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Weekend Edition

The Best of The S&A Digest
Saturday, August 22, 2009

If I ran the Wall Street Journal, I'd shut it down for a week and fumigate the place... At the very least, I'd ban the phrase "above analysts' expectations." This phrase is such an obvious and well-known scam, I'm shocked it's still allowed in print. I would call Wall Street analysts a bunch of whores, just like our senators and congressmen... but that does real whores a disservice. Then again, a whore's expectations are about as low as a Wall Street analyst's these days, so maybe it's a good fit after all.
 
Take Home Depot, for example...
 
Home Depot, the world's largest home improvement retailer – and a bellwether for both the retail and housing sectors – announced "better than expected" earnings of $1.1 billion for the second quarter. Of course, the most prominent feature of its earnings is that they were below last year's second-quarter earnings of $1.2 billion... just like almost every other company that has beat analysts' expectations. (Wall Street analysts' perennially low expectations must make them wonderful marriage partners.)
 
But headlines – in this case, Home Depot 2Q Profit Beats Expectations – can be misleading. The headline doesn't tell you a huge chunk of Home Depot's earnings came from one-time cuts. About $410 million of total earnings (37.3%) came from cutting costs and tax settlements.
 
And of course, like so many other companies, Home Depot's sales fell 9.1% to $19.1 billion. Sales from stores open more than one year (comp sales, a key retail measure) dropped 8.5%.
 
So in reality, Home Depot's sales are down a lot, profits are down a little (buoyed by cost cutting and tax settlements), and comp sales are down a lot...
 
If Home Depot keeps turning in "above expectations" performances like this one, it should be completely out of business in about 10 years. Mr. Market reads the daily news and swears by every word, bidding Home Depot shares up more than 3%.
 
Just so we're clear on what really happened at Home Depot: Less money came in the door. Period. It sold less. It earned less. And this ain't poetry or painting: Less isn't more in finance. In finance, less is less. Why does the Wall Street Journal do such a miserable job of telling you this? It's not even trying to hide its attempts to slip more happy pills into Mr. Market's morning coffee.
 
Insiders are pouring into the latest Inside Strategist recommendation... In less than a week, the three-top executives at this major technology firm bought $4.3 million in stock. And according to one company insider, these same three executives have loaded up on price dips in the past – and made millions. We think they're about to make millions more...
 
If shares simply return to historical valuations, Inside Strategist readers will make 300%. And that doesn't factor in the company's enormous growth potential... In the future, do you think more or fewer people will be watching movies and listening to music online? We can say, with near certainty, the answer is more. And this company will be the No. 1 beneficiary of the need for increased bandwidth and storage capacity.
 
This could be one of our biggest winners of the year. 
 
As you might have heard... I was invited to ring the bell at the New York Stock Exchange opening on Monday morning, along with Steve Sjuggerud. Yes, we worried this might mark the top in the market for Stansberry Research. Like I told our friend Rick Rule, the legendary resource investment banker, back in 2007: It's awfully hard to be contrarian when you're popular. But there's a bit more to the story... and I think you'll find the explanation valuable.
 
Our old friend, Eduardo Elsztain, invited us to a ceremony at the NYSE. Eduardo, you may recall, is the head of a group of Argentine land and real estate holding companies. Over the last 30 years, Argentina has suffered one financial crisis after another – all caused by the same kind of politics that have come to America lately. Out of all of the speculators, investors, and business experts we know, nobody is better equipped or better prepared to make money in U.S. real estate over the next several decades than Eduardo, because he has literally been through this before – time after time.
 
We invited Eduardo to speak at Stansberry & Associates' Alliance conference last November in Hong Kong. We wanted him to tell our best customers what was about to happen in the U.S., and we wanted to give them the opportunity to invest directly with Eduardo, who was in the process of setting up his distressed U.S. real estate fund. This new fund, alongside Eduardo's listed company IRSA, just made its first big U.S. acquisition. To celebrate the deal, Eduardo was ringing the bell at the NYSE.
 
Here's what we were celebrating... IRSA, along with Eduardo's other investors, agreed to purchase 5.7 million shares (10.5%) of Hersha Hospitality Trust (HT) for $2.50 per share. Hersha owns 73 middle-market hotels in major metropolitan markets, primarily in the Northeast corridor. What did Eduardo see in Hersha? The company controls more than $1 billion in assets, but the stock has a market cap of less than $200 million. The stock is cheap because Hersha also has more than $800 million in debts.
 
Here's the interesting part: Nearly all of Hersha's obligations have low, fixed interest rates and maturities after 2012. Eduardo is essentially making a bet that between now and 2012 inflation wipes out the real value of these debts. Eduardo also got a little insurance. In exchange for the equity investment, Hersha granted Eduardo's group the option to buy another 5.7 million shares at $3 a share anytime before July 31, 2014 – though these options are capped at $5. Said another way, for an average price of $2.75, Eduardo is buying 21% of Hersha. That's roughly 15 hotels for $31 million – or about $2 million per hotel.
 
I did the same kind of analysis on MGM's 2005 acquisition of Mandalay Bay, where I calculated MGM was paying $2 million per hotel room. I'd much rather pay $2 million for the entire hotel than for a single room.
 
If Hersha survives this downturn, we estimate Eduardo will make his investors something between 400% and 1,000% on their investment.
 
Regards,
 
Porter Stansberry




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