Announcer: S&A Investor Radio looks beyond the regular headlines heard on mainstream financial media, to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.
Frank Curzio: How’s it going out there? It’s Wednesday, September 25, and I’m Frank Cruzio, host to the S&A Investment podcast, where I break down the headlines and tell you what’s really moving these markets.
You know, I’m not really a Facebook guy, but it’s almost like I have to comment on this site after reading my friends’ posts. For example, most of my friends’ posts – yeah, they have these nice – these beautiful comments about their wives, especially on their anniversary, “You’re the best thing that ever happened to me; I love you so much. So grateful for meeting you, you changed my life forever.”
And their wives, like, post again, “Oh, it’s been a great ten years. You’re the love of my life; you’re amazing.” And it’s such crap. I know these people. I hang out with them, and they hate each other. The only reason they’re together is because they have kids. They don’t want to pay child support, have full custody of their kids, which is gonna limit their social life.
I know these guys have girls on the side; they go to stripper bars. I’m sure their wives are cheating as well. Totally unhappy, yet I read these comments, and I have to laugh. And really, if you really, really love your spouse, why do you feel the need to tell everyone else about it? It just never made sense to me.
And I know I’m opinionated as hell sometimes. I have a comment about everything, and I get the last word ‘cause this is a podcast, which is pretty cool, if you think about it – right? It’s like all of you should start your own podcast. Sometimes I’ll talk about a lot of things right here on the podcast instead of Facebook. Like Florida.
I have a quick story about Florida. I gotta go there. Last week, I told you – [chuckle] – last week I told you my wife went to Las Vegas to see her family, and, you know, I had my kids and everything.
And my daughter’s three-year-old birthday is today, and we’re having a part for her next week. So, my wife wanted to get these invitations, this way she could send them out. You know, so that when she got home, it’s all taken care of.
So, she calls this place, and it’s a gymnastics place that hosts parties. And it’s really cool for kids. And you rent it for two hours. The kids run around on bouncing trampolines. They also have a bounce house; it’s awesome.
So, she calls a lady and asks her for the address to send these invitations before she went to Vegas. So, now she comes back; she’s sent the invitations; she’s weighting for responses. And wouldn’t you know it, the lady who owns the business gave us the wrong address. The wrong address for her own business. We sent out 30 invitations with the wrong address on them, and the party is next week.
Florida. That’s all I’m gonna say, I didn’t want to go there. Again, I get a lot of comments on me about Florida, “Frank, go back to New York.” [Chuckle] I just had to mention it; I can’t believe it.
Anyway, this Facebook thing, if you really want to hear me unplugged, then send a friend request to me, Frank Curzio. But I’m warning you, you probably won’t like me much after reading my post because I can’t hold back, especially when I hear stupid things. I’m just not the type of person that could sit back and just listen.
I always – you know, again, I’m very opinionated and, you know – again, like when people post, “It’s hot out today,” or, “I’m taking a walk,” or even one of my friends who posted that, “Fundamental analysis is basically worthless,” and he’s obviously a TA guy, technical analysis, and he writes books. He’s a good guy.
You know, I just thought of posting it, trying to rip him apart, because – and these guys, technical analysts, they never post their records. I mean they tell you, “Buy here,” or, “Sell here.” “I’m a millionaire; you’re not, just follow my advice.” Yet I know personally that most of these TA guys were getting killed the last two years.
And I posted, “I guess that one or both of those guys is really an idiot, since, you know, fundamental analysis makes no sense, which, by the way, he’s probably saying that – or whoever is saying it – because they can’t read a balance sheet. It’s very difficult; they just like to read charts.”
Anyway, I would never dismiss anybody’s point of view on investing totally and say something like that. But I had to comment. If you ever want to hear me unplugged, send a friend request to Frank Curzio; it’s Facebook. Probably not gonna like me in a few weeks after you hear my comments, but you will be entertained and, truthfully, you’ll probably agree with more than half the stuff I say.
So, it’s another outlet for me to post really post my comments outside this podcast. And, if you’re interested, again, friend request to Frank Curzio.
But moving on, I have a great show for you today. My guest is none other than Stephanie Link. Stephanie is co-portfolio manager of the Action Alerts Plus portfolio at thestreet.com. That’s with Jim Cramer. Also one of the stars of Fast Money on CNBC, and one of the smartest stock analysts I now.
We had a great chat today about valuations. How expensive or cheap are stocks right now? So many different valuations. You hear, “It’s 15 times earnings,” “It’s 20 times earnings.” Well, we’re gonna get to the bottom of it and show you exactly how we measure where earnings are for S&P 500 companies.
We’re gonna talk about industries to buy right now. And so, how Facebook, Apple, BlackBerry all have used these large tech companies. Are they buys right now? And, as always, Stephanie will share at least ten of her favorite stock picks with us. If you’re a first-time listener, it doesn’t get better than Stephanie Link, and you definitely don’t want to miss.
Later on the show, I’m gonna break down the markets. And a lot of people now are calling for a major pullback, except for one guy, who’s been a bear forever. It’s not Richard Maher, but he’s been a bear forever. Believe me, you’ve heard this name, and he’s telling people that U.S. stocks are actually a buy here. Maybe you can ___ ___ inside to sell.
Also, a lot of political risk coming. Earnings recently been pretty bad. We have it up there that, you know, S&P 500 third-quarter earnings, they start October 7. Alcoa is – seven companies already reported, only one of ‘em beat on the bottom and top lines. So, we’re seeing weak earnings right now. Very early on, but seeing weak earnings.
So, we’re gonna tell you what to do with your portfolio. I’ll explain that in a little while in that segment. And then, I’m gonna go back to one of my educational segments, and I’m gonna tell you why I’m still in love with this sector that has outperformed the S&P 500 by a 3:1 margin over the past two years. Not hard to guess, we just had a small ___, but I can tell you this sector later on, and also tell you why you should be buying stocks, and how to buy stocks in this sector to make a lot of money.
But first, into my interview with Stephanie Link, I start by asking her, “Is it time to finally take profits in stocks?”
Stephanie Link: The million-dollar question. We actually have been raising cash over the last couple of months. We have a little bit higher levels than we typically do. And just because we expected September to be volatile, it typically is. August, September, October, these are not the times of the year where you’re gonna see real outside bets be made.
So, we have a little extra cash on hand. And that said, though, Frank, when you get the reactions you do in the market – so, for example, when I’m involved in Red Hat, put the stock down seven, eight percent on a disappointing report, you know, you want to be able to take advantage of the name that you’ve made a shopping list about, to be able to be buying when you do get those dips.
So, you may not see this massive market pullback, but you see these selective stocks get hit. And that’s where you want to be buying, and that’s actually what we’ve been doing. So, we’ve been very selective in what we’ve been buying, with a cyclical bias.
Because I do think, once we get through this Washington noise – the debt ceiling, the budget, the debate – I think that sets us up for a very health fourth quarter, and I think you see chasing for performance, and so we want to be involved. So, that’s why we’re selectively putting our money to work here.
Frank Curzio: Now, everybody thinks that this whole debate in politics is gonna go bad, the debt ceiling debate. We’re gonna see headlines like, “People are gonna lose their jobs,” “People are not gonna get paid.” We’re gonna see those headlines in the media. How do you play this? Do you ignore it because it’s temporary? I mean they’re probably gonna come up with some kind of a solution, last-minute solution. What are you hearing that people are expecting? Is it just like, “Ah, this is gonna be a short-term headache and just pull through it,” or are you looking to trade it ‘cause it may – this time around it could be something a little bigger?
Stephanie Link: Well, you know, when everybody’s talking about the same thing, and we’re all worked about the same thing, something other than the things that we’re all worried about is the thing that kinda shocks us. Right?
So, I don’t think that it’s gonna be smooth sailing. I do think it’s gonna be choppy, and I do think we’re gonna have bad days, like we had on Friday, and it’s very easy to take gains, because people are up 15, 20, 25 percent on the year, depending what – you know, what you’ve done.
But I think that – I think it’s gonna be choppy, and I think do you want to use it towards your advantage to buy that choppiness, to really participate in to the end of the year. I think that most portfolio managers in those hedge funds are below their – either their high water marks, their benchmarks, whatever you have it, and I think that you’re gonna see chase for performance.
And I do think also that the economic data, the global economic data, is getting better. We’ve talked about this a couple of times. I think even back in the spring we started seeing green shoots in Europe and in China and in Japan. And that continues.
We’ve seen kind of a stabilization, at least for the time being, in the emerging markets. And that was very important, to at least see things just stabilize. And so, I think all of that is very important. And my emphasis this year has been kinda shifting away from the U.S. market and into some of these other parts of the world, because the valuations are so compelling.
So, those are the names, as I said before, we want to get cyclical into the fourth quarter and capture the benefits of the recoveries in these global economies. And we’ve seen it, and we get data points every week, every hour it seems, that is showing that that’s really where you want to be, at least until the end of the year, and then we can reassess next year.
Frank Curzio: Yeah, you bring up an interesting point on emerging markets because there’s been so many arguments that, “Listen, the U.S. is the place to be, even if we’re mildly expensive,” which we’re not. I think we’re fairly valued here, 15 times earnings. You can’t say – which anybody – I don’t think we’re expensive either. But now you brought up a good point about emerging markets. How do individual investors play this? I mean is it ADR? Is it a ETF?
I mean how would you be playing this in your Action Alerts Plus portfolio, where you get exposure to these markets that you’re right, almost all the data points that are coming out shows that it’s not a booming economy in China and Europe __ __ ___ ___?
Stephanie Link: Well, I would say that there’s two different ways of playing the global recovery. I think that definitely you want to be owning some exposure to Europe. And you can own that via the ETF. We own the VTK.
But the other way we’ve been playing it is through some of the industrials, where you have, say, something like the auto companies. They’ve got anywhere from 30 to 50 percent of their revenues tied to Europe.
So, something like a BorgWarner, or something like a Johnson Controls, or even some of the other industrials like Eaton or Honeywell. They’ve got a fair amount of exposure in Europe, and so certainly there’s kind of a couple of different ways you can play Europe.
In terms of Japan, I own – we own the DXJ. We’ve owned the EWJ. We’ve owned a couple of different ETFs in the past, and I think the DXJ to me is the one where I feel the most comfortable about.
I prefer to own kinda these multinational companies, where you can really learn about the fundamentals, and you can really understand the nuances and how to take advantage of them as prices of the stock, but Japanese equities are not my forte. And so – and the multinational companies don’t really have a ton of exposure to Japan. So, I’m more inclined to own the ETF in Japan.
China, it’s all about the multinational industrials or the consumer companies that have exposure in China. You certainly can own the ETF, the FXI; we have in the past. But you can own a Yum! Brands for sure. You can own a Cummins. We own Joy Global. We own Vale. These are all companies that will participate, if we believe that the recovery is for real, and it continues to show momentum, which I do believe, at this point, that’s where it is.
And to your point of everybody willing to be in the U.S., that’s exactly why, starting in the summer, we started to shift towards the international kinds of stocks and market, because I do think that that’s kind of consensive thinking. And while I do think the U.S. is doing a little bit better, we kinda keep – we’re kinda like stuck in the mud at 2, 2.5 percent GDP, and we’ve now got Washington headaches and that kind of thing.
So, I do expect to see a second half of the year recovery and 2014 recovery in the U.S. But these other countries and these other regions are trading at 1.2 to 1.5 times book value, where the S&P is trading at 2.5 times. So, there’s certainly better value, I think, elsewhere.
Frank Curzio: What about the Fed here? I mean a lot of miscommunications here. You’re seeing Summers is almost guaranteed to be Fed chairman. He steps down. You’re looking at no tapering, which really surprised even the guys at _____. I mean __ __ ___ and get on and say that, “Look, we’re definitely, you know, gonna see some tapering when the Fed __ ____.” And it turned out, you know, it didn’t happen.
Does this lead to any point of view or change in your investment philosophy with the Fed? I mean whether they taper or whether they don’t taper, or is this news just all on the table?
Stephanie Link: Well, I think that – yeah, it would shock all of us – right? – the fact that they did not taper. On the margin, most of the way I feel and what we just talked about in terms of owning cyclical and owning global recovery quarries, that did not change.
What did change were our positioning in the financials, because (a) they’ve had a heck of a move year-to-date, up 20 or 20 to 25 percent. We’ve had some regional banks up 40 to 45 percent year to date.
And a lot of the rally was because of the steepening yield curve, of the fact that the U.S. economy was improving, the Fed was gonna taper because the U.S. economy is improving, and that was all a good thing. And as the yield curve steepens, the regionals do quite well, the banks in general do quite well, they make more money and they’re more profitable.
So, when the taper announcement, or the non-taper announcement came, that really impacted the banks, and you’ve seen them sell off pretty substantially over the last couple of days. They’ve really underperformed.
We took some profits in some of the regionals, like a KeyBank, for example, but I still like the group because I do believe there’s – on the one hand, yeah, maybe the steepening yield curve, or the flattening of the yield curve, hurts their profitability.
But if you believe that the Fed is going to keep the pedal to the metal until we see good data, and until the economy really improves, well, eventually the economy will improve, and these companies are gonna lend, and their growth will be better.
So, what I think, at the end of the day, you know, what I believe in the financials is you kinda want to have maybe not just a yield play, not just the regionals. I think you really want to have more capital markets, companies that are kind of diversified within the financial entities.
So, something like a Morgan Stanley, for example. We’ve bought back into that one. I think even a JP Morgan gets in some of these legal issues, but I still think in the low 50s. That makes some sense.
I’m less inclined to own Wells Fargo; I want to be smaller in the regionals. And I still like the insurance companies, the special situation ones like AIG and Hartford. But that’s the sector on the margin that has changed in my view.
Now, should the Fed go and taper, and the yield curve start to steepen again, that’s great. The regionals probably will rally, but so will the capital market plays and the other financials. So, definitely want to have exposure; I just think we want to tweak it here in the near term.
Frank Curzio: Talking to Stephanie Link, chief investor and officer of The Street. Fast Money superstar.
Frank Curzio: And co-editor of the Action Alerts Plus portfolio along with Jim Cramer. And I – you know, I feel terrible ‘cause I never give you a chance to do this. Explain to people out there, who don’t know what Action Alerts Plus is, and that newsletter. And if they want to subscribe, how can they do it?
Stephanie Link: Oh, sure. Well, thanks, Frank. Action Alerts Plus is Jim Cramer’s charitable trust; it’s his own money; and it’s housed at thestreet.com. And it’s one of our largest products at The Street. And basically, we run a portfolio like anyone else. It’s a long only portfolio.
And we have some restrictions whereby if Jim talks about a stock, we can’t trade it for a few days and that sort of thing, but overall it’s really a – we try and take good stocks. We try to teach and educate and really help subscribers understand what it’s like to run money. And we play with an open hand.
So, we basically – anything we do, we send out in various different alerts, in bulletins. We tell our subscribers what we want to do; they get to do it before we do. And then we buy or sell whatever we want to buy or sell. And as I say, we also educate as well. So, we go through our sector waitings and our allocation and those kinds of things. And it is quite a bit of fun.
And it’s also – it’s very challenging. In a year like this, it’s hard to keep up with an S&P that’s just been on fire. But it’s been a lot of fun. We’ve had some pretty fun picks this year, and so we hope to continue to grow the business.
Frank Curzio: Let’s get into some of those picks. You know, we saw a lot of technology used, with Apple coming out. And I don’t know if – I know that you did own Apple once – if Apple’s still in the portfolio. You don’t even have to tell anybody, ‘cause I know people pay for that advice. But let’s start with Apple here. And you’re looking at fundamentals. You have ___ __ _____ value track; you have other people say you have price targets in excess of 600.
You know, what’s your opinion here with the new iPhone release? Is this company now – you know, does it deserve the ten time multiples and it’s now maybe in the category of a Microsoft where it’s not a growth company no more; they pay a dividend? Or should they deserve a higher multiple; you think they’re cheap?
Stephanie Link: I do think it’s very cheap, and it’s one of the reasons why we have a small position in it. I do, though, think that the smartphone market is getting saturated, and it’s very competitive. And Apple has not released really “wow” products. So, as a result, I think the stock is kind of in the trading range. Could it go to ____ 550. Certainly, just because it is so cheap.
And for the first time, we’re seeing numbers actually go higher. ‘Cause they reset expectations for the last year. They missed revenues. They missed earnings, and for the last year margins were under pressure. So, this is the first time, yesterday, where the company actually raised their numbers.
Now, not to where they need to be. I mean to put it into perspective, they actually said that margins were gonna be at the high end of the 36 to 37 percent guide that they forecasted for next quarter. Well, this is down from 60 percent, Frank, in 2012.
So, margins have been contracting. And I think that they’re kind of stuck in this 36 to 40 percent level. But it’s all going to deteriorate materially from here. I do think earnings probably are biased to the upside, and let’s see if the momentum continues with the launch, if they’re rolling out the new products to more countries faster than ever.
I definitely think there’s a place for Apple; I just think that maybe the easy money has been made. And again, I think it’s a trading range stock. So, if it gets into the mid-550s, probably would sell; we’d scale it back. If it gets to the 450s or below, we would probably ticket it.
But there are so many other technology stocks that I would own that are easier to own, to be honest with you. I mean even Facebook, at this point, to me, has more momentum and more growth opportunities, and in a space that’s really not – untapped, if you will. They only have a five percent share of online advertising. So, think about how far that can grow over time, and I think that a lot of people have been skeptical on that one.
So, if you gave me which one I had to pick today, I think it would be Facebook. We own Facebook as well. We’ve been selling a little bit on the way up because it just goes up every day. But I do think that the growth outlook is much more visible in my view.
Frank Curzio: And you bought Facebook, I mean, early on. I would say I think it was probably when the company – it still went down – you know, it still went down. But once it started coming back up, I mean this is one of the stocks that – and I’ve been wrong before, and I always say when I’m wrong. But I’ve been pounding the table in the 20s to tell people to buy it, because I think everybody focuses on valuation, not looking at the big picture.
We have over one billion users in one spot, and it was just a matter of time before one smart guy found a way to make money off of it. And it seems like they’ve figured out that business now. Now, you’re saying five percent of the market cash here; there’s a lot more growth. But now we’re seeing a stock that was, you know, in the 20s, low 20s, even 19, if you take the absolute low, now it’s closer to 50.
I mean what’s your target on this stock? Which I know it’s difficult to comment on stocks that you own or you bought at certain levels, at least I find it hard. But say for someone who wants to establish a position in Facebook, would you tell ‘em to buy a small position today? You think it’s going higher? Where do you see Facebook go?
Frank Curzio: So, I think if you’re gonna buy Facebook today, you have to buy it and just close your eyes because the thing is very volatile. But I actually can see, at least in the near – between now and the end of the year, mid-50s kind of stock price.
I’ve had to raise my target several times. Yes, we started buying it at 28, and we bought it all the way down to 22. And it was painful, by the way; 28 to 22 is a huge downward move. But we bought all the way down; we had conviction in the long term.
So, I think the really easy money in Facebook has been made. But I do think with Instagram and with their video opportunity – and again, with just a small market share of online advertising, and them monetizing mobile, I do think that the stock could go a lot higher over the long term.
That said, it’s had a heck of a move. I would not be surprised to see it consolidating. In fact, I’d like to see it consolidate, just ‘cause it’s moved up so far so fast. And it’s funny, I was talking to somebody today, we thought that – everyone thought when the Facebook IPO came out, that this is where the stock would be after the IPO. And clearly, it was a disaster in the making, and it has worked out since.
I think that there’s more that – that there’s more upside, because there’s just much more growth opportunities. Now, you got to believe that the management can execute, and the expectations are very high into the print for 3Q. So, I certainly would be careful of buying it into the quarter, but I think if you see it pull back, that’s where you want to be buying.
Frank Curzio: Now earlier on you said you’re overweight cyclical. Tell people exactly what that means. And obviously you’re predicting, you know, the economies here and emerging markets are gonna get better. But what are some cyclical sectors that maybe go down to individual stock? I know you named a few in the auto industry, but what are some of the names that you like when you say you overweight cyclical here, at least going through the fourth quarter?
Stephanie Link: Right, so into the fourth quarter, I would own industrials; I would own materials. And a new thought for me is I would own energy. I wanted to wait for energy to come back down after the serious scare and where crude prices were so elevated.
So, I think you’ve started to see kinda the premium come out of the crude. And these stocks have really handled it pretty well. So, I think those three sectors can do well into the second half of the year and to the end of the year. I also like technology, and I do again – I’m very selective in financials. But these are all kinds of cyclical.
These are companies that will benefit as the U.S. economy improves, as we get through the overhangs with Washington, and we can focus on the fundamentals of the economy improving, and then also on the global markets improving again: Europe, China, and Japan.
So, okay, so some names in the industrials? I like the auto sector, as I mentioned earlier, JCI is one that we own, Honeywell, Eaton. Those have exposure to auto. They also have exposure to HVAC – H-V-A-C, which is heating, ventilation, and air-conditioning control. So, all of that is kind of an interesting way of playing the industrials.
I like the aerospace cycle, and again, that’s really more Honeywell. And I still think that there are some real opportunities in the truck market, in the trucking sector. And Cummins and Navistar are two names, and again, Eaton as well, are all companies that will benefit.
On the materials side, I look for special situations. I can’t own some of the most speculative material names that just go up and down with the commodity price. But I like Vale because they’re doing an internally restructuring story. I like Freeport McMoRan ‘cause I do like them diversifying away from copper and into the energy market. And so, I like those two names very much.
And I also like, in kind of basic materials, I fell like Weyerhaeuser, maybe not as much as I like Boise Cascade, but I like those two companies; they’ve got some special situation restructuring stories that are working.
The only area in energy that I think you really have a lot of leverage to would be the oil services side. So, I like Schlumberger; I like Weatherford. And this company called Frank’s International. You’ll like that, Frank; that’s for you. It’s an IPO that actually is very interesting for me here. So, those are some of the stocks that I like here.
Frank Curzio: Now, two more quick questions, very, very easy questions for you – [chuckle] – what are your thoughts on gold here. Simple question, but there’s a lot of gold bugs out there. You saw this market get killed; it did come back a little bit. What are your thoughts on the market, maybe gold prices and even gold stocks?
Stephanie Link: Well, the only reason I would own gold is if I thought that inflation was a scare, or if I thought that there was a real macro event that was very problematic. Certainly gold will spike if, in fact, the discussions in Congress go poorly over the debt ceiling and with the budget debate. Gold will certainly rally.
But to see a sustainable rally in gold, you’ve got to have something that’s really problematic and/or inflation. Now, you could argue, Frank, if you had a two-, three-, four-year horizon, buying gold now, given that all of these central bankers around the world are printing money will lead to some sort of inflation. But that’s something that you’re gonna have to wait a long time for.
So, if you buy gold on that premise, you have to wait several years, and that’s not in our time horizon. And again, thinking that if the economy – global economies pick up, you are gonna see a little bit of inflation, hopefully the central banker can control it in time, but that’s something that – that would be the main reason to own gold, in my view, and it’s just not – it’s not evident as of now though.
Frank Curzio: And last question, here, most important, what is your sleeper pick to win the Super Bowl? And when I say “sleeper pick,” that means you can’t pick Denver or Seattle.
Stephanie Link: Oh, I was gonna say Seattle totally. I’ll tell you who will not make it; how’s that? The Steelers, they certainly will not make it. They’ve got some problems. And I’m not sure the Giants are anywhere close either, but it’s a long way to go. I’m still pulling for my Jets, even though they had 20 penalties in the game on Sunday. But, you know, the real standout, the real shining star right now does look like it’s Denver. And as you know, I’m a fan of Denver, too. So, I’ll take the Jets or Denver.
Frank Curzio: The Jets – I love the Jets. And it’s funny, I always have to ask you about sports ‘cause you’re like a closet sports maniac, and people don’t know. How did you know that they had 20 penalties, which was a record, by the way. They had –
Stephanie Link: Dude, I watch it; I watch it. And I love it. I do enjoy – I love football, but I love all sports. You know, you and I, we talk about sports all the time; it’s a lot of fun. So – and I watch it while I run in the morning, too. So, I get caught up while everyone’s still sleeping. [Laughter]
Frank Curzio: That’s great stuff. Well, I tell you, I say this to all my guests. But listen, you’re on Fast Money a bunch of times a week. I know you’re doing appearances on other parts of CNBC. I know you run Action Alerts Plus portfolio. I just wanted to thank you for coming on.
I know it’s tough to take a half-an-hour of your schedule, and I mean that sincerely because you’re one of the favorite guests; we get a lot of positive comments. And I really enjoy the fact that you’re able to come on still with your busy schedule and your success.
Stephanie Link: Oh, my goodness, it’s my pleasure. I always enjoy – I always talk – I love just talking with you, and it’s really – you make us all smarter, Frank, since you ask such intelligent questions, and really the questions that people want to know. And you’re a great listener, too. So, I really appreciate being invited, so thank you.
Frank Curzio: Ah, thank you. And hopefully we’ll chat soon, okay?
Stephanie Link: Sounds great, take care.
Frank Curzio: As always, great stuff from Stephanie Link. I love her – great analyst, and I learn a lot from her every single time I talk to her. She’s humble, smart. But this podcast is about you. Let me know what you think, [email protected] I usually get a ton of positive comments about Stephanie because she shares so many thoughts, so much information with us. But again, this podcast is not about me; it’s about you. Let me know what you think about Stephanie at [email protected]
Now, let’s get to the markets. So, a lot of complaints about the Fed not tapering or reducing its bond buying program. Caught many analysts, especially the guys at PIMCO off guard. I mean I saw Mohamed El-Erian come on and say they’re basically “definitely” gonna taper tomorrow, right before the announcement. And these guys usually know everything that the Feds do. It was a big, big surprise.
And, you know, people are like, “Why is this such a surprise?” Well, we have unemployment falling from 7.9 percent at the start of the year to 7.3 percent today. We have solid earnings from S&P 500 companies. Right? We have very little inflation based on a lot of different indexes. I know a some people would disagree based on food and stuff like that, but what the Fed looks at is CPI that’s showing a little inflation.
The market is near an all-time high, so we see those corporate profits transfer over to higher stock prices. But yet, we have a Fed that says we’re not really seeing a recover yet, which is kinda weird. Now, what does this mean for you? ‘Cause it’s very, very important. I mean I say it’s not so important about, you know, who are the Fed chairmen going to be, or what’s going on.
But it is important whether the Fed’s gonna taper or not, but here’s why. Because if they’re not gonna do it, they’re going to keep QE in place. You have to look at different sectors that are gonna benefit and sectors that are not gonna benefit.
And one that’s gonna benefit is dividend stocks. And these companies will deserve to trade at a premium because interest rates will remain low through 2015 – that’s Bernanke’s words – and people are gonna be craving yields.
Now, I don’t know a better alternative than buying, you know, Big Pharma here, the large defense companies. And a lot of people are saying, “Well, you know, they’re cutting spending and defense companies.” These guys are so cash rich, they’re just gonna continue to pour money into dividends and buying back their stock here. I think they’re good plays. They’ll probably get more than a three percent yield in almost all those stocks.
Or even better, my special is a small cap elite dividend payers. They’ve been raising their dividend annually for decades using small cap stocks. Have huge growth potential. I feel like you’re buying the McDonald’s and Coca-Colas of today. A lot of people in my newsletter are buying these stocks. Four names you’ve never heard of, but you probably use their products all the time. Three of those companies are 100-year-old businesses. Cash – huge cash flow generators.
And a small cash specialist newsletter is still on sale for $39.00. Again, I’m pitching it here because I think this is a great alternative than buying the McDonald’s and Coca-Colas. They give off far more growth than these companies that could get taken over, and they pay higher yields. So, instead of buying McDonald’s and Coca-Cola – not telling you to sell them here, but these are much better alternatives if you’re looking at compound to hold ‘em long term. Again, almost all my subscribers love these picks. If you’re interested, e-mail me, [email protected]
As for gold, people believe, you know, “Hey, more QE is great news for gold. More stimulus will create inflation, and gold is a great place to be during inflationary times.” But we’re not really seeing inflation here. I mean ___ __ ____ food and commodities are rising.
You know, home prices are on the rise, but what the Fed really looks at is CPI, and that’s all that matters. That’s all that matters. Forget about what you think; it doesn’t matter. The Fed’s gonna keep QE there as long as they see inflation low. And they see it low because they look at the CPI.
You know, they base their entire policy on this number. As long as CPI remains in check, we will see more QE, and, you know, you’re looking at real inflation, which includes – what? – the five-year Treasury, less core inflation is lower compared to 12 months ago. But as for gold, I’d probably be a seller here.
Look, you buy gold as a safe haven, as alternative currency, or as a hedge against inflation. And we have little inflation. The economy’s on much better footing, and I don’t see the dollar losing its status or its currency status of the world’s best currency for at least 10 to 20 years, or forever, for that matter.
So, it’s difficult to make the case for owning gold here, especially when we were up for – what? – 10, 11, 12 straight years, and now the last two have been rough for gold. _____ gold stocks, they’re up huge over the past few months. Many are struggling to make a profit with gold under $1,400.00 an ounce, all-in cost. Check it out. Go to Google, all-in cost. There’s several analysts that provide all-in cost. It’s like $1,300.00 to $1,400.00 dollars to produce gold. That means they’re gonna be losing money unless we see gold prices stay over $1,400.00 an ounce.
If you want to buy gold stocks, if you think I’m wrong, I would probably buy the royalty plays like Franco-Nevada, Royal Gold, Siestrum Gold, which have agreements in place to buy gold at super-cheap prices. They have real low expenses, and it’s like 15 to 20 people working at these firms. They’re basically like the Goldman Sachs of the gold business. They just set deals and buy production.
So, they’ll put $30 million, $40 million behind a project. And once it produces, they’re able to buy gold for, like, $400.00, for the life of the mine, which could be 15-20 years, 10 years, whatever it is, but their cost to buy gold is so low, as long as these agreements come into play – and it’s all stipulations within these agreements. I know ‘cause I recommended some of these companies.
Like if they don’t produce that mine at a certain time, they get their money back, or they’ll be able to buy gold instead of for $500.00 an ounce, for $400.00 an ounce. It’s all financial engineering within these companies. And these are great companies to own. They got nailed along with the whole gold industry, but they really should outperform.
They’re gonna show profits even as gold prices come down. Their margins are gonna shrink, but they’re not gonna lose money like the gold producers, especially if gold prices come down, ‘cause they’re still able to buy gold at $500.00 and sell it at whatever - $1,200.00, $1,300.00, $1,400.00 – when a lot of the gold producers can’t do that. So, they’re gonna see less commodity risk than pure play gold producers.
Finally, stocks in general. Still a great alternative compared to most asset classes, like bonds, treasuries, CDs, even cash. But we are trading at 15 times earnings, so we’re not so cheap. We do have an analyst, Gina Adams, works for Wells Fargo; she’s a strategist there, calling for the S&P to finish the year at 1,440. It’s 1,700 right now. That’s a decline of 15 percent from – in what? – three months. That’s what she’s calling for. She cites that earnings – the multiple for the S&P 500 stocks is now at 20. They’re expensive. They need to come down.
And look, if you’re confused by this number, I don’t blame you. It seems everyone has a different multiple when it comes to S&P 500 companies. They deal – it’s trading at 15 times, 20 times, 17 times, 18 times, forward, backward, up, down, whatever it is. This is how I look at S&P 500, and I think you should look at it as well.
I take expected earnings for this year, 2013. Companies are reporting third quarter results right now. So, you have third quarter and fourth quarter. So, expectations for this year, 2013, the consensus estimate by all the Southside research firms, like Thomson, First Call, is $110.00 for 2013. So that – the $110.00 is total earnings for S&P 500 companies put together. The S&P 500 is trading at roughly $1,700.00. So, if you divide $1,700.00 by $110.00, you’re gonna get a multiple of 15 times common earnings.
So, right now I had the S&P finally trading at 15times current earnings. Is that expensive? No, but it’s definitely not cheap. But I tell you it would surprise me, when I’m looking at these ____ estimates, one bullish indicator for stocks is Nouriel Roubini. I mean he’s no longer a bear on U.S. stocks. When did that happen?
Weird ‘cause he was super bearish since 2010 – and what? – we’re up well over 100 percent in these stocks, S&P 500. But now he says U.S. stocks are a great alternative compared to investing in the rest of the world. He expects the dollar to go up years ahead. I mean that may be the ultimate sign to sell, in my opinion.
I don’t know; I’m not picking on the guy, it’s just – you know, he’s been – he actually called the crash. He did; he called it before it happened. You know, he was writing about it, and I give him credit. But he just – you know, during that time, he maintained his bearish stance. And I don’t – you know, I don’t like to talk bad about people who maintain their bearish stance, because nobody really knew what the Fed was gonna do back then.
When the Fed’s gonna inject money into banks, all bets are off. Everything you learned about research is off. I mean nothing makes sense. The Fed basically backstopped the economy and said, “No, no, no; we’re not going down any further.” But it’s just over that time, to see the Fed interject all this money and backstop the auto industry, the housing industry, every kind of industry out there to save jobs and hope that the financial markets didn’t collapse, you have to have a different thinking in your research process.
And that’s why I admire David Tepper, who came on and said, “Hey, you know what? The Feds, they’re – it’s a great market to buy.” And he said that in 2010. And I feel like a lot of these bears never changed their mind, and Nouriel was one of ‘em. But it’s interesting. I don’t know if it’s a contrarian indicator, if it’s a good indicator, but he’s actually bullish on U.S. stocks. When was the last time Nouriel Roubini was bullish about anything? It’s interesting.
So, look, it’s been a great run for stocks over the past 12 months, but on the earnings front, I’m starting to see some misses. In fact, seven S&P 500 companies reported third-quarter earnings so far. Only FedEx beat on the top and bottom line. So, earnings season officially starts October 7. That’s when Alcoa reports.
But so far, it hasn’t been great with these earnings. I’ve even seen a lot of companies – not S&P 500 – report really weak goddits. You’re looking on a political front. We have another debt ceiling to __ ____. And the headlines will read, “Possible Government Shutdown Ahead.” “People Are Gonna Lose Their Jobs.” Those are the headlines.
You gotta give it to the media, fear sells. And if you can’t use fear, use racism. Racism sells even more than fear. They can’t use racism, so they’re gonna use fear to sell their paper. So, when you get the paper, it’s gonna say, “Government Shutdown, No Agreement.” “People Are Gonna Lose Their Jobs.” You’re gonna see that, and that’s gonna impact the market.
When this debt ceiling debate happens in a few weeks – and it’s gonna be nasty. Republicans are not looking to compromise, even if they get what they want. Just looking to create a massive headache for the Democrats. And whether you’re a Democrat or Republican, don’t take sides here. That’s exactly what’s gonna happen. Again, it’s gonna be ugly. It probably impacts stocks at least in the short term.
So, my advice here is to be careful. Use reverse ETS to hedge your portfolio in case we see a 10 to 15 percent decline. Also, take some off the table on huge winners. Don’t sell your full position, but take some profits. This way you’re happy if the market goes down, because you have cash to buy stocks. You’re also happy if the market goes higher, because you still own a stake in these companies.
And I know I’ve been preaching this strategy for a few months, and the market hit new highs. But just be safe here. I mean based on risk reward, where do you see a common sense point of view, which is very important. Forget about the note. But where do you see the next 15 percent move coming from? The upside or the downside? I mean if I had to bet, stocks are much more likely to fall 15 percent than rise 15 percent from these levels over the next few months, since we’re up massively since November. Right? Even over the past 12 months, we’re up huge.
I mean if I had to bet, I would think that we would see – if you had to put money on it, where would see the next 15 percent, up or down? I would say down. I think most people would. So, protect yourself. I could be 100 percent wrong. Maybe we go up 20-30 percent. I mean who knows? But you made a lot of money. Especially if you followed my advice in my newsletter, you’re probably doing real well right now.
S&P 500’s up huge. The Russell is up huge. Everything’s up huge. Most stocks are up. Be smart here. You know, don’t get greedy. Greed is good, but you don’t want to be too greedy. So, be smart here, protect yourself. Wait to see what happens on the political front. Wait and see what happens on the earnings front, and then wait to see what happens on the tapering front. And we’ve got a lot of risk coming in, a lot of people predicting a huge downfall in the year-end. Just be safe. Be prepared. This way you can invest in a lot more money and stocks later on, especially if you’re taking money off the table today.
Hey, guys, let’s get to my educational segment; it’s regarding biotech stocks. People love biotech. I know, because when I recommend small cap biotech names in my two newsletters, I get a ton of e-mails. And people have a cult following on these names, like Dendreon or Arena Pharmaceuticals, pretty cool.
But if you’re looking at the major index, and I don’t know if you guys know this, but it’s called IBB; it’s a ETF. Over the past two years, we’ve seen a monster run in biotech stocks. And it’s called the iShares NASDAQ Biotechnology Index. It’s up 120 percent over the past 2 years. To put that in perspective, the S&P 500 is only up 50 percent in the same time frame.
Now, it’s important you look at this index, especially if you’re gonna invest in biotech stocks, because if it does come down, no matter what biotech stock you buy, chances are you’re gonna lose money, even if it’s a good biotech. So, you want to look at the global picture, the macro, before you get into the micro. Just my opinion.
So, you’re looking at it, and, you know, you say, “Wow, it’s up so much.” However, there’s a fundamental change happening within biotechnology today. And most readers to my newsletters, and even listeners to this podcast, are familiar with the natural gas story taking place in America over the past year
You know, my research team and I have visited every major shale area in the U.S., including the Bakken in North Dakota, Eagle Ford, Permian Basin in Texas, and the Marcellus in Pennsylvania. And we witnessed firsthand the huge fundamental change taking place in natural gas due to, you know, new technologies, horizontal drilling, fracking. You guys know the story now.
You know, we have a lot more than a hundred years supply of the clean fuel. And this is what I call fundamental change in the industry. So, instead of natural gas prices trading in relationship to oil prices – remember, we used to see that? – well, you know, the ratio is eight times. And once – you know, if it goes to six times, you should buy whatever, natural gas, you should sell oil. And people used to look at that metric a lot.
That metric is meaningless now, ‘cause natural gas prices – the natural gas industry is a fundamental change. We have massive amounts of supply. That’s why we’re looking to export it. We’re looking to put, you know, all the major trucking fleets in America are switching over to natural gas because it’s cheaper than diesel. I mean there’s fundamental change taking place in this industry due to massive supply.
Biotech is experiencing the same thing. It’s no secret, if you’re looking at Big Pharma, sales are slow. Companies like Merck, Pfizer, Johnson & Johnson, they’re seeing some of their signature drugs come off patent. This is referred to by experts as “the patent cliff.” You guys know a patent grants a company the right to exclude competitors from selling its products for 20 years. And once a patent expires on a block-buster drug, it’s open season. Generic companies could produce that drug, and basically profits are almost completely lost from companies like Merck, Pfizer, and Johnson & Johnson.
Now, more important, industry researchers, they project $300 billion of sales that are at risk for patent expirations in 2018. That’s a lot of money, $300 billion. What’s that - $50 billion a year over the next 6 years. The good news is for Big Pharma companies, they saw this risk coming years ago. It was already on the table. So, to make up for this massive loss in revenue, you know, they’ve done a lot of shareholder-friendly things: buy back stock, increase their dividend.
But one of the things that they’ve done, which is very important, companies like Glaxo, Pfizer, all these big guys, they used their cash hoards to invest in biotech stocks. So, in other words, Big Pharma is investing billions of dollars to partner up with biotech companies, in hopes of these companies discovering the next major block-buster drugs. That’s their growth edge. And they’re doing this by opening up their own venture capital firms.
So, you’re seeing more money flow into biotech than ever before because of what’s taking place – the patent cliff taking place in Big Pharma. And if you look at the partnerships, it’s amazing. Because I’ve studied biotech for ten years, I’ve never – almost every single one of these companies that have a promising drug are partnered with Glaxo; they’re partnered with Pfizer. And it’s unbelievable. Like it’s so easy for these companies.
And if you’re looking at Pfizer, Merck, and Johnson & Johnson, they have over $75 billion in cash on their balance sheets. And that’s a lot of money for investments, considering there are over 700 publically traded biotech companies with a market capital under $1 billion.
So, you’re looking at this industry in terms of fundamental – there’s a fundamental change taking place in biotech. It’s not a cyclical move where, “Wow, biotech’s been beaten up, and this is a two-year run that’s gonna come down.” You’re gonna continue to see money – massive amounts of money flowing to biotech. They have no choice.
And where are these Big Pharma companies going to find growth? They could become shareholder friendly all they want, but they’re losing $300 billion through 2018 in sales from these patent expirations. So, they have to try to find the next growth engine, and that’s biotech. That’s why you’re seeing a ton of money pour into this sector, which is great news.
Now, you’re looking at biotech stock. Your saying, “Frank, I want to invest in biotech stocks. How do I do it?” You know what? We’ve made money from a simple formula. People like to buy stocks heading into Phase 3. They’re running up, you know, it’s great news, and if it gets approved, wow, I mean 20-30 percent, it’s great. It’s the worst strategy you could think of.
What you want to do is invest in biotech companies that got destroyed. And these companies get destroyed every single day. Now, you could punch up a list of stocks, go to __ ____, you’ll see three or four biotechnology companies on this list; they’re down 30-40 percent a day because their drug didn’t receive approval or got bad results. But you have to look into those results. ‘Cause a lot of times, when they don’t meet their primary endpoint, what they need to do is those companies are gonna get killed.
So, what they want to do is they have to present this research again. And when they present this research again, the stock goes down 60 percent. A lot of these companies fall below cash. So, you could look at their cash balances, see how much cash they have. You could look at their pipeline. It’s almost like you’re buying their pipelines for free. And then you’re gonna look at these companies, who they have partnerships, and try to get companies that are partnershipped with Glaxo, partnershipped with Pfizer, partnershipped with Merck.
So, you want to look at the – say there’s ten companies in a month that get destroyed. They’re down 30 percent plus. And I’ve seen companies fall 70 percent plus. Look at their cash balances first. They’re going to be trading close to their cash balances. Look at their pipeline and trust. What on the cal is coming up in 2014, 2013, 2015?
And you want to look at these biotech companies and say, “Okay, what was the reason why that they failed this result?” Are they totally doing away with the project? Then maybe you want to avoid it. But maybe their cancer drug, they want more research on it. It didn’t meet a primary endpoint. And that research is gonna __ ___ six months from now. It’s a great opportunity to buy one of the best sectors in the market right now, and you’re able to buy some of these small cap stocks at a 50 or 60 percent discount.
So, that’s what I’m looking at right now for Phase 1 subscribers. Again, it’s a very expensive micro cap newsletter, which I’m editor. I don’t usually sell; it’s usually for institutions, but we just recommend it to microcap biotech companies that are down 50 percent each over the past month.
And these stocks are screaming “buy.” You’re getting the pipeline for free. They have enough cash. Glaxo owns 17 percent of one of these companies. And the reason why they came down, it wasn’t like it didn’t result; they’re canceling the project. They’re gonna come out with more research; they just have to dig in and do a little more research.
It’s gonna cost a little bit of money. But these stocks, just everybody runs to the exit. It’s not like a gold stock that’s down 30 percent, or when a company misses earnings estimates, is down 15 percent. People run away from these stocks. And they crash 50, 60, 70 percent.
It’s a great opportunity, and you’re eliminating that risk that comes with biotech when you’re buying these companies near cash. But yet, you could share that upside, which could be 200, 300, 400 percent or higher after these companies happen to turn these programs around, and these drugs get, you know, Phase 3 approval, even FDA approval. You’re looking at gains of 500 percent plus.
This is what we do, some of the research in Phase 1. I wanted to pass along, if you’re looking to invest in biotech. I know biotech has been on a tear, but I think it’s gonna continue to be on a tear, continue to be one of the top-performing sectors because of fundamental change, and my way of picking stock – just look into it.
You know, buy a couple of shares, whatever it is. Don’t go crazy in case you’re wrong, or you’ll lose money. But it’s a low-risk way to play biotech with a huge, huge upside.
Okay, guys, that’s it for me. Hope you enjoyed the podcast. The Eagles are in big trouble. I hate to say this, but I would trade Michael Vick right now while he still has value. Not saying that to be, you know, one of those fans that just pour on the Eagles and stuff like that.
But I saw something last week that was startling. In the second half, he was actually turning to the coach right before the snap. So, Chip Kelly could read the defense and then give Michael Vick the play through his headset in his helmet. And you usually see that in low-level college games, and it shows that Vick is not intelligent enough to read the defenses by himself, which is a shame for somebody that’s been in the league for longer than ten years.
I don’t see him being the starting quarterback for longer than two or three weeks here. I think he’s just having trouble reading defenses in this offense. I think it’s just a little too confusing for him. But I do think that it’s gonna be a long season for the Eagles, and I still think that Chip Kelly’s offense is a game changer, but Vick is just not capable of running it. So, sorry, Philadelphia fans, but that’s how I feel.
Anyway, come and visit us online at www.stansberryradio.com. You can subscribe to our ____ list by just putting your e-mail in a little box. We’re gonna send you the latest offers on our newsletters in S&A, including mine. I’d also like if you’d ____ podcasts and transcripts. Again, the e-mail address is stansberryradio.com. If you need to e-mail me, about this podcast, questions or feedback, you could do so at [email protected] That’s [email protected]. Thank you so much for listening. Enjoy the week, be safe, and I’ll see you in seven days. Take care.
Announcer: The information presented on S&A Investor Radio is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.
Announcer: S&A Investor Radio is produced by Stansberry & Associates Investment Research, the leader in investment newsletters.
[End of Audio]