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Weekend Edition

The Best of The S&A Digest
Saturday, February 6, 2010

Peter Schiff... Marc Faber... Jim Rogers... All these famous gurus are predicting a market crash is imminent.
 
I would have thought all three of these market veterans would know better than to waste time on market predictions. But they're all on TV and I'm not, so who's really wasting time?
 
I can't tell you with any certainty that the market is going to drop. Nor do I know anyone who has ever been able to do that. If Schiff, Faber, and Rogers were being honest, they'd tell you predicting market drops isn't a skill they have. It's just a big, fat guess, designed to get them more of the media attention they all seem to crave.
 
I can't predict the future of stock prices, but I don't need to. U.S. stocks have been overpriced for months. The Wilshire 5000 index represents the entire U.S. stock market, from ExxonMobil down to stocks of less than $1 million in market cap. Recently, the Wilshire has been trading for over 35 times earnings.
 
It's hard to find cheap stocks with the whole market trading for 35 times earnings. If I approach you with an opportunity to buy a business at 35 times earnings, you should laugh and walk away.
 
That explains why I haven't made a new long stock recommendation in my Extreme Value newsletter since I recommended IMS Health at $13 a share in August 2009. A buyout offer – the second one of the year for an Extreme Value stock – pushed IMS Health's share price up nearly 70% in less than three months.
 
IMS Health is a market-dominating business that tracks 90% of U.S. prescription drug transactions and stores the information in a one-of-a-kind database that's been 50 years in the making. Big Pharma can't survive without this information. IMS Health was selling for around five times its ample free cash flow. It was a no-brainer, a one-foot hurdle you could step over (unlike all the 10-footers out there today). You didn't have to take a big risk to make a big, fast return.
 
With Komrade Obama contemplating a government takeover of the entire health care system, comprising 16% of the U.S. economy, no wonder another high-quality, cash-gushing health care stock has gotten cheap enough to become my first new Extreme Value buy recommendation in six months. When I see a great business selling for less than six times free cash flow, with zero debt and one-third of its market cap in cash... well... that's what I sit around waiting for. It's a stock I can't say "no" to.
 
The main thing that's different about what I do is simply that I'm willing to say "no" on your behalf. I'm willing to admit when there's nothing good enough and cheap enough to recommend.
 
You probably don't think much about this, but the failure to say no is one of the worst things brokers, banks, and other financial-service providers do to you, their client. They fail to tell you option-ARM loans, 20%-plus variable-rate credit cards, high-cost mutual funds, and other risky financial products are set up to make you poor and them rich.
 
Nobody ever says, "Please don't buy this product from me. It's not a good idea for you."
 
Consequently, there's a huge, wide-open market for saying no on your behalf. I've found virtually zero competition there. My readers see me doing it when they open six straight issues of Extreme Value without seeing a new long stock pick. That probably feels a little disappointing... though I doubt it felt disappointing when they made more than 240% in a few months on International Royalty (the other Extreme Value buyout target from last year).
 
Saying no so often certainly does me little good. I could sell a lot more newsletters if I were permanently bullish and focused more on the persuasiveness of my writing than the quality of my research. I don't see how that benefits you, so I don't do it. Should I work myself straight out of a job by making Extreme Value too difficult to sell, hey, at least I'll leave with a clear conscience, not to mention a better track record than most of the competition.
 
If you want to know which stock out there today is good enough, cheap enough, and safe enough that I can't say no on behalf of Extreme Value subscribers, just read the February issue, which comes out Friday, February 12, after market close.
 
Regards,
 
Dan Ferris




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