- Boo-birds abound for Apple, but today, you’ll learn why it’s a buy
- Meanwhile, a proven pick from 2012 is a favorite for 2016
- Also: The giant that “belongs in every portfolio”
- So that’s what the FBI means by Silicon Valley changing its “business model”
- The TSA buys time before its driver’s license crackdown
- Getting down to earth as a reader says we’re “speaking from on high”
Before we launch into today’s episode in earnest, let’s quickly get some “meta” stuff out of the way. (Longtime readers, you can skip ahead to 00:25.)
We have a longstanding policy at The 5 — going back to when our fearless leader Addison Wiggin launched this e-letter in April 2007. Our analysis comes free. Our advice and specific recommendations, you have to pay for. That’s how we keep our independence from Wall Street and avoid kowtowing to advertisers.
On rare occasion, we break from this policy. Today, as you might have gleaned from the subject line, is one of those days. Consider it an act of goodwill. We hope you like what you see and you’ll consider adding another paid subscription to the one you already have with us.
And if you already subscribe to one of the newsletters whose picks we’re spotlighting today, we hope you don’t object too strongly. Two of the companies are as blue as blue chips get these days. The third we’ve mentioned before… and it’s a buy once again.
So with that out of the way, let’s jump right into your three free picks.
You don’t have to look far these days to find negative headlines about the world’s biggest company as measured by market cap.
“Apple Has Tough Road Ahead: Analyst,” says CNBC. “Shareholders Should Be Very Worried,” says a Forbes contributor.
To no small degree, those headlines are a function of short-term tunnel vision: In recent months, Apple’s been merely keeping pace with the rest of the stock market. Or as one wag put it at Macworld magazine, “Apple’s stock is performing about as well as the market overall, so clearly it’s time to panic.”
Too, there’s the fact AAPL has become, well, the world’s biggest company as measured by market cap. “Apple’s best growth days are now squarely in the rearview mirror,” says our income specialist Zach Scheidt. “Apple’s sheer size makes it impossible to continue to grow at the same rate it has in the past.”
But that’s not a bad thing if you want to pull down reliable income: With AAPL, you claim a stake in a $205.7 billion pile of cash.
Apple doesn’t need as much cash as it once did. “There is less of a need to invest in projects that will help the company grow,” Zach explains, “because there are fewer growth opportunities now available. At the same time, more cash is coming into the company. This is because the company already has an established business with reliable sources of income and a large base of customers.
“Since mature companies don’t need to invest their cash in growth opportunities, they are free to distribute that cash to investors.”
Steve Jobs jealously guarded that cash hoard during his tenure at Apple. But less than a year after his death in 2011, AAPL started paying a quarterly dividend. It wasn’t much, and it still isn’t — about 1.9% based on today’s stock price.
But “things are about to get much more interesting for Apple investors,” says Zach.
“On April 27 of this year, Apple announced that the company would expand its ‘capital return program’ to a cool $200 billion. Through this program, Apple is using its large cash balance to increase dividends to investors and to repurchase shares of stock. By March of 2017, Apple will have paid out $200 billion to investors.”
The buybacks will juice the dividends. “With fewer shares outstanding,” Zach explains, “Apple’s income (and dividend payments) is spread out among fewer shares. This means more income (and larger dividends) for every remaining share of AAPL.”
And Zach is confident Apple fanboys will continue to drive sales. “Apple is one of the few lucky companies that can literally create its own demand simply by introducing new products.”
Zach believes Apple’s share price could double over the next two years… and its dividend payments could grow 150%. His full case for AAPL can be found in the most recent issue of Lifetime Income Report.
“This is a favorite for 2016,” says Chris Mayer of what happens to be an old favorite — Kennedy Wilson Holdings (KW).
KW was Chris’ way to play “the biggest fire sale in history” at the start of 2012. That’s when European banks were desperate to unload assets — especially property — to raise cash and shore up their balance sheets.
By the time we first mentioned it in The 5 in October 2014, Chris’ readers were up 118%. Since then, KW has continued to appreciate — but not as dramatically. Now, Chris says the stock is poised for another strong move.
“KW buys, sells, owns and manages real estate assets,” he reminds us. “It has $17 billion under management. These assets are mostly in the U.S., U.K. and Ireland. Kennedy Wilson bought them opportunistically, at discounts, often from banks looking to unload them. Then they improve the properties, enjoy the cash flow and sometimes harvest the gains.
“We were fortunate to buy KW at a price well below net asset value at the time. Luckily, the opportunity to buy KW below net asset value has opened up again. By a variety of measures, Kennedy Wilson is worth at least in the range of $31-33 per share.” [As we write this morning, you can snag it for $24.30.]
“And that NAV is growing. Even just a 15% growth rate puts net asset value at $36-38 per share at the end of 2016. That’s a potential 2016 return of nearly 50% if the stock should trade for NAV, as it has frequently done in the past.”
KW’s performance illustrates the power of compounding — so essential to achieving a 100-baggers that Chris pursues for his readers.
“We want to own businesses that can compound returns at a high rate for a long time. After that, it’s just math: 25% for 20 years gets you 100x, for example.” Chris’ readers who bought four years ago have earned an annualized 33%.
Meanwhile, “KW just had the biggest acquisition year in its history,” Chris tells us. “Plus, I think the people here are worth investing alongside. Officers and directors own almost 20% of the stock. The largest shareholder is Bill McMorrow, the CEO, a talented deal maker and investor who created the company from almost nothing. Exactly the kind of guy you want to find and stick with.”
Chris’ full re-recommendation appears in the current issue of Mayer’s 100x Club. Subscribe now and get a free copy of his book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them. Just enter the password “mayers100x” at this link.
“Firms are often founded based on an innovative idea, and once it runs its course, they founder and die of old age,” says Ray Blanco of our science-and-wealth team.
This is what makes Johnson & Johnson (JNJ) such a standout. It’s been around for 129 years. “Innovation — and good timing — has proven a key to J&J’s continued success over the decades,” Ray says.
“With over $8.5 billion invested last year, it remains an innovation powerhouse. In fact, J&J has founded innovation incubators all over the world. For example, in San Diego, it has a 40,000-square-foot incubator under its Janssen subsidiary called JLABS. Here, it hosts 30 young companies, providing everything up to large-scale laboratory facilities.”
More JNJ incubators can be found in San Francisco, Massachusetts, Canada and Israel. “J&J-funded startups are working on everything from Alzheimer’s to autoimmune disorders,” Ray goes on.
“All this research and development is paying off. J&J has launched 14 new pharmaceutical products since 2009, seven of which are on track to break $1 billion in sales this year.”
JNJ is up 5.4% in the six months since Ray recommended it in Technology Profits Confidential… while the S&P 500 is down a touch. “JNJ belongs in every portfolio,” he says. “This iconic American company is one that every long-term investor should own.”
Now to the markets… where for lack of any other excitement, the burning question is whether the S&P 500 will end the year slightly in the red or slightly in the green.
Yesterday, it closed slightly in the green for 2015. As we write this morning, it’s still in the green, but not as much — 2,072. Gold has retreated to $1,061.
Again the big mover is crude — down 3%, at $36.69. The move is fueled both by the Energy Department’s weekly inventory report and a statement from Saudi Arabia’s energy minister that keeping the spigots wide open “is a reliable policy, and we won’t change it.” So there.
We have a better idea this morning of just what the hell FBI director James Comey was talking about when he said Silicon Valley needs to rethink its “business model.”
That was back on Dec. 9, when he once again sounded the alarm about end-to-end encryption — which Apple and Google use to secure the latest versions of iOS and Android from hackers and other bad actors. Comey doesn’t like end-to-end encryption because it also locks out the feds.
For a long time, Comey and other government types have tried to argue that if Silicon Valley just tried hard enough, it could come up with a way to let the feds in and keep everyone else out. Not possible, said Silicon Valley execs — who, unlike government officials, must live in the reality-based community.
We raised an eyebrow earlier this month when Comey told Congress made the cryptic remark that “it’s not a technical issue… It’s a business model question.”
“FBI Seeks to Reframe Encryption Debate,” says a front-page story in today’s Wall Street Journal.
“Hoping to escape a continuing debate over the technical feasibility of decryption, which they fear plays into Silicon Valley’s hands, FBI Director James Comey and others are pushing executives to move away from a policy they say values customers’ privacy over public safety…”
“Challenging tech CEOs like Apple Inc.’s Tim Cook directly suggests that Mr. Comey could be laying the groundwork for a push in Congress for legislation that would force the companies to change their products.”
So there you have it: Changing a “business model” means knuckling under to the feds… and opening up the country’s entire communications infrastructure to hackers and foreign governments. Now we know…
Now another 5 business travel update addressing the “Will I need a passport to take a domestic flight?” question.
As of Jan. 10, at least nine U.S. states will be in defiance of the 2005 Real ID Act. Their driver’s licenses won’t meet standards laid out under the law. The practical effect is that the land of the free would now require an internal passport — at least if you lived in those states and wanted to take a domestic flight.
This week, Homeland Security put out an updated FAQ at its website: “DHS will ensure that the traveling public has ample notice (at least, 120 days) before any changes are made that might affect their travel planning. Until enforcement at the airports begins, the Transportation Security Administration (TSA) will continue to accept state-issued driver’s licenses and identification cards from all states.”
Hmmm…. As we suggested back in September, it’s possible the DHS is buying itself time — knowing the uproar that would ensue if tens of thousands of people were denied access to air travel. “Unfortunately for all of us,” we quipped, “the feds know exactly how far they can push things before the governed withdraw their consent.”
“Kill and burn a goat, let’s get this show rollin’,” reads the intriguing subject line of a reader’s email.
The reader was a little put off yesterday when we updated what we called “one of our biggest forecasts at the start of 2015 — stresses in the junk bond market that will, in later years, set off the next financial collapse.”
“To us little people,” the reader writes, “the words ‘in later years’ is like words spoken from on high.
“Is this a prediction? If so it differs from other tea leaves you have read. I know we can’t expect you to name time and dates of the first domino to fall, but we read a lot into what you do say.”
The 5: Here’s what we can say with certainty: Another financial crisis is baked into the cake because the politicians and central bankers papered over the last one.
Yes, timing is tricky: There’s been no shortage of Internet screamers in recent years who swore up and down the next crisis was around the corner in 2010… 2011… 2012… all the way up till now.
We, on the other hand, have had to be more circumspect — knowing real people were counting on our guidance to make real financial decisions and not to “get their doom on.” We like to think we’ve done a good job of that — i.e., identifying gold’s breakdown at $1,650 in early 2013 and spotlighting biotech plays that outperform even a torrid biotech market.
The period 2012-14 was one we gave the name, “Tale of Two Americas.” Innovations poured forth from Silicon Valley, from biotech, from the shale energy patch — even as the unresolved rot from 2008 continued to fester.
Late last year, we said the Tale of Two Americas had nearly played itself out. We were headed into less certain territory. 2015 has certainly borne out that call.
And what of 2016? We turn to our fearless leader Addison Wiggin, writing today in The Daily Reckoning: “If you take heed of Jim Rickards’ and David Stockman’s’ current forecasts, the next shoe to drop is going to be a doozy.
“With luck and hard work, the ideas we publish will be unique and will benefit you in ways you cannot find anywhere else on the Internet or in print. Ideas that we guarantee in writing will make you richer, happier, healthier and more successful… even in the face of what are likely to be hard times.”
We’ll be with you each day and every step of the way…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. If the three picks in today’s episode of The 5 resonate with you, we’d like to draw your attention to something we call the Agora Financial Advisory Reserve.
The Advisory Reserve gives you lifetime access to all six of our entry-level newsletters. In addition to the three we spotlighted today, you get Jim Rickards’ Strategic Intelligence, Penny Stock Fortunes and Outstanding Investments.
And you get that lifetime access for a low one-time membership fee. It’s an unbeatable value if you’re a buy-and-hold kind of investor who doesn’t want to step out too far on the risk curve. Details here.
