David Gardner’s “Ultimate ‘End of America’ Play”

"One stock you must buy while the chips are down"

By Travis Johnson, Stock Gumshoe, November 21, 2011

I LOVE this ad. Not just because it’s fun to read, full of hyperbole, and fills our head with dreams of huge investment returns — they all do that.

No, I love it because it’s great to see the big newsletter publishers answering each others’ challenges — you’ve certainly seen and heard Porter Stansberry’s “End of America” videos and ad letters, promising that civil unrest, loss of purchasing power, hyperinflation, and the collapse of civilized society will come from the fall of the dollar as the world’s reserve currency, and probably seen his prescriptions for that “End of America” that he proposes to subscribers of his newsletter (to the best of my recollection the ideas were: buy a farm, hide some gold coins in a self-storage facility, short a select group of stocks that are destined to fail, buy some guns, and I’m probably forgetting a couple).

And now the Motley Fool, in the persona of David Gardner, who rode the dot com bubble quite nicely and is one of the more prominent “growth” guys who were happy to buy Priceline.com, Amazon, and Netflix when I thought they were freakishly expensive (and yes, I was wrong — at least much of the time), are telling us that they have the “one thing you must do” if it’s “the end of America” … and it ain’t the same thing Porter’s telling us.

Here’s the pitch from the Foolies — the letter actually comes in from Paul Elliott, and it talks about how he and his young colleague “the Kid” (Austin Edwards) are going to put their own money into this investment idea from David Gardner.

They’d like you to join in, of course, with a cheapo offer to subscribe to the Motley Fool Stock Advisor, the newsletter run by Dave and Tom Gardner, the founding brothers of the Fool — and to entice you, they’ll tell you what they think you should do at this “End of America” time … if you subscribe.

Or, we must add, if you just sift through the clues like your friendly neighborhood Gumshoe and think about the idea for yourself.

First, here’s their take on the “End of America” bit — they talk about the last time “The End” was forecast, the late 1970s/early 1980s:

“By the time I was 18, every living soul on the planet knew that America was in the crapper.

“It had been 10 years since a bunch of goofballs called OPEC turned the spigots off, and our neighbors’ banged-up cars snaked around the street corners …

“When I was 14, angry mobs of ‘students’ stormed OUR embassy in Tehran, kidnapping 52 Americans, and burning OUR flag on national TV…

“Inflation AND unemployment hit double digits before I turned 15… and when I climbed behind the wheel of my parents’ Grand Prix, mortgage rates hit 18%.

“Our neighbor’s cars lining up for gas circa 1974.

“The so-called ‘misery index’ peaked above 20% for the first time in history….

“Looking back, I call this period the ‘great acceleration’ — and that’s exactly what it felt like coming of age in the 1970s.

“Things were bad, and they weren’t going to get better. Ever. They were going to get worse and keep on getting worse… only at a faster and faster rate every day.

“If I had to guess, I’d say that’s what it feels like at “The End of America!”

“Of course, I’m not telling YOU anything you don’t already know…

“But when I try to explain this to my colleague, Austin Edwards, he looks at me like I’ve lost my mind. Then again, I don’t call him ‘The Kid’ for nothing.

“He didn’t live through ‘The End of America’ like we did in the 1970s… or endure the “prepare for a lifetime of mediocrity and scraping by” speech from his girlfriend’s father.

“This is his first trip to the rodeo. So it won’t surprise you to hear that ‘The Kid’ is pretty rattled by this new ‘End of America’ talk…”

So that’s the basic premise — that this isn’t the first time that our country or economy have been written off. He doesn’t exactly promise that it won’t be right this time, but he’s clearly taking a lot more from Warren Buffett than from the fearmongers — and in fact, he uses a story that Buffett told him earlier in the year as his other linchpin. Here’s the story he says Buffett told:

“He assured me it wasn’t personal.

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“I could have his blessing, but I shouldn’t get my hopes up. For all my good intentions, NOBODY can expect to provide his daughter a happy and comfortable life.

“Not even an ambitious college graduate like me, heading east to an Ivy League business school in the fall. Not in these times…

“Not with the ‘socialists’ in the White House… millions pounding the pavement for work… our military mired in conflict and worn out.

“At best, we should prepare for a lifetime of mediocrity and scraping by. It’s not my fault, he assured me. It’s The End of America.”

That apparently is the story Warren Buffett was told by his girlfriend’s father — I have no idea if it’s real or not, but it would have been probably 1952 (that was the year he started at Columbia under Benjamin Graham, I think), when there was a bit of post-Korean War malaise on its way to hit the economy, and the start of a mild recession. From what I remember of his biography he didn’t actually start dating his wife, Susie Buffett, until he came back to Omaha after finishing business school, so the dates seem slightly odd. Perhaps it was earlier. But the point remains: folks have often predicted the end of “the way things are” or said that we’re going straight down the tubes … and so far, it hasn’t worked out that way.

And Buffett is certainly an optimist about America — last time I saw him interviewed, he said something along the lines of, “the luckiest person in the history of the planet is the baby who is born today in the United States.”

That’s almost certainly a misquote, but it’s close — and it definitely makes me feel better than I do when I hear Porter Stansberry’s ads on satellite radio about our coming day of reckoning. And yes, I know Porter’s not the only one — he has just been the loudest voice of the most recent charge. The “End of America” idea writ large, and the protection of your assets from whoever the latest bogeyman might be, has probably built quite a few fortunes in the investment newsletter world over the past few decades.

So now that the Motley Fool guys have made me feel a little better, how are they going to make us rich?

With a stock pick, naturally.

Here’s an excerpt to get your juices flowing … or maybe to get you humming, “God Bless America”:

“How one U.S. company quietly fueled the most fortune-generating innovations the world has ever seen…

“Without the contributions of this U.S. pioneer, Thomas Edison might never have invented the light bulb… and he certainly wouldn’t have been able to mass-produce it…

“Thousands of railcars would have ground to a standstill at the turn of the century due to the lack of a safe and reliable means to manage an ever-increasing amount of traffic…

“Radios and TVs might never have made it into millions of homes across America — not to mention the world.

“Ultra-high-powered telescopes — including the Hubble and Subaru — would have never glimpsed distant galaxies… and NASA astronauts may well have never made it to the moon.

“And that’s just the tip of the iceberg.

“High-speed Internet would be a luxury reserved for university libraries and top-secret government agencies… wonder drugs would have gone undiscovered… and you would have no idea what a ‘flat screen’ TV even looks like.

“Amazingly, this one master innovator had a hand in all these and nearly every other technological innovation you can name. I’d defy you to go a day without using something that relies on its technology.

“Yet, despite its incredible 160-year track record — much like the great nation that spawned it — this company has been counted out time and time again by Wall Street analysts, loud-mouthed “experts,” and the investing public in general.

“And you know what? That’s music to my ears — and it’s fantastic news for hardworking, profit-minded investors like us.

“Because much like EVERY SINGLE TIME some clown sends you an urgent video update declaring ‘It’s The End of America…’ these wiseacres have been proven dead wrong EVERY SINGLE TIME.

“Meanwhile, investors who have recognized this company’s uncanny ability to reinvent itself have gone on to make spectacular fortunes — again and again. And you can mark my words when I tell you this time is no different.”

OK, so we will mark his words, but first we have to figure out which stock he’s hinting at.

We’re told that Wall Street thinks this company will grow only 2% a year for decades, which the Foolies think is “downright crazy.”

And that the analysts are predicting their demise because …

“They’re just clever enough to realize that for the past decade this company’s bread and butter has been supplying behind-the-scenes components critical to the manufacture of LCD and other flat-screen TVs.

“And now that everyone and their mother has upgraded to flat screens, it’s only natural that they assume that the company’s sales are about drop off a cliff… making this story unsexy and irrelevant.”

They counter that by saying that flat-screen TV sales growth is slowing, not contracting … and that this company has “tremendous pricing power” and that they’re cutting costs to increase margins.

So you may well have already figured out the name of this top-secret “End of America” stock, but here are the last few clues to make sure we get it right:

“this remarkable All-American innovator …

  • Just came off one of its strongest years in history — with over $7.3 billion in sales over the past 12 months…
  • Is on track to grow its top line to $10 billion — and its free cash flow to $7 billion — by 2014…
  • Has a fortress balance sheet — with nearly $6 billion in cash and negligible debt…
  • Is run by a forward-thinking, shareholder-friendly CEO — with nearly three decades at the company, and…
  • Just hiked its dividend by 50% — and now sports a solid 2.2% yield ….
  • the company has developed yet another revolutionary new product… with sales realistically projected to grow 700% between 2010 and 2014.”

And this stock is trading at six times earnings and is trading at near half of its 52-week high. As the Fool says …

“That might be a bargain for a low-growth, cigar-butt business whose best days and meaningful growth are behind it. LET ALONE a technology leader whose products have fueled everything from the light bulb to the Internet to flat-screen TVs…”

One last kicker? They say that the catalyst is the explosive growth expected in smartphones and tablet computers, and that …

“… Amazon has just announced that it will use this critical input for its hugely anticipated new Kindle Fire tablet scheduled to ship within the month….”

… and …

“Buying this stock right now is like buying Hope Diamond growth potential — at cubic zirconia prices…”

Phew. OK, that’s a lot of quoting — but you get the idea, David Gardner, patron saint of high-PE growth stocks, is touting a stock that sounds like it’s pretty well dirt cheap … and, as luck would have it, it’s also a stock that I have a certain fondness for, though I sold my shares over the Summer … this is …

Corning (GLW)

And yes, Corning has been one of the most fabulously innovative companies in the history of the country — though almost entirely in the relatively narrow field of glass and ceramics.

And they do get much of their revenue from large-format glass for LCD displays and flatscreen TVs, and the feared softness and competitiveness of that particular sector is the main reason that the stock is cheap. Really cheap. They did earn just over $2 per share over the last year, so the trailing PE is around 6 … and they are expected to do slightly worse next year, so the forward PE is a bit higher, but not much, at about 7.5. And growing, analysts think sales will bump over $8 billion next year.

Why sell such a cheap stock? Well, in my case it was a realization that I didn’t really have a handle on future large-screen TV demand, or on Corning’s ability to control that business against pretty stern competition, and I was therefore betting pretty heavily on their next wave of products — mostly Gorilla Glass, the super-strong glass that is indeed in the Kindle Fire and in lots of other handheld devices, probably including the iPhones and iPads. Gorilla Glass, though a big and growing business, is not nearly big enough yet for them to make up for any real softness in LCD TV glass demand, though, and they hadn’t convinced many TV makers to upgrade to more expensive Gorilla Glass for larger formats.

So I had an epiphany (OK, perhaps that’s an exaggeration) that I applied to a few stocks in my portfolio late in the Summer: Why buy a supplier to the trend if you’re not sure how profitable they’ll be, when instead you can buy an almost unimaginably cheap growth stock for a much purer play on that trend? So I sold Corning and bought Apple (AAPL), which, though not Corning cheap, is pretty close.

Back out Apple’s ridiculous $80 billion-ish cash and investment hoard and you get a cash-adjusted enterprise value of about $260 billion, analysts expect something like $36 billion in earnings next year … so that’s 7.5X earnings. Corning is cheaper still if you use a similar metric, analysts think they’ll earn roughly $3 billion next year and the cash-adjusted enterprise value of $18.5 billion means you’re paying just a bit more than 6X earnings. Those are academic exercises and the comparison doesn’t mean that much, largely because Apple’s cash hoard is absurd while Corning’s is more reasonable, but you get the idea: 6-7X earnings sounds really cheap, and historically it is, but in the current environment there are quite a few inexpensive tech stocks available.

And I don’t regret selling Corning to buy Apple. I actually bought a bit more Apple this morning. But that doesn’t mean Corning will be a bad investment, of course — even if I’m right, which is not necessarily always the case, both companies could do extraordinarily well and you can certainly make a “bottoming out” argument for Corning much more easily than you could do the same for Apple.

I love Corning’s long history of meaningful innovation that has created whole industries — they’re behind much of what we expect from high-speed internet thanks to their innovation in fiber-optic cables, they invented Gorilla Glass decades ago and didn’t re-discover it until recently, when they realized there was now finally an end market for such a product, and the list goes on and on — I admire Corning the way I admire 3M, an industrial and invention-ing dinosaur that can still get it done.

But Corning, unlike most of the large-to-midsize industrial firms like 3M, is unusually dependent on a single product, which is certainly a risk — clearly David Gardner thinks the risk of a slowdown in bigscreen TV demand, or of margin contraction in that business, is overstated by investors. Maybe he’s right, I don’t know — and that’s largely why I sold the stock.

But yes, it is cheap. And they’ve made a lot of really cool stuff, and probably will do so in the future.

And I’d probably buy shares of Corning before I buy a family farm to keep myself in acorn squash through the coming apocalypse … but that might just be because I’m way too lazy to be a farmer.

It’s your money, though, so what do you think? Is it the “End of America” or are we simply being presented with a great opportunity to buy a company that has built a lot of what made America great, and to buy ’em dirt cheap? Let us know what you think about Corning, or burying your krugerrands, or whatever else — that’s why we’ve got the friendly little comment box down there.

P.S. We’ve probably uncovered more teasers from Motley Fool Stock Advisor than from any other single newsletter over the years (though there are a few that are close), and we’ve heard from a lot of subscribers — but we always want to know more, if you’ve ever subscribed to the Gardners’ letter, please click here to review and rank it for your fellow investors. Thanks!