September 29, 2014
This Forever Stock Is Ready To Soar... Thanks To Its 'Stealth Catalyst'
By Dave Forest
As you many of my long-time readers know, my boots-on-the-ground approach to finding the world's best investments has taken me all over the globe.
Recently, I found myself in Bangkok -- a Southeast Asian hotspot brimming with opportunity to launch new products and investments.
Surprisingly, though, it was in a small tailor shop down one of Bangkok's narrow side alleys that gave me the most inspiration.
DA cab driver -- who I'm sure the tailor had paid to bring potential clients to his shop -- dropped me off to have a look around. As luck would have it, I needed some new suits. And after finding the merchandise in the shop to be of good quality, I got down to the heart of the matter with the shop owner -- the price.
He opened with 30,000 Thai baht for two suits -- about $1,000. Not a bad price for a tailor-made item... but I'd seen better. We eventually haggled down to 26,500 baht, but I still wasn't convinced. And with a week to look around at other shops in the area, I started to head for the exit.
Then he made a final offer. "I'll throw in two ties." I hesitated just a second more...
"And a leather belt."
Sold. I shook his hand and reached for my Thai bankroll. I just love getting something for nothing.
There are a fair number of good businesses around the world. Businesses that, when you crunch the numbers from their financial statements and look at their operational performance, prove they have all the hallmarks of a company that generate value for their shareholders.
But sometimes, it's what is not on a company's financial statements that can offer the most value to potential investors.
I call these items "Stealth Catalysts" -- macro-events that have the potential to increase a stock's value through big tailwinds in industry, policy or politics. When you buy stocks with Stealth Catalysts, you're getting hidden upside value that's not factored into the stock's price -- like getting something for nothing.
Starbucks (Nasdaq: SBUX) is a simple, yet powerful example of a "Forever Stock" with a Stealth Catalyst where the upside is being missed by most investors.
Many investors already consider it to be one of the best businesses on the planet, both in growing its overall sales and in improving margins through operational efficiency and rising same-store sales. Last quarter for example, Starbucks grew its global revenue by 11% and saw its operating margins rise by 200 basis points to a record 18.5%.
But when you factor in Starbucks' Stealth Catalyst, the company's value becomes even more impressive.
You see, many international companies have taken a hit lately because of global currencies falling against the dollar. This means lower profits when international sales in yen, euros or rupees are converted back into greenbacks.
That's led to some malaise around international stocks, as compared with their domestic counterparts. Overseas indexes such as the iShares Emerging Markets Index Fund (NYSE: EEM) have lagged the S&P 500 by nearly 40 percentage points since January of 2013.
But thanks to Starbucks' Stealth Catalyst -- its unique foreign exchange management that hedges its exposure to the various currencies in the countries where it operates -- the company has seen very little loss on foreign exchange.
Starbuck's Stealth Catalyst has made it's overseas profits steadier and more reliable than the market gives it credit for. It's also what's helping the stock outperform its foreign and domestic peers that don't have this Stealth Catalyst (as you can see in the chart below).
And even with this hidden value from the Stealth Catalyst, you can still buy Starbucks at a discounted price and get the upside created by the firm's foresighted fiscal management systems for free.
That's a situation I love -- a well-positioned business with an unrecognized advantage. I'll buy those stories every time.
But Starbucks isn't the only company I hold with an impressive Stealth Catalyst.
Take Ensco (NYSE: ESV), a well-established leader in the global oilfield services sector.
With a 6.5% yield, this oil driller carries one of the best dividend yields not only its industry, but in fact across the entire stock market.
But that's only the start. There's plenty of upside that's not priced into Ensco's stock right now -- from structural changes happening in the offshore oil and gas sector.
And that's where the stock's Stealth Catalyst comes into play. Namely, through re-emergence of shallow-water drilling that's leading to unexpected profits for the company.
In general, most energy investors consider shallow-water target areas like the Gulf of Mexico Shelf to be low-impact -- with most of the big discoveries having already been made. The mainstream view is that deepwater drilling is where the industry's at today.
But -- quietly -- shallow-water spots are making a comeback. Advanced drilling techniques are helping to unlock millions or even billions of barrels of new reserves, formerly left behind. And it's not just in the Gulf of Mexico, but also other shallow-water locales like the UK's North Sea.
And it just so happens that Ensco is the world's biggest provider of the "jackup" rigs used in shallow-water drilling. That's a nice position to have, given the groundswell of activity that appears to be shaping up in this sector.
No one has recognized this upside in the stock. When I purchased the stock in February, Ensco was trading at just a 9.8 P/E multiple, a little lower than the industry average of 15.2x. It's been holding near that level since -- but I suspect there's a great deal of upside coming as the shallow-water drilling boom continues to unfold -- reflected in my target price of $82 for the stock.
By holding Ensco today, my Top 10 Stocks readers and I are getting a great business -- with big upside. It's a perfect example of a Forever Stock with a Stealth Catalyst.
But Ensco and Starbucks are just two Forever Stocks I hold that offer investors great additional value thanks to their unique Stealth Catalysts. One energy supplier I hold in my Top 10 Stocks portfolio is up 70% since March 2012, thanks to an unanticipated explosion of natural gas liquids from shale gas plays across the United States.
Another one of my holdings is up 91% since we recommended it just three years ago and is likely to return even more thanks to one of the most powerful Stealth Catalysts today -- an unexpectedly high global demand for the latest smartphones, tablets and personal computers. The stock is currently trading at a price-to-book ratio less than half of the industry average.
I like this company so much, I've included it in my report "The 10 Best Stocks To Hold Forever." To get the details on this Forever Stock and others like it, visit this link.
Good investing,
Dave Forest
Chief Investment Strategist
Top 10 Stocks
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