Stealth Bull Market In… Telecoms?
by Porter Stansberry

Cockeysville, Maryland

*** In yesterday’s Digest I noted:  “Zero growth in bank credit paired with a relatively high Fed rate tells me that the economy will slow, commodity prices will decline, and the housing market will not spring back to life.” Today, the government’s statisticians told us GDP growth slowed dramatically over the summer (1.6%) as the housing market collapsed. I wouldn’t be surprised to see our economy enter a recession in the fourth quarter. And I wouldn’t be surprised to see oil go below $40.

*** Jeff Matthews speculates on why insider selling has spiked sharply over the last two weeks. “How about this: how about two weeks from now when Wall Street wakes up and finds Charlie Rangel has become chairman of the House Ways and Means Committee and Barney Frank is now in charge of overseeing Wall Street…”

*** Will you make more money with aggressive or conservative investments? Says hedge-fund manager and self-made billionaire Michael Steinhardt: “My objective is to create a portfolio which under almost no circumstances will lose money and under the best circumstances would make about 20% a year… in other words, I do not try to hit home runs in my present portfolio.” Says new S&A subscriber John Beachy, “It all sounds great for people with money. I need leverage. I need as many small plays as you can give me.”

Give John a little time… he’ll learn.

*** Bank workers in India today are going on strike to protest the outsourcing of their jobs. An estimated half million people will participate. India’s central bank agreed to let banks outsource “noncore” processes such as loan and credit-card processing to third parties.

*** Many of our recommended stocks are at new highs: Berkshire Hathaway, Disney, Chevron, FLIR Systems, ONEOK, Macquarie, Oakley, and American Capital. Move your trailing stops up. Also up big yesterday (7.2%) was my recent PSIA wireless recommendation. But I can’t keep up with Jeff Clark, whose nanotech picks are soaring. One was up 10% yesterday alone.

*** We wrote it. Did you own it?

“…you should do pretty well buying homebuilder stocks and holding for at least three years. MDC Holdings, Toll Brothers, and Pulte are all nationally focused homebuilders. They're also the least levered in the group.”
– Extreme Value, September 8, 2006

Gains since Dan’s piece went out:

MDC Holdings: +27%
Toll Bros: +17%
Pulte: +13%

*** Lots of interesting feedback today. Somehow people got the idea that I’m a Republican! They couldn’t be more wrong. I hate anybody who taxes me, tells me what to do, and points a gun in my face if I don’t go along.

Gary Wohlleben: Are you suggesting in your tirade against Al Gore, all Democrats, and global warming that the prudent and smart thing to do is nothing? We should ignore the possibility that it might be man made, or made worse by man, because it has not been demonstrated “absolutely”? If it does exist, and we could have slowed it or reversed it over time, I think your children will pay an awful price for your arrogance.

Karen Sutherland agrees: Keep your political beliefs to yourself. They don’t have any place in an investing newsletter, and that is certainly not what I shell out my money for, especially since I completely disagree with you.

Norman Diamond: As an 80 year old geezer, my only concerns about global warming are the effects it will have upon my children and nephews and nieces. The ice layers surrounding Greenland have melted to a quite noticeable degree and the Northwest Passage is now easily traversable.  Glaciers have also receded by significant amounts. What’s your explanation for this?

Porter Comment: Beats me. But I’m not stupid enough to believe that I can anything do about it.

*** Enough of the politics. Let’s move on to the folks who are really angry with us.

Mark Nyman writes: “I don’t write you about the party I am having, or the wonderful places I get to go, how warm or cold it is, or conversations with your wife, your golf game, etc. This is terribly boring drivel… I and others are drowning in blah, blah, blah, blah. I know you can provide a better product.”

Porter Comment: Mark, we care about you enough not to talk about money all the time. Please have a gentle hand with us when we blah, blah, blah too much.

*** And a counterpoint from Rob Womack: I am an Alliance member. Just wanted to tell you how much I enjoy reading all of the publications. Good copy, interesting stories, excellent investment advice. The reason for writing this time is to congratulate Porter on the change in The Blast [now The Digest]. Really love the new layout, the tight paragraphs, and the personal flavor that makes me feel like part of a larger family. One of these days I will make it to Baltimore or to one of the Alliance events. Thanks again for enriching my life in many ways.

*** On my upcoming Bull and Oyster Roast, a fellow Maryland subscriber wrote: Good luck with the Bull & Oyster roast.  I’ll be doing the same thing this weekend at my place in Lutherville.

*** The answer to yesterday’s riddle? It’s simple: Australia was the earth’s largest island, before and after Cook discovered it.

*** Warning: We will read what you send us. Tell us what you think about our work here: feedback@stansberryresearch.com.

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Don’t look now… but there’s a new bull market in telecom.

Level 3 has doubled this year. Verizon has moved from $30 to nearly $40. Cisco is up from $18 to $24. Even telecom stocks with regulatory overhang, like Telecom New Zealand, have put in a solid bottom and moved higher for the first time in years. Here are a few examples:

What’s driving the resurgence? Two things. One, video over the Internet (aka YouTube) is finally filling up all of the extra fiber-optic capacity that was installed in the late 1990s, giving companies such as Level 3 and Verizon’s MCI new life. Demand is again leading the market, instead of supply. Second, there’s a major upgrade coming to the Internet’s operating software, Internet Protocol (IP). Called Internet Protocol version six, or IPv6, this new software will accommodate an essentially unlimited number of connected devices. This will lead to even more data on the net and higher revenues for the networks.

This demand is setting off a wave of spending. Verizon will spend $25 billion over the next four years connecting fiber to the home infrastructure in the United States. Deutsche Telecom is spending $3 billion to replace its copper network with fiber. Vodaphone is spending $265 million on a fiber backbone in Europe to support its wireless business.

The irony, of course, is that just as fiber-optic networking is once again becoming a great business, Wall Street wants nothing to do with it. As a result, telecom stocks are dirt cheap. Once again, Wall Street is wrong and there’s never been a better time to buy.

Let me show you the math I did back in February, when I recommended Verizon to my PSIA subscribers:

“…Once telecom is back in favor on Wall Street, Verizon’s shares should trade at around 15 times cash flow, which would indicate a total market cap of around $315 billion. Today the market cap of Verizon is only $87 billion. Thus we expect to see a return of at least 262% – assuming Verizon never grows its cash flows in the future.”

Verizon has moved up about 30% since then. The dividend isn’t quite as fat as it once was. Nor is the stock so cheap. But with video exploding over the Internet, my earlier prediction of 262% profits seems far, far too small.

As I told folks at the Alliance meeting last week, Verizon is the one stock in the world right now that you can’t afford NOT to buy.

Good investing,

Porter Stansberry

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