Editor's note: This week, we're interrupting our regular DailyWealth Weekend schedule to share a must-read essay from Stansberry Research founder Porter Stansberry. In the essay – adapted from the March 23 edition of the Stansberry Digest – Porter discusses a strategy that you can reliably use to double your money or more in a reasonable period of time...
This won't surprise you...
Extremely wealthy and successful people don't invest in regular stocks.
They invest in deals, not index funds. They buy into real estate deals... buy into private financings (with warrants)... engage in arbitrage... and own private companies, which are far better-managed than public ones.
And typically, in almost the exact opposite way you've been taught to invest (if you learned how in college or through the mainstream media), they tend to heavily focus their capital into a small number of outlets for long periods of time.
They tend to exchange liquidity for value... And they tend to exchange duration for certainty.
These deals happen all the time. And I'll tell you a secret I sure wish I had learned earlier in my life: Big deals aren't any harder to pull off than small ones.
Both take the right economics, people, and legal due diligence. The only real difference is that one might make a few million dollars, and the other might make a few hundred million dollars.
What does any of this have to do with you?
You may never have $1 million in capital to put into a private deal. You'll probably never be "in the room" when big deals get put together. But if you know where to look, you can still find a few of these incredible opportunities in the stock market.
What I'm going to tell you about today is the single biggest secret to getting into extremely high-quality private deals, even with tiny amounts of capital.
And as you'll see, this is a strategy that you can reliably use to double, triple, or quadruple your money in reasonable periods of time. It really works. And it's one of the most lucrative strategies in the world.
Plus, everything I'm going to show you today is real. These are actual investments we've recommended... deals we've gotten subscribers into – starting with a gain of more than 200% we made recently.
I'll tell you everything – the name of the stock, how the deal ended up in the stock market, and why the insiders are still buying shares hand over fist.
This is what you should focus on as an investor, not the "noise" coming from Washington or Wall Street. So pay close attention...
It doesn't happen often...
But every now and then, a high-quality private-equity deal ends up trading on the stock market.
Virtually all of these deals have one common characteristic – they're designed to turn debt into equity.
Isn't debt bad, though? Well, yes, it can certainly be risky. But again, one of the big secrets of successful, wealthy investors is that they're willing to trade duration for certainty. Private deals are typically loaded with debt, because that's what generates a lot of the return.
I know that sounds risky. But chances are, you've done the same thing with one of the biggest investments you've ever made – your house.
If you're like most people, you bought your house with a small amount of money down and then spent 15 years (or longer) to slowly convert that debt on your balance sheet into equity. As long as your home appreciates in value, that ends up being a good investment for most people.
Almost all good private deals work in the same way. A wealthy investor (or a group of wealthy investors) will buy a company and immediately load it with a lot of debt. If it's a good, well-managed asset, over a period of five to seven years, it can grow enough to pay off these debts, converting billions of dollars in debt into equity... and earning a windfall for the owners.
Most people are familiar with how this structure works in real estate. If you've ever been pitched a commercial real estate deal, then you know that the cost of the debt plays a major role in determining whether the deal is feasible (and will be profitable).
That's exactly what private-equity firms like Blackstone (BX), KKR (KKR), and Cerberus Capital Management do for investors...
They buy companies using a lot of debt and then work hard to quickly convert that debt to equity to produce big returns.
In either case – whether it's buying real estate or buying corporations – investors must be sure that the underlying assets are good enough and growing fast enough to both pay off the debt and continue to grow the business. When that's the case, the returns are extraordinary.
Let me give you an example...
Back in 2006, Richard Kinder – the founder (and for many years, the CEO) of energy-infrastructure firm Kinder Morgan (KMI) – orchestrated a deal. He allowed a group of private-equity investors including Goldman Sachs (GS), Highstar Capital, and Carlyle Group (CG) to buy out his firm.
These wealthy investors paid public shareholders around $13 billion. Where did the private-equity investors get so much money? They put up $3 billion of their own funds – and got $10 billion by loading the company with debt.
As you probably know, Kinder Morgan is one of the best pipeline firms in the country. Over the next five years, the company continued to prosper. Because the deal was going well, the private-equity investors were able to sell shares back to the public five years later. By that point, the company was worth $22 billion. Thanks to the debt used in the deal, the private investors did even better. Their initial $3 billion investment was now worth $16 billion.
To use our house analogy, the Kinder Morgan deal was like buying a $130,000 rental house with a $30,000 down payment (23%). Over the next five years, the value of this "house" almost doubled to $220,000. Even better, rents in this neighborhood soared, too. The homeowner was able to pay off the entire mortgage. Imagine earning seven times your money on a rental property in five years! That's the power of combining leverage with a high-quality, reliable, growing business.
Every now and then, for one reason or another, a private deal like this will end up on the stock market...
The most common way this happens is when a private-equity firm brings one of its deals back to the stock market. Most of the time, the biggest gains have already been made and the private-equity firms are just cashing out.
Sometimes, private deals happen in a way that can truly benefit individual investors. The managers of a public company decide to recapitalize themselves. They adopt a private-equity-like capital structure without involving outside investors.
Sometimes – very rarely – a private-equity firm will screw up and sell shares in a valuable private deal far, far too early.
That's what happened recently with the shares of BlueLinx (BXC) – a small, Atlanta-based distributor of building and industrial products.
Stansberry Venture Value editor Bryan Beach brought the situation to the attention of his subscribers in January. Currently, the stock is up more than 200% from his original recommended price. Shares soared in March – exactly when Bryan told his subscribers they would.
Let me tell you how it happened, and why we could see a lot more upside from here...
BlueLinx was a private-equity deal Cerberus put together about a decade ago. It's a simple business. BlueLinx distributes building supplies to homebuilders. It owns 39 distribution centers across the U.S. The business was built in the 1950s by Georgia-Pacific, the big timber company.
By the mid-2000s, Georgia-Pacific needed to raise cash to pay down debt and sold this subsidiary to Cerberus. Cerberus, in turn, loaded the company with debt – including a 10-year mortgage that couldn't be prepaid.
The key factor in these kinds of private-equity deals is how quickly the balance sheet can be transformed from mostly debt into mostly equity.
Your mortgage works exactly the same way. If your rents could pay off your mortgage in a few months instead of 15 or more years, imagine how much better your annualized returns would be on your rental property.
In 2010, with BlueLinx's stock in the gutter, Cerberus made a bid to buy back – from the public – the 50% of shares that it didn't already own. The shareholders ultimately rebuffed Cerberus' offer. They believed the company's prospects were far brighter than reflected in the market – or in Cerberus' offer. So Cerberus held on to its 50% stake for another seven years.
Then in October 2017, Cerberus finally cut its ties with BlueLinx after 13 years... It had simply outgrown its investment.
In January, Bryan recommended scooping up the exact shares Cerberus left on the table. It's one of the few opportunities we've seen where the "little guy" can swoop in and reap the benefits of a private-equity payday.
Bryan pounced because he knew that BlueLinx was poised to turn everything around...
Home construction was booming. And for the first time since taking on the onerous mortgage, the company finally had the financial flexibility to rapidly convert its balance-sheet debt into equity.
Companies can sometimes accelerate the debt-to-equity transition, increasing their earnings. Or they can do this by "unlocking" assets that are hidden on their balance sheet. That's how it worked with BlueLinx.
How did Bryan get an idea of what would happen this year with BlueLinx?
The critical factor was really knowing the company firsthand... because the database information on the company was woefully wrong.
You see, accounting rules require real estate to be valued on a company's balance sheet at the price it was acquired, not at its current value. As I mentioned, BlueLinx operates a network of 39 distribution centers around the country. These valuable industrial sites were purchased over the past 60 years... And they had appreciated.
But they were carried on BlueLinx's balance sheet for their acquisition costs.
By selling these assets to investors (and then leasing them back), BlueLinx will be able to generate more than $200 million in cash, allowing it to pay down its private-equity acquisition loans. It will transform itself from a business carrying six years' worth of earnings in debt to a company with debt equal to only two times its earnings. This will have a profound effect on its equity value, as reflected in its share price.
When would investors realize this incredible and dramatic change to the capital structure of this company? Bryan predicted it would happen in early March. As he wrote in the January issue of Venture Value...
When you factor in the brand new, lower debt balance, nearly double today's price... The recent price jump is a precursor for what we'll likely see in early March, when the company files its official U.S. Securities and Exchange Commission ("SEC") financial statements. For years, financial screens have "screened out" BlueLinx because of the optics problems we discussed earlier. This will start to change once it files its official 2017 numbers in March.
Bryan's prediction proved prescient...
But the real kicker came on March 12, when BlueLinx used its improved liquidity to acquire one of its main rivals, Cedar Creek, in a deal valued at $413 million.
Overnight, the market realized what Bryan had told his readers in January... The balance sheet is misleading. This is actually a big, well-capitalized company, ready for big things. Its potential had simply been hidden by some accounting vagaries.
I'm willing to bet that few of you have ever seen investment research this detailed or valuable...
The truth is, Venture Value is the best value we offer in our entire lineup of publications. Research like this isn't available anywhere else, at any price.
This product is designed to ferret out values that other investors miss (like BlueLinx). It's also designed to find investments that are small, where the opportunity for huge gains is realistic.
These investments are safe and reliable, and produce excellent results. What else are you looking for?
Regards,
Porter Stansberry
Editor's note: Bryan just put together a research report for his Stansberry Venture Value subscribers that details five "dark stocks" that nobody on Wall Street is following. These stocks could help you make 200% or more this year. Find out how to get instant access to this report – as well as a FREE bonus year of Bryan's research in Venture Value – right here.
