Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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