What’s Stansberry’s “Dirty 30” All About?

Checking out the teaser pitch for Stansberry's Big Trade service

By Travis Johnson, Stock Gumshoe, July 20, 2017

Several folks have been writing in with questions about Stansberry’s “Dirty Thirty” promotion for his Big Trade newsletter ($3,000 for three years, no refunds), so that’s where we’re pointing the Thinkolator today.

The pitch is not a new one — Porter Stansberry preannounced his “Dirty Thirty” idea last Fall and started selling subscriptions around November, I think, and the list has probably changed a bit over the past year… presumably he has been adding new recommendations, and maybe taking profits on some of the stocks that have fallen sharply this year (several of his short targets have certainly fallen in 2017 so far, even if we don’t know exactly which 30 companies he has chosen — we know he specifically has called out big retailers and mall REITs and some oil, auto and lending companies, and almost everything in those sectors is down or flat this year).

The basic idea is fairly simple: He thinks that the low price of options, combined with the festering crisis in corporate debt (lots of companies that he thinks will be unable to pay their interest, or roll over their debt when it comes due, leading to a wave of bankruptcies), presents an opportunity for betting against debt-heavy companies in the options market.

If this is an unfamiliar concept to you, it’s basically just “buying put options” — but he’s more specifically talking about long-term predictions, since it’s devilishly difficult to predict when there will be a credit crisis with any precision, so that would mean buying very long-term put options, most likely LEAPs where available (most options are available only going out about nine months or so, but LEAP options, when they’re available, go out a couple years (with only January expirations)… so right now, for example, to use an example of a heavily indebted stock that Porter has publicly criticized in the past, Ford Motor, you could buy January 2019 put options and get about a year and a half for your theory to play out.

How would that work? Well, in the case of Ford the likely options would be the January 2019 put options at strike prices of $8 or $10, since those are the options that have very large open interest and heavy trading volume (which makes it easier to get orders filled at reasonable prices — and means there’s “room” in the trade for a newsletter editor to recommend it to 1,000 of his closest friends without completely blowing up the price).

If those terms don’t make sense to you, “Open Interest” is just the number of options contracts that exist in the market at that expiration date and strike price, “volume” is the number of contracts that have changed hands or been created or closed that day.

Right now, the $10 put option for Ford would cost you about 85 cents a share, and the $8 put would be about 37 cents. Options contracts represent 100 shares each, so the minimum you could put into that trade would be $37 (or $85), plus commission… the commission goes down a bit if you buy in more, so let’s assume you buy ten contracts of the Ford $8 Jan 2019 puts for $370.

How do you make a profit? By seeing F shares trade below $8 before January of 2019. Ford shares right now are at about $11.70, so this is a bet that there will be a substantial fall in the share price… though it’s not overwhelmingly dramatic, you don’t need Ford to go bankrupt for this trade to work, you just need the stock to fall by 30% or so to generate a pretty nice profit.

Of course, in order for it to turn into a “windfall,” you’d need Ford’s share price to fall dramatically — preferably to near zero. If F shares fall to $5, then the $8 put option you paid 37 cents for is now worth $3… if they fall to $2, that same 37 cents turns into $6. That’s a nice return on a very speculative trade, though the other side is, of course, that if Ford keeps trucking along, rising a bit or staying flat or even falling just 10% or 20% over the next year and a half, you’re likely to see the value of your put option decline to 0. Most speculative option purchases don’t work out, because you have to be correct in the timing, direction, and size of the expected move in the stock price.

But, of course, if you’re convinced, as Porter appears to be, that a real credit crisis is in the offing over the next year or two, and that this will bring down many of the big US companies who rely on a steady diet of debt issuances or who are overlevered, then it could certainly work out if you make a bearish bet on 30 of those companies using options — options are very levered, so it would only take a couple really successful trades to cover the cost of ten trades that wash out and go to zero. You do have to be right about the direction of the market, about that big trend of collapsing share prices in a few sectors, and about the timing (you don’t have to be super-precise about the timing if you’re buying LEAP options out a couple years, like you would have to be if you were speculating on a collapse in a matter of a few months, but even predicting bankruptcy within a 15-20 month period is no mean feat).

I don’t know whether Ford is still a company that Porter would bet against, but it fits his general theories pretty well — they have a huge amount of debt, including, according to Ycharts, close to $50 billion in debt that matures within the next year or so (and another $90+ billion in long-term debt), and the business is certainly not as rosy as it was a year or two ago — revenue is weak, earnings are falling, and the residual value of cars that are coming off of leases is much lower than expected. Add on the worry that Porter comments on about a consumer debt crisis in auto loans, and you can see how he would logically continue to bet against Ford.

The same argument probably holds true with the big car rental companies, who also carry huge amounts of debt and suffer as the value of the cars they sell is dropping, and Porter also specifically calls out Santander (SC) as a company he thinks will collapse further because of its leading position in subprime auto lending, so you could probably find some other candidates in that group.

But what folks have been asking me about are the hints Porter has dropped about some other specific companies that he’s added to the “Dirty Thirty” list of debt-happy or “distressed” stocks to bet against. So what might they be?

Here are the hints dropped for one of them:

“This $1.5 billion stock is going to $0

“To begin with, you need to know about one particular company whose name I guarantee you’d recognize.

“It’s a Texas-based retailer that owns hundreds of stores in malls nationwide.

“At first glance, you’d think it’s a great company… worth roughly $1.5 billion on the stock market. All its press statements are upbeat… often showing attractive women smiling.

“It’s garbage.

“The whole company belongs in a toilet….

“This Texas-based company, for example, can no longer afford to even pay interest or maintain its properties…

“Over the past 5 years, it has lost more than $3.6 billion. Meanwhile, it paid $1.75 billion in interest over the same period….

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