Lots of folks have been asking me about this latest “Magic Stock” that’s been hinted at by Porter Stansberry in his ads for Stansberry’s Investment Advisory… and I can see why.
It sounds delightful — and most of the premise is based on the fact that these “magic” stocks that can grow profitably forever, with very little additional capital required to keep the growth going, are extremely rare… Porter implies that his screen for “magic” stocks is so restrictive that it rarely comes up with a company he wants to recommend. Indeed, the implication is that this stock he’s teasing today is really the first “magic” stock since he picked Hershey in 2007.
He pulls out the name of the master, Warren Buffett, in beginning to describe what these “magic” stocks are… starting with the magic that Buffett acquired in 1972. Here’s how Porter describes that:
“On paper, it was only worth about $5 million. Yet the family was hoping to get $30 million for it.
“If Buffett went through with the purchase, it would become the biggest investment he had ever made –nearly twice as large as any previous.
“But it was unlike any other investment he’d ever encountered before…
“It had a large, loyal customer base… and was able to raise prices even in the most difficult market environments…
“It had very low capital requirements. Meaning he could invest the growing profits from this ‘Magic Stock’ into other opportunities, without impacting its business in any way…
“And because of its strong brand and efficient business model, this investment would involve a very low level of risk (meaning he could be confident he wouldn’t lose money on it).
“So Buffett offered the family $25 million for all remaining shares of this “Magic Stock.” And the family accepted.”
That’s See’s Candies, which Berkshire did indeed buy for $25 million back in 1972 — and it has grown nicely and generated huge amounts of profit for Berkshire over the years, presumably without the need for a lot of additional capital.
Buffett’s strategy is quite different now, as you may have noticed — he is just as likely to buy massive, capital-intensive operations as to buy these so-called “magic stocks”… partly because Berkshire is just so big, and because they have a constant need to deploy capital in massive amounts into profitable investments, and capital-intensive businesses are good at sucking up capital and paying out reasonable returns (like railroads and utilities).
But he also loves brands, which are an important aspect of this “magic stock” stuff — brands create products that are more valuable than they should be, more valuable than other products that might be functionally almost identical and cost the same amount to produce, and the best brands are hugely long-lived, like Coca Cola, another major Buffett holding.
Speaking of which, Porter mentions another Buffett “magic stock” …’
“To give just one example, 16 years later Buffett would pay more than $1 billion for a similar ‘Magic Stock.’
“Today THAT investment is worth an incredible $16.7 billion — a 1,185% gain on his initial investment that has resulted in more than $15.5 billion in profit.
“And just like his first one, this ‘Magic Stock’ continues to pay out more than 40% of that initial investment every single year.”
And yes, that was Coca Cola (KO), which Berkshire put $1 billion into in 1987 or 1988. And yes, Buffett was pretty widely mocked at the time because Wall Street was convinced that Coke had peaked after rising something like 20% a year for almost a decade… that was just a couple years after the widespread mocking brought on by “New Coke,” and it seemed like a silly has-been investment to much of the world.
Perhaps not coincidentally, Warren Buffett still spends each Annual Meeting sitting at the head table, regaling tens of thousands of shareholders with stories and answering questions… and every few minutes, he takes a sip of Coke and eats a piece of See’s Peanut Brittle (which is horribly addictive, I’m forced to admit).
Porter’s first “Magic Stock” came back in 2007, he says, and that was in the same vein as See’s and Coke — that’s when Porter recommended Hershey’s and said he expected it to be his best stock pick ever (it’s certainly doing nicely since then, with a little bonus thanks to the takeover offer made by Mondelez recently).
And the crux of the matter, and what probably has a lot of Gumshoe readers intrigued, is really that these “magic stocks” are what most of us would call “blue chips” — you don’t have to worry as much about them:
“But here’s one of the most incredible things that this taught me about these unique types of stocks:
“Anytime the market begins to fall, Magic Stocks almost never fall anywhere near as much.
“And then the opposite is also true:
“When the markets finally rebound, Magic Stocks shoot up at an even faster rate.”
Can’t go wrong with that, right? Go down less, go up more? That’s pretty much Xanadu for stock investors… we may get distracted by the high growth, high octane stuff that keeps investing interesting, and we may speculate on crazy things just like we occasionally hit the tables in Las Vegas… but for our retirement, what we want is slow and steady growth without a lot of worry. So why aren’t we buying these kinds of stocks all the time?
Well, partly because this is some tiny niche that Porter is identifying through backtesting, and he says there are almost never “magic stocks” available at attractive prices that would trigger a buy signal for him.
So yes, you know where he’s going with this: Now is one of those times, a buy signal has been tripped, and there’s a “magic stock” to be had.
What is it?
Here’s how Porter sums up the idea of the “Magic stock”:
– “THE HIGHEST-QUALITY COMPANIES ON THE MARKET — They have long-lived products or brands with strong customer loyalty, healthy operating margins, and can gradually raise prices — even in the worst economic conditions.
– “THE MOST CAPITAL-EFFICIENT BUSINESSES ON THE MARKET — They have very low capital requirements, and are able to grow their cash profits at a very high rate without having to make substantial reinvestments back into their business. It’s almost impossible for high-tech companies to qualify as a Magic Stock — because they always need to spend a huge amount of their profits trying to invent new products. Magic Stocks, on the other hand, always have plenty of money left over for shareholder-friendly activities like dividends and share buybacks.
– “THE SAFEST STOCKS ON THE MARKET — They have very low beta (or volatility )– meaning their stocks go up or down less than the overall market. And because of their strong brand and efficient business models, have little risk of losing an investor’s capital altogether.”
Then he adds some squishier analysis and some undisclosed criteria, trying to separate out the “value traps” from these “magic stocks” …
“Many companies that meet these criteria are value traps… or are simply way too expensive to buy at today’s prices.
“So we added a few other criteria to refine the idea even further. There are only a small handful of companies that meet these strict criteria at any given time.
“However… when you run across a company that meets all these criteria, and is selling at the right price… you’ve found a ‘Magic Stock.’ And it is not a time to hesitate… it is time to make an immediate and significant investment.”
And Porter says that these criteria he uses to identify “Magic Stocks” have been backtested using market data from the past 15 years, and they’ve beaten the market handily, something like 13% versus 7%, and have also never lost money over any three-year period.
I won’t argue with the theory, at least — capital efficiency, strong brands, good operating margins and low volatility are reasonable things to look for in “blue chip” type stocks that you can hold for a long time. Do we get any more clues?
“Right now, just ONE stock qualifies across all the strict criteria I described a moment ago.”
We know, we know, but which one?
“… this company was built by one of the world’s best investors.
“It serves a huge group of customers in North America, just like Hershey. And it has extraordinarily reliable results (like Buffett’s first “Magic Stock” type investment.)
“In fact, the Magic Stock I just recommended to my readers just posted its 39th consecutive quarter of double-digit earnings growth. And it has an established history of returning most of those profits back to shareholders.
“No wonder its stock has soared 700% over the past 10 years”
Who is it? Well, there are a couple possible matches for that… but after checking the chart that accompanies the tease, I think the best one that the Thinkolator delivered is AutoZone (AZO).
Can’t be 100% certain, but the highest trading volume for this stock in the past month was on June 24, the first trading day after Porter released his “magic stock” to his subscribers. We wouldn’t expect a big bump, even from a large subscriber base like Porter has, because it’s a $25 billion company… but it has risen about 9% in the last couple weeks since that recommendation, much better than the broad market’s 2% rise.
And the ad includes a chart that indicates $10,000 invested on February 1, 2006 in this stock would have turned into $79,588 on June 21. That’s not quite an exact match for AutoZone, but it’s within a couple thousand dollars, and the shape of the chart is extremely close to the hint in the ad.
Some other very well-run companies are fairly close to that kind of return but not as good a match to the final number or the chart, like Tractor Supply (TSCO) or Middleby (MIDD).
And on the other little hints? AutoZone has had something like 39 consecutive quarters of double-digit earnings per share growth… though depending on how you measure the earnings growth, there was one quarter that might have been less than “double digit” (that’s the quarter they reported in August of 2014, when year-over-year earnings per share growth was just under 9%.
And the company was built by someone who you might consider to be a good investor, J.R. “Pitt” Hyde, though I don’t know if he was lauded as an investor at the time… he was celebrated and admired as an excellent retailer, someone who effectively translated the retail success of Wal-Mart in building an efficient and strong consumer experience and employee esprit de corps into his family’s chain of auto parts stores, and he’s been mostly a philanthropist and biotech investor since leaving the CEO job at AZO. His reputation as an investor, whatever that reputation might be, presumably comes from the biotech investing he’s been doing through Pittco Holdings in the 20 years or so since he left day-to-day leadership of the auto parts empire he founded, the biotech interest was apparently seeded by his successful treatment for prostate cancer in 1996.
So as I said, I can’t be 100% certain of this one… but it’s the best match I can find, and it’s certainly a reasonable company with a strong and impressive record. They’ve also bought back a lot of shares over the past several years, which is part of what creates their impressive per-share earnings growth record.
The debt has also been very gradually growing over the past decade, which is slightly worrisome (gradually increasing debt and buying back stock gives the impression that you’re borrowing to buy back shares, which is shareholder-friendly in the short term but not always in the long term). That might be an unfair concern, the debt has certainly not ballooned and I don’t know what their capital requirements are — they do have legitimate needs to carry and increase debt, since the stores are all company-owned and they have to finance inventory and grow the store base if they’re going to keep growing the bottom line.
And the biggest reason I’m a little uncertain about this match? Porter has hinted at AuzoZone in the past, for other services at Stansberry & Associates — in fact, he called it a “magic stock” just back in January when he was talking about the “magic stock” screening method he had developed for the Stansberry Data service (that service was offered only to folks who had “lifetime subscriptions” to Stansberry Investment Advisory, I don’t know if the stock was a recommendation of that newsletter at the time or not). So… perhaps there’s a different stock out there that better matches the clues. If you’ve found it, feel free to let us know with a comment below.
Porter is pretty certain of the merits of his magic stock… here’s more from his sum-up:
“I’m convinced that this is the safest, most reliable, most opportunistic investment an individual investor can make today to get rich.
“But again… there’s no telling how long this opportunity will be available. Any big movement upward in the price could force me to move this stock to a ‘Hold.'”
So… exciting? Maybe. AZO has a lot more competition than it did when Pitt Hyde was building the company, including the slightly-faster-growing O’Reilly Automotive (ORLY), which boasts an extremely similar 10-year stock performance (but carries more of a premium valuation than AZO). I can’t personally get that excited about a retailer, but that may be a personal failing of mine — AZO has certainly been an investor favorite for a long time, and has made a lot of money for long-time holders.
Have any thoughts about AutoZone or this notion of “magic” capital-efficient companies? Let us know with a comment below.
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