By Porter Stansberry in the S&A Digest:
This morning, our editor in chief, Brian Hunt, sent me a note about our S&A 16 recommendation of Rite Aid bonds last January.
Last year produced the biggest return we've ever registered in the history of the S&A 16. Mike Williams' Rite Aid bond was placed in the portfolio at a price of $286. As things got "less bad" in corporate bonds, this position advanced to its current price of $915. And as Mike predicted, Rite Aid was more than able to cover its interest payments, which amounted to $68.76 in yield. Total gain on our buy price was 244%. A special congratulations to Mike Williams is in order. We feel True Income is one of the most valuable financial newsletters you can find at any price... and Mike is performing a great service for income-oriented readers. There's simply no advisory like True Income anywhere.
My bet is 90% of our readers have never bought a corporate bond, don't really understand how they work, or why they're frequently far superior to stocks – both in terms of risk and the potential for total returns.
I asked Mike Williams – our in-house bond analyst and the editor of our bond-centric publication, True Income, about his performance last year. Mike has been analyzing bonds professionally since the year I was born (1972). This experience gives him a perspective on bond investing most people simply don't have – and never will. Says Mike about his best picks:
The picks I like the best are not always the best performers. To me the "best" is the best return for the lowest risk.
Over the last year, there were three of these "no-brainers": ILFC, Janus and Sears... ILFC (the jet aircraft leasing giant) are brilliant operators, hugely profitable, absolute masterful debt management, well-established investment-grade credit whose only fault was poor choice of a corporate parent. For that we buy an investment-grade, two-year bond at an impossible 31% discount.
Janus (the fund management company) is such a simple business it is nearly impossible to screw up... And I personally knew the guys at InTech, a new acquisition that Janus was cross selling very successfully. I knew Janus would benefit from a stock market recovery. It had a cash hoard of $400 million and generated more cash every day. A BB-plus credit trading at another impossible 35% discount.
Sears was similar. After months of punk retail sales, investors wanted nothing to do with the sector. But Sears was not going to go away. It had lots of cash, lots of valuable real estate, and lots of time. This bond offered us 9.2% in cash and was, in my opinion, an underrated BB credit trading at a 27% discount. Lampert (Sears' largest shareholder) had been buying back both stock and debt.
This bond ran up to $970. We sold it and bought a longer-dated Sears bond for $605. That increases our effective annual cash yield to 15%, which we will collect until 2017. Same credit, more money for longer...
If I had the power to grant all of my subscribers one gift... I'd probably choose an understanding and an appreciation of the bond market. I am more and more convinced part-time investors should keep nearly all of their investment dollars in short-duration corporate bonds trading at a discount to collateral value. It's the only sure way I know to earn substantial returns without putting capital at risk.
Crux Note: If you're one of the 90% of readers who aren't familiar with bonds, you owe it to yourself to try a subscription to Mike Williams' True Income and learn from one of the world's best. You can learn more
here.
More from Porter Stansberry:
Crux Classic: This tax fact should make your blood boil
Porter Stansberry: The single biggest trend in all of finance
Porter Stansberry: Why most investors always lose in stocks
