Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17
Gold’s Next Downside Target Is Around $700… Even if It Breaks Up First - 19th Apr 17
SPX May be Completing its Corrective Pattern - 19th Apr 17
Silver Production Has “Huge Decline” In 2nd Largest Producer Peru - 19th Apr 17
Soothing East Asia's Nerves as Trump's Administration Reaffirms US Power in Asia-Pacific - 19th Apr 17
The Brexit War - Article 50 Triggered, General Election 2017 Called - Let the Games Begin! - 19th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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