should be — MLPs don’t pay corporate taxes but instead distribute all their earnings and most of their cash flow to unitholders, who then absorb whatever tax liability there is (sometimes not much, at least until the shares are sold). Technically these aren’t “shares” and they don’t pay “dividends” — for MLPs you’d use the terms “units” and “distributions” instead, but functionally it works the same. And as with most “income” investments, you would likely have done far better if you had reinvested the distributions and let them compound.
One meaningful drag on the performance of Blackstone and similar companies has been the fact that lots of investors don’t like dealing with MLPs, which require an additional bit of tax reporting (you get a K-1 form each year)… and that a lot of institutional investors (like many mutual funds) aren’t allowed to invest in MLPs. That relative undervaluation, at least as they see it, has made the leaders of these companies grouchy — or as grouchy as you can be when you’re a successful billionaire, at least — and they have indeed started to convert now that lower corporate tax rates take away some of the advantage of being a tax pass-through entity like a MLP. That’s where those ARES and KKR examples come from, those are both similar companies to Blackstone in many ways, though much smaller, and both have converted to being regular old “C” corps (KKR just finalized its conversion last week, ARES was earlier in the year).
And, yes, Blackstone is the only “dominant” MLP that is in the Fortune 500 but not the S&P 500 — the only other candidates aside from the smaller Carlyle Group (CG) or Apollo Global Management (APO), neither of which is quite big enough to make the Fortune 500, would all be MLPs in the energy space, mostly pipeline and infrastructure owners which are far more volatile and are different kinds of companies, with less incentive to change structure than the asset managers have.
Conversion has arguably worked well for KKR’s stock so far, though ARES has lagged a bit this year, perhaps at least partly because the conversion came with a lower dividend (corporations generally try to pay a steady and growing dividend and tend to be more conservative with their payout ratio and retain some earnings for reinvestment and growth, MLPs sometimes have more irregular dividends as cash flow rises and falls in a given year). So there’s no guarantee that conversion will cause the stock to soar, or that Blackstone would be included in the S&P 500 if it did convert (KKR is big enough to enter the S&P 500, too, though I haven’t seen any indication of that happening yet)… it’s quite possible that if Blackstone cut their dividend as part of a possible conversion to a corporate structure, the stock could go down — presumably shares are largely owned by folks who own the stock because of that 6% dividend, and investors tend to hate dividend cuts even if they come for a good reason.
The stock has been volatile and made some big swings over the years, as you’d probably expect from an asset manager with big real estate exposure and interest rate (and some regulatory) sensitivity — it fell twice as hard as the S&P 500 into the 2009 lows, but also rose close to 200% from 2013 into its highs of mid-2015 when the broader market was far more boring (up ~50%).
So that’s your answer: Eifrig appears to be teasing us with the idea that Blackstone will soon decide to convert from a partnership to a corporation and will then be added to the S&P 500 and face significant buying pressure from a new batch of institutional and index investors. That’s certainly possible, and is being widely speculated about in the media (as in Barron’s here and Bloomberg here), but I don’t know that there’s any reason to expect it to happen within the next three days — the July 14 date is probably in the ad mostly to spur readers to action, not because there’s a logical reason why Blackstone would rush to convert in the wake of KKR’s recent conversion. If you want the other side of that argument, there’s also a Bloomberg article here about why they shouldn’t convert.
Which means the ball is in your court, dear readers — interested in a big global asset manager that does indeed look like a “world dominator” in some ways, with a high income yield of 6%? Would you need them to convert to a corporation to be appealing to you, even if it might come at the cost of a lower dividend (and easier tax filing?) I wouldn’t tell you to avoid Blackstone, it certainly looks like a decent investment and it is a strong and well-connected company, and the asset management business is a great one for profit margins as long as people are interested in investing money… but I would evaluate it on its own terms, without the conviction that it will convert and enter the S&P 500, and see if you like it as it is today. Give it a gander and let us know what you think with a comment below, if you please.