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Weekend Edition

You'll never guess which two companies are on Porter Stansberry's 'Black List'
Saturday, January 18, 2014

 Porter Stansberry thinks the market could fall 50% (in terms of earnings multiples).
 
 As he has said many times... Porter believes the massive amount of money the Federal Reserve has printed since the financial crisis will cause interest rates to rise. And rising interest rates push the earnings multiples of stocks down.
 
 Porter also highlighted the froth he sees in today's market by focusing on Internet retailing giant Amazon. He wrote:
 
Do you think a private company that's valued at almost $200 billion can really increase in value by 50% in a single year? Do you think that any private business – which must face constant competitive pressures – is really worth 56 years of operating cash flows or 150 years of earnings?
 
No business in history has ever deserved to be worth this much... and certainly not an Internet retailer. Retailing is an absurdly tough business. It's akin to business suicide. Amazon – the most dominant Internet retailer in the world by a huge margin – produces a return on equity of only 1.5%. And yet investors are paying 20 times book value (today) to own this stock. I doubt those investors are going to do well over the long term...

 Today, we'd like to bring your attention to another company sporting an absurd valuation. Unlike Amazon, which has risen to become the dominant Internet retailer, this other company hasn't proven its chops. It's still in its infancy.
 
The company is 3D Systems (DDD), a 3-D printing company. We admit, 3-D printing offers huge growth potential. (Bulls argue we could see a 3-D printer in every home, but we doubt it.) Today, DDD sports a $9.5 billion market capitalization. It currently trades for around 20 times sales and 72 times forward earnings.
 
Consider this... In Porter's monthly "SIA Black List," which he publishes in Stansberry's Investment Advisory, he lists companies with a $10 billion market cap trading at more than 10 times sales. The more companies that appear on the Black List, the frothier the market, he argues.
 
DDD is trading at two times Porter's gauge for an absurdly expensive, large-cap company.
 
Take a look at this two-and-a-half-year chart from DDD:
 
 
 Hedge-fund manager Whitney Tilson – whose firm, Kase Capital, is short DDD – recently returned from the Consumer Electronics Show (CES) in Las Vegas. He sent this update on DDD to his private e-mail list:
 
DDD... had the largest booth in the 3D-printing area of the convention hall (which included maybe 15-20 companies), filled with all sorts of printers, ranging from the new Cube (which it says will retail for under $1,000) on up. The printers were all furiously at work – but doing little more than producing little plastic trinkets.
 
I was really expecting to find myself lusting after one of these machines, but was sorely disappointed. I understand 3D printing's usefulness for industrial uses like producing prototypes – a business that's been around for many, many years – but utterly fail to see any chance of widespread consumer adoption. Yet the hype and valuations in the sector presume that 3D printing is going to be as revolutionary as the iPhone or iPad. What a crock!
 
My other big takeaway from spending an hour in the 3D printing area of CES was the fierce competition – more than a dozen companies were showing off 3D printers that appeared very similar to those of DDD. Heck, there was even a low-end, generic Chinese manufacturer with a printer for $499. In short, this looks like a business that is already becoming highly commoditized – which likely explains why DDD's margins have declined for each of the past two years.

 Tilson also pointed out that DDD announced it appointed will.i.am, a member of the music group the Black Eyed Peas, as its chief creative officer. Tilson said it reminded him of when Blackberry named musician Alicia Keys its global creative director in January 2013.
 
Since the announcement, Blackberry's stock has fallen from $16.60 to around $8.50 a share today. (Blackberry ended its deal with Keys this month.)
 
 Even the bulls say DDD is getting long in the tooth... Analysts from investment banking firms Needham & Co. and FBR Capital Markets placed price targets of $100 and $98 a share. (DDD is currently about $92 per share.)
 
 Small Stock Specialist and Phase 1 Investor editor Frank Curzio also attended the CES. Frank was particularly enthusiastic about a new technology in an already widely used consumer electronic. From a recent Growth Stock Wire:
 
But one of the biggest trends this year was an innovation of a product you already use every day...
 
Thousands of ultra-high-definition and "4K" televisions were on display at this year's CES. These are super-high resolution TVs where the picture is almost life-like. 4K televisions have screen resolutions four times today's high-definition televisions.
 
I expect this technology to spur the next major replacement cycle in TVs.

 You can read Frank's full essay here.
 
 The "Draghi Asset Bubble" – the rise in European asset prices thanks to European Central Bank chief Mario Draghi's adoption of the monetary policies established by Federal Reserve Chairman Ben Bernanke – is in full swing...
 
Shares of the iShares MSCI Spain Fund (EWP), which holds the stocks of many of Spain's largest companies, hit a two-year high last week.
 
Also, at its first government bond auction of the year, Spain recently sold nearly $7.2 billion in five-year debt – more than its target. The maximum yield on that debt was 2.411% – the lowest yield Spain achieved since adopting the euro currency. The previous low was 2.644%.
 
The auction came the same week as an oversubscribed bond sale from Ireland. On the same day, Portugal and Spanish bank Bankia also tapped the debt markets.
 
Sentiment in Europe is improving...
 
 Despite the rising prices and bond-market confidence, European blue-chip stocks are still cheap. Steve Sjuggerud, who originally recommended European blue chips in the November 2013 issue of True Wealth, updated readers in the most recent S&A 16 (a model portfolio we send out quarterly for our lifetime S&A Alliance members):
 
European blue chips are coming off dividend yields around 3.5%. Based on history, buying near those levels can lead to big gains. On average, 113% gains in just 2.8 years are possible. And it isn't just dividends...
 
European blue chips are also cheap compared with their own earnings history. Based on next year's earnings estimates, the Euro Stoxx 50 – the index where most of Europe's blue chips trade – is 17% cheaper than its 10-year average price-to-earnings (P/E) ratio. The same is true when we look at the price-to-book (P/B) ratio.
 
History shows European blue chips have a tendency to soar from these levels. And we have the opportunity to buy these stocks at an 18% discount to their 20-year-average price-to-book value.

 I asked Brett Aitken, co-editor of Stansberry International and a Barcelona resident, for his thoughts on Spain's recent performance. Brett and Porter dedicated the latest issue of Stansberry International to Spain.
 
He said the rising stock prices and lower bond yields are "clearly very promising for Spain."
 
Cheap credit in the early 2000s led Spain to its own financial crisis in 2008-2009. But lately, Spanish economic sentiment is improving. Exports are rising. And yields on 10-year debt have fallen from 5.5% to a little more than 4% in the past year. In addition, Spain is starting to attract major investors. From the issue:
 
Interest in the property sector is also heating up. Over the past few months, we've seen large private-equity funds – like Blackstone Group – and big institutional investors – like Goldman Sachs – investing in Spain. This past week, legendary investor George Soros and "Bond King" Bill Gross, who manages the world's largest bond fund for the investment management firm PIMCO, have signaled their intentions to enter the market.

 Brett recently traveled to New Zealand, Australia, and Singapore. He told me the folks he spoke with in those places are still skeptical about investing in Spain, which he takes as a bullish sign.
 
Everyone I spoke with about investing in countries like Spain looked at me as if I had three heads. That tells me it's still way off the radar for most investors. But once I explained our investing approach in our new publication... and the opportunities that exist, the conversation turned. Their interest grew.
 
Bargains are tough to find right now in some of those markets I visited. I'm sure we'll see investor interest continue to grow in places like Spain as global investors start looking for better buys than they can get in other developed markets.

 Brett recommended a Spanish energy company he thinks could rise by 60% over the next 12-18 months... and still represent a fair value. This company has a 155-year history. It's growing, and it's extremely well-managed... And it just secured another 544 million-euro contract to add to its 2 billion-euro backlog. Plus, it pays a 6.8% annual dividend (higher than almost anything you can find in the states).
 
Right now, Stansberry International is only available to our lifetime subscribers to Stansberry's Investment Advisory and S&A Alliance members. But we're currently offering readers 30 days to test Stansberry International (including access to all back issues). In fact, we're giving readers 30 days to test more than $2,000 worth of our research as part of our first-ever "Focus Group." You'll get access to research from Porter, Dr. David "Doc" Eifrig, Steve Sjuggerud, Frank Curzio, Matt Badiali, and Dan Ferris (whose research alone costs $1,000 a year).
 
But you'll only pay $49 to sign up. You can learn the details here.
 
Regards,
 
Sean Goldsmith
 
Editor's note: The Weekend Edition is pulled from the daily S&A Digest. When you register for our Focus Group, you can take a look at all of our best-selling work for 30 days... for just $49. To learn more about this opportunity – which gives you access to Brett's 60%-upside recommendation – click here. But don't delay... this offer is only good for a limited time.




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