Customer Service 1 (888) 261-2693
Please enter Search keyword. Advanced Search

If You Don’t Buy Blue-Chip Stocks Now, You Never Will...

By Porter Stansberry
Thursday, October 19, 2006

Most investors don’t understand my excitement...

Early this year, I noticed the world’s best companies were, inexplicably, trading at 20- or 30-year low valuations. So I did what any reasonable investor would do... I loaded up.

I mean that figuratively, of course. I’ve been “buying” the best blue-chip stocks I could find, all year long, by recommending them to subscribers of my newsletter, Porter Stansberry’s Investment Advisory.

In all, I’ve recommended eight bona-fide blue-chip stocks this year. And they’ve been very profitable, right out of the gate.

Most of my readers would probably prefer to learn about a small, high-tech widget maker that might, could, maybe will produce the next great gizmo... and see its share price rocket higher. Over the years, I’ve certainly found a lot of stocks like that. But that’s the hard way to invest. It requires taking on a lot of risk and making a lot of trades. As a result of frequent trading, you end up making Uncle Sam your partner. He takes a big cut of all your short-term profits. Like any respectable hedge-fund manager, he doesn’t care about your losses.

Let’s say you take a small part of your portfolio – $5,000 – and you begin trading risky stocks, cutting your losses quickly, and only moving into new stocks that are in definite uptrends. Let’s say you’re great at this kind of trading, among the best in the world.

In one year, you make five consecutive trades that all go up 50%. The first trade takes your capital to $7,500. Second trade gets you to $11,250. Third trade gets you to $16,875. Fourth trade gets you to $25,312. And the fifth trade takes you all the way to $37,968. (By the way, the only person I’ve ever known to actually compile winning streaks like this in his trading is Jeff Clark, who writes our S&A Short Report.)

At the end of the year, your trading partner, Uncle Sam, takes his cut. If you’re in the top bracket, that’s a 36% hit. Your actual profit was $32,968. But Sam takes $11,868. You get to keep $21,110. Sure, that’s pretty good. Not enough to live on, but a lot better than you could have earned in muni-bonds. So, you keep at it for another year...

The next trade you make is a biotech. Whoops. The company announces before the market opens that its Phase III product was a total failure. The stock falls 80% – before it opens. You can’t get out. All you can do is sell, because you’re afraid the stock will fall more. Your portfolio is now worth $4,222.

While the numbers I use above are hypothetical, I’ve seen that sequence of events happen to almost everyone I know who does a lot of trading. Very, very few people are cut out – emotionally – to be traders. Plus, with Uncle Sam as your partner, it’s simply very hard to win.

Now, let me show you what happens when you’re able to buy a world-class, blue-chip stock at a great price.

Let’s consider Anheuser-Busch (BUD), the blue-chip brewer I recommended in March. I thought it was one of the best investment opportunities I’d ever seen in more than 10 years as an investment researcher.

I won’t bother here detailing all of the reasons why I like BUD, except to say that it controls a market-leading position in the United States (and has held onto it since the 1950s). It has major investments in China, and, at the time of my recommendation, the stock was trading at such a low price that the company could have afforded to buy back all of its stock based on its cash flow. I certainly wasn’t the only investor to notice the situation: Warren Buffett was piling into the stock, too.

Talk about safe: BUD has paid a cash dividend every single year since 1933 (when prohibition was lifted), and for the last 10 years, it has bought back 3% of its shares outstanding annually. As a result, buying Anheuser-Busch when I recommended it would have produced a synthetic yield (cash combined with buyback) of more than 6% annually. That’s extraordinary, especially considering that the yield on the company’s outstanding debt is only 5.3%. Or, in other words, investors buying the stock were being paid more, annually, than the folks buying the company’s bonds.

Here’s the best part. The company typically earns about 60% a year on its balance-sheet equity, which is astronomical. Imagine if you could buy a mutual fund that’s earned 60% a year, on average, on its investments since the 1950s. It’s this company’s extraordinary profitability and capital efficiency that will produce outrageous long-term capital gains for its investors.

If you had bought Anheuser-Busch 20 years ago, you would have paid a split-adjusted $3.91. Thus, you would have earned 9,485% on your money so far – not including dividends. And, assuming you never sold any shares, you wouldn’t have paid a penny in taxes on these gains. They’ll continue to compound tax-free.

Anheuser-Busch is so safe, I told my readers that they could put up to 25% of their portfolio in the stock. In fact, the headline of my issue that month was “Will You Buy Enough?” Since my recommendation, the stock is up just about 19%.

This is how you really get wealthy investing.

There hasn’t been a better time to establish a handful of big, long-term positions in the world’s best companies since the early 1990s. With the Dow Jones Industrial Average breaking out to new highs, the bargain-basement prices on blue-chip stocks won’t last much longer.

If you don’t buy ’em now, you never will.

Good investing

Porter Stansberry

Recent Articles