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:Are you getting our free Daily Update
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“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 &