Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17
Is Inflation an issue or did the Fed Mess Up? - 8th Aug 17
Top 3 Technical Trading Tools Part 1: Japanese Candlesticks - 8th Aug 17
Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - 8th Aug 17
What Happened to Thousands of Sheffield's Street Trees 2017 - Fellings Documentary - 8th Aug 17
Solar, Bubble, Banks, War, and Legal Tender: Five Reasons Why You Should Buy Silver Now - 7th Aug 17
CRASH - If Some People Do It, Nothing Bad Happens, But If Everyone Does It, All Hell Breaks Loose - 7th Aug 17
Gold and Silver : The Battle for Control - 7th Aug 17
Precious Metals Sector is on Major Buy Signal - 7th Aug 17
Stock Market - Has Time Run Out? - 7th Aug 17
Get Ready for an Historic Upside Gold and Silver Run - 7th Aug 17
BOOM! Bitcoin Rockets To New All-Time High As Cryptocurrencies Surge Higher! - 7th Aug 17
U.S. Dollar: This Crash Signals the End - 6th Aug 17
Predicting The Price Of Gold Is A Fool’s Game - 6th Aug 17
Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - 6th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

One of Wall Street's Worst "Dirty Secrets"

Companies / Mergers & Acquisitions Dec 23, 2012 - 11:13 AM GMT

By: DailyWealth

Companies

Porter Stansberry writes: What I'm going to show you today, you'll rarely see from mainstream financial analysts.

This secret is worth too much. It generates hundreds of millions of dollars every year for the insiders on Wall Street. This secret is why investment banking is such a lucrative trade.



Nobody who's collecting big profits on this secret wants you to understand it. That's because once you do, you won't look at investments the same way again...

Let me give you an example of how this secret works...

Meg Whitman is now the president and CEO of Hewlett-Packard (NYSE: HPQ). But in 2005, she was CEO of eBay (NASDAQ: EBAY), which paid $3 billion to acquire Skype – a company whose software allows customers to speak over the Internet for free. The company had no material revenue, nor a viable business model. It didn't appear to fit with eBay's business in any way. Two years later, Whitman was forced by her auditors to recognize a $1.4 billion loss on the investment.

Later, after she had joined Hewlett-Packard's board, Whitman approved the acquisitions of IT giant EDS, smartphone maker Palm, and software company Autonomy. HP paid around $26 billion for these companies. HP accountants have determined that HP overpaid by at least $19 billion for these three companies alone.

That's right... $19 billion of investment losses. Today, the entire company is only worth $28 billion.

Some of the deals were so bad that, even at the time, they were laughable and widely mocked. For example, of the Autonomy deal, Oracle Chairman Larry Ellison said, "Autonomy tried to convince us to buy their company... we thought $6 billion was way too much... and HP just paid twice that!" Just to prove its point, Oracle even set up a website called "Please Buy Autonomy."

Corporate investment losses like these are one of Wall Street's dirty secrets. Like I said, putting these deals together generates hundreds of millions worth of profits every year for Wall Street. Nobody on Wall Street wants companies to become more capital efficient or to return more money to shareholders. They want more deals. They want more fees.

And so, nothing negative is ever said about the number and magnitude of very poor investments made by public corporations.

The even bigger problem for shareholders is the compensation structure for top CEOs. There's a tremendous disconnect between the risks they take with the shareholders' money and the risks they face personally.

The compensation structure of most of the S&P 500 CEOs allows them free access to the retained earnings of their companies. That means, if they make good investments and earnings increase, they can collect huge, windfall gains from their stock options. On the other hand, if they make horrible investments with the company's capital, they're likely to be fired... and to receive a huge, windfall exit package.

The scale of this problem is not widely appreciated because Wall Street downplays it and very few investors really understand the damage big corporate investment losses will have on their returns.

How big are these losses? So far in 2012, S&P 500 companies have written off $40 billion in investment losses.

Here's the good news. You can completely avoid this enormous risk by simply focusing on companies that are "capital efficient." In other words, they pay out a large part of their gross profits to shareholders in the form of dividends or share buybacks. These companies generally don't do big deals, mostly because they get a much higher return on capital by simply reinvesting in their own shares.

We think focusing on capital efficiency is particularly important right now. Corporate America is sitting on a ton of cash.

Deloitte, the international accounting and consulting firm, recently released a study about the cash balances of the S&P 500 and large investment groups. They found S&P 500 cash balances are currently at record highs – and represent nearly 10% of total assets. This is more than double the average for the preceding 14 years... and more than triple 1998, when cash made up around 3% of total assets.

Buffett once noted that management teams with money to burn on acquisitions "behave like teenage boys who just discovered girls." Corporate America certainly has money to burn right now.

In an environment like this, you want to be very wary of which companies (and managements) you partner with. All kinds of cash sloshing around can create bidding wars, so it's especially important to steer clear of companies with histories of impairment charges.

Instead, gravitate toward level-headed managers who have shown a history of demonstrating capital efficiency.

Good investing,

Porter Stansberry

P.S. Due to my extensive writing on this subject, many readers know they can conservatively earn 10%-15% per year in these businesses. But thanks to a critical anomaly in the market right now, you can make 50%-100% on these same stocks... every 12 months or so. What's more, you can make these big gains while taking on less risk than a conventional shareholder. You can learn about this anomaly in a special presentation we've put together. Watch it here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2011 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife