This Indicator Says One of the World's Greatest Businesses Is 'on Sale' Today

How to safely double your money in stocks... A strategy that is tailor-made for today's expensive market... What happens when the stock and bond markets disagree?... This indicator says one of the world's greatest businesses is 'on sale' today...


In September, Porter and his team of analysts introduced a remarkable idea...

It's simple, yet it offers the rare chance to safely earn 100% or more in today's expensive market. It involves a situation they call a market "bounce back." From the September issue of Stansberry's Investment Advisory...

We've become fascinated with the concept of a market "bounce back" – which we define as when a stock falls 50% or more... and then bounces back to its previous level. Mathematically, these stocks double just by getting back to the levels where they previously traded.

It's common sense... really, just basic math. But it's incredibly important: A stock price that's been halved will double simply by bouncing back to where it traded before. These are companies that don't need to soar to new heights... They just need to get back to where they were.

Of course, finding these situations is easier said than done...

As they noted, not every stock that plunges 50% will rebound. Many times, the decline is justified... And the stock is headed to zero. Sometimes the drop brings expensive stocks down to a more reasonable valuation. And sometimes a company is facing a multiyear "macro" headwind.

But many stocks do bounce back. And Porter's team spent months to figure out exactly why. As they explained...

Over the past year, our team has spent more than 1,000 hours looking at thousands of companies that fell more than 50%. We were looking for traits that the "bounce back" companies shared – a signal that the drop is temporary.

For months, we mainly hit dead ends. We noticed many bounce-back companies were due to accounting restatements. But nobody maintains a list of "restated" companies... and it's not easy to make one. We raided the U.S. Securities and Exchange Commission's filing databases, compiled a population of restated companies, and began to back-test. So far, it has been a dead end. Most of these companies bounced... but it often took far longer than we would have expected... and the catalysts were unpredictable.

We looked at "one-time problem" bounce-backs – like retailer Target (TGT) after the data breach in 2013, or fast-casual restaurant chain Chipotle Mexican Grill (CMG) after its food-borne illness scare. We even looked at stocks that dropped after short sellers posted online hit pieces. The information was valuable... but we weren't able to spot any reliable triggers.

And then finally... a breakthrough. As often happens, it came when we weren't even looking for it. We found a reliable bounce-back indicator that has worked hundreds of times over various back-tested periods.

What was this 'indicator'?

Again, it was simple: It was the bond market.

You see, a few months earlier, Porter's team of bond analysts became fascinated with a different scenario that plays out far more often in the markets. They wanted to know what happens when the stock market and the bond market disagree about a company...

Sometimes, the price of a stock sells off sharply, but the company's bonds maintain their value. In other words, equity investors lose faith in the stock, while bond investors remain confident in the company's future.

But we wondered... does this divergence tell us anything?

So they dug into the data and looked for every instance they could find. And what they discovered was incredible...

Our team has studied more than 1,000 situations when a stock fell more than 50% over a short term. And in hundreds of those scenarios, the bond market "disagreed" with the stock investors. As the chart below demonstrates, investors who bought shares when the market had given up on them routinely doubled their money (or better)...

The black line is a representative index of various "bond market disagreed" situations that occurred in stocks from 2010-2014. The horizontal axis represents the number of months from when the stock market first began to sell off these stocks.

You can think of it like this. On average... the stocks in this "bond market disagreed" population were trading at $100 a share and dropped to $40 a share. (That's a 60% loss.) Within two years, this "average" stock was trading for $89 a share... that's 11% below the pre-fall levels. But it's more than a double from the low. ($89 is 123% higher than $40.)

Now, to be fair, you're not likely to buy at the precise bottom every time...

But these data show you don't need perfect timing to earn huge gains from this strategy. In fact, even if you only catch half the move on average, you'd still dramatically outperform the market...

Of course, nobody is going to consistently buy at the exact low point. But this research demonstrates that these stocks bounce back quickly and drastically. Even if you time your entry at such a point where you do half as well as buying at the exact low... you'd still be making around 60% over a two-year period.

Our bond team had stumbled upon the greatest "bounce-back predictor" we'd ever seen. When a company's stock falls but its bonds don't... the stock market almost always ends up "agreeing" with the bond market, and shares bounce back toward their prior levels.

What accounts for this strategy's remarkable track record?

As the team explained, it's likely due to a few big differences between bond investors and typical stock investors.

First – at the risk of angering many of our readers – bond investors simply tend to be smarter than stock investors...

This isn't our opinion... it's an old market adage. The results above certainly suggest that it's true. Buying bonds is boring and difficult. And it's almost impossible to make huge "home run" type gains overnight in the bond market. But bond investing may be the best way to compound wealth over time...

For this reason, the bond market attracts a different kind of investor. Mainly, the bond market is filled with institutions like banks, insurance companies, and pension funds. This is the small group of investors we talked about earlier. It's made up of stodgy old organizations that have no emotional attachment to their capital.

Longtime readers know we've been publishing bond research for more than a decade. It's something our firm takes seriously. And it has paid off for our subscribers. As Porter's team continued...

Our bond letters have compiled some of our company's finest track records. Those of you that read our current bond letter – Stansberry's Credit Opportunities – know that it is incredibly difficult to ferret out values in the corporate bond market. Out of 40,000 offerings, we're lucky to find a couple dozen to research. And even fewer warrant recommendations.

With this background, the study above made perfect sense. As researchers who follow both markets closely, the old adage about bond investors felt like it was probably true. But the data prove it. When the stock market and bond market disagree about a company, it's the stock investors – not the bond guys – who end up changing their minds.

In particular, stock and bond investors are often focused on different things...

Stock investors tend to follow metrics like revenue growth and earnings per share. But bond investors are obsessed with the most important measure of a business' health: free cash flow (or "FCF")...

We've preached for years that cash flow is what matters above everything else... Revenue growth is great... but it's worthless if it doesn't generate additional FCF. Look at it this way:

If you owned 100% of a business, would you rather it generate $5 million in revenue and $50,000 in FCF... or $1 million in revenue but $500,000 in FCF? Clearly, you'd want the business cranking out $500,000 in cash, despite the lower revenue.

That's why FCF is sometimes called "owners earnings." It's the take-home cash left for owners after paying all the bills and making all necessary capital investments. If you owned the business, that cash would be about the only thing you cared about.

But stock market investors aren't stupid...

While they tend to be jumpy and more emotional than bond investors, they eventually get things right. And this is what ultimately drives prices higher again...

To get that all-important bounce-back, stock investors have to capitulate, acknowledge their overreaction, and drive up stock prices by buying shares.

As a group, stock market participants are skittish. They're quick to react to any scrap of news. But they aren't stupid. If a business continues to perform well despite their worries, eventually the stock investors come around...

That's what legendary value investor Ben Graham meant when he said in the 1930s: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

Again, these situations are relatively rare...

But right now, this bond market indicator is flashing "buy" on one of Porter's favorite stocks in the market.

It's a cash-gushing, capital-efficient business with one of the most valuable consumer brands in the world. Yet shares have plunged about 50% over the last few years, pushing the company's valuation to historic lows.

You see, this company was overexposed to the "death of retail" trend we've been following in the Digest. It was reliant on dying department stores for a significant percentage of its sales.

However, despite a nearly 10% drop in revenues over the past two years, the company's free cash flows haven't suffered. In fact, they've actually grown by double digits over that time. Better yet, the company is already taking steps to turn things around.

In short, Porter's team believes the market is overreacting. And the bond market appears to agree... While the stock has been cut in half over the past two years, its bond prices have barely budged.

If history is any indication, investors have the rare chance to safely double their money or more in one of the world's greatest businesses today.

Stansberry's Investment Advisory subscribers can read the September issue for all of the details right here.

If you're not yet a Stansberry's Investment Advisory subscriber, you can get instant access to the September issue with a 100% risk-free subscription. Click here to learn more.

New 52-week highs (as of 11/6/17): Apple (AAPL), Amazon (AMZN), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), CBRE Group (CBG), Emerging Markets Internet & Ecommerce Fund (EMQQ), Eaton Vance Enhanced Equity Income Fund (EOI), Grubhub (GRUB), Huntington Ingalls (HII), ETFMG Prime Mobile Payments Fund (IPAY), KraneShares Bosera MSCI China A Fund (KBA), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), Microsoft (MSFT), Nvidia (NVDA), iShares MSCI Global Metals & Mining Producers Fund (PICK), ProShares Ultra Technology Fund (ROM), Sabine Royalty Trust (SBR), ProShares Ultra S&P 500 Fund (SSO), Tencent (TCEHY), ProShares Ultra Semiconductors Fund (USD), short position in Sprint (S), and short position in GGP (GGP).

A quiet day in the mailbag. What's on your mind? Let us know at feedback@stansberryresearch.com.

"Just wanted to say how much I enjoy Stansberry Investor Hour. It is my favorite part of being an Alliance member. Any time I can listen to Porter opine on any subject, it is a pleasure. He forces me to think harder and smarter. Buck makes a great partner as he has his own niche of expertise. I'm guessing you make very little money doing this but it is much appreciated." – Paid-up Stansberry Alliance member Glenn G.

"Thanks for the heads up on 'chained CPI.' The question is, will they try to use this for COLA in Social Security, annuities, etc.?" – Paid-up subscriber Patrick Roache

Brill comment: The government has already explored indexing Social Security and other benefits to chained CPI. It hasn't done so yet... But given its soaring debts and the potential for massive price inflation down the road, it may just be a matter of time.

Regards,

Justin Brill
Baltimore, Maryland
November 7, 2017