Razor Blades and Epic Wealth

Posted On Jan 4, 2017 By Dave Gonigam

  • The man whose heirs inherit a fortune that grew 300-fold
  • How “Extreme Pita” points the way to generational wealth
  • Forget the Fed minutes: Rickards on Yellen & co.’s 2017 plans
  • 2017: The year of powerful and nonaddictive painkillers
  • The value of a college education, continued… Rickards, gold and patience… going the extra mile for a valued customer… and more!

“My father was never full of himself,” recalled Donna Turley. “When asked what he did for a living, he often answered that he made razor blades.”

About three weeks ago, retired Gillette executive Joseph Turley died at age 91. He began working at the company’s Boston headquarters in 1960. By 1981, he was the president. After retiring in 1988, he stayed on the board until the mid-1990s.

Turley’s obituary in The Boston Globe didn’t state his net worth. But assuming he owned even a modest amount of company stock from the get-go, it was substantial: From 1964 until he stepped down from the board, every dollar invested in Gillette grew to $300.

What made Gillette tick during those three decades is a phenomenon our friend Chris Mayer calls the “twin engines.” They provide the lift for many of those elusive 100-baggers — stocks that grow at least 100-fold.

“The best way to show you how the twin engines work is with an example,” Chris tells us.

“Let’s say we have a stock that earns $1 per share and trades for 20x company earnings. That would make the stock $20.

“Now, five years later, earnings have tripled to $3 per share.

“If the stock still trades for 20x earnings, then you’ll have tripled your money, as the stock would trade for $60 per share. That’s a nice result. And shows you the power of the first engine: earnings growth.

“But the second engine I look for is a low multiple on those earnings,” Chris goes on.

“Let’s say you find a similar stock trading for just 10x earnings. The stock is $10 and earns $1 per share.

“Now, five years later, earnings have tripled to $3 per share.

“But the cat is out of the bag. The market has come to appreciate the power of its business model, and the stock trades for 20x earnings. Now the stock is $60, as in the prior example… and you’re up sixfold.”

Gillette had the twin engines going for it. “The safety razor company grew its sales 11% per year,” Chris explains. “Earnings grew 15% per year. But it took more than these numbers to make it a 100-bagger.

“At the start of its run in the late 1960s, the stock traded for just 10x earnings. By 1995, it traded for nearly 30x earnings. The stock returned more than $300 for every $1 invested.”

If three decades is too long a time horizon for your investing purposes, consider how the twin engines worked across just one decade at MTY Food Group.

MTY is a franchiser of fast-casual restaurants. It operates four dozen brand names; unless you live in Canada, you’ve likely never heard of any of them. “Extreme Pita”? “Croissant Plus”? They sound like an old SCTV sketch…

But forget the funny names and watch the numbers: “MTY stock went up 100x from 2003 to 2013,” Chris says. “That’s just 10 years.

“Sales went up 7.8x. Earnings went up 12.4x. But the stock was up 100x… because in 2003, you could’ve bought the stock for 3.5 times earnings. And in 2013, it traded for 26x.

“That’s the power of the twin engines,” Chris sums up. Focus on finding stocks that both have the ability to grow… and the potential for a higher revaluation.

Naturally, Chris is on the hunt for stocks that are just now firing up the twin engines. “I particularly like Atlas Financial (AFH),” says Chris, “which insures small fleets of taxis. This is an old recommendation of mine, which we bought around $6 per share. Today, at $17, it’s still a compelling bargain with lots of room to grow. The management team, led by CEO Scott Wollney, is excellent. And they have ‘skin in the game’ – they own 12.5% of the stock.”

Want more? Tomorrow night during an online investment master class, Chris will reveal the names of six stocks on his watch list — and the “Mayer Method” behind those picks. Many of them have those same twin engines, along with a few other traits, that could make them “the next Apple”… “the next Starbucks”… “the next Wal-Mart”… long before they’re on Wall Street’s radar.

The event is tomorrow at 8:00 p.m. EST. It won’t cost you a thing to watch. If you have any interest at all, sign up for free access now. The 5 won’t send you any other reminders; this moment is your last chance to get in. Here’s the signup link.

The major U.S. stock indexes are adding to their gains from yesterday. At last check, the Dow had once again pushed past 19,900. Small caps are outperforming the blue chips, the Russell 2000 up more than 1.5%.

The market action after we went to virtual press yesterday was strange: The dollar rallied hard, oil lost ground, Treasury yields backed down. Despite the dollar strength, gold held its own and then some; this morning, the Midas metal is up to $1,164, a three-week high.

Traders are marking time until the release of minutes from the Federal Reserve’s meeting last month. That comes around the time this episode of The 5 hits your inbox, at which moment every sentence will be inspected for secret clues to the Fed’s intentions this year.

It’s a pointless exercise, for two reasons. In the first place, and at the risk of repeating ourselves, Fed “minutes” aren’t like the minutes from your local library board meeting. They’re not an objective record of who said what; they’re a document carefully crafted for public consumption.

And in the second place…

“Fed forecasting is surprisingly easy despite the sturm und drang of the talking heads,” Jim Rickards wrote us just before hopping on a plane to China this morning.

“It’s a matter of considering what we know, and what we don’t know, and observing the indications and warnings that presage the unknown.

“What we know is that the Fed is biased toward rate increases as long as the economy is growing. This is because the Fed needs to raise rates to 3.25% before the next recession in order to cut them back to 0% when the recession hits: approximately the amount of cutting needed to pull the economy out of recession. The Fed is unlikely to reach this goal without either causing a recession or facing one, anyway, but they will try.”

The key phrase, of course, is “as long as the economy is growing.” Much more from Jim tomorrow as we roll out his first major forecast of 2017…

2017 will bring “a major breakthrough in pain management, one of the biggest revenue markets for drug companies,” says Ray Blanco — back for a second day of new year’s predictions.

One of the catalysts will be something we described as 2016 drew to a close — the 21st Century Cures Act — passed with overwhelming bipartisan support. The law “makes it easier for small biotechs working on lifesaving cures to bring new therapies to market.

“This will be great across the entire biotech universe, but parts of the bill favor certain segments of biotech and pharma in particular. Nearly 1,000 pages long, it addresses everything from drug regulation to innovation to basic research funding.

“On the funding side, we see serious attention paid to combating the epidemic of opioid addiction that’s swept the country. The act pushes $1 billion to prevent opioid dependence. This doesn’t just address illegal drugs like heroin, but also legal prescription drugs that cause addiction.”

That could be great news for two companies Ray is following in FDA Trader. One is working on an abuse-resistant form of morphine. The other is working on a painkiller that does away entirely with the euphoric sensation that makes opioids subject to abuse. Both could have “magic dates” during 2017.

What are magic dates, you ask? Check this out.

To the mailbag, where the usefulness-of-college thread still shows signs of life…

“On my first day of university, all us frosh were given an overview of university life. The university padre’s remarks were short and sweet: ‘Don’t let getting a degree interfere with getting an education.’

“I’m an engineer, and the main thing you get over four years is a way to think. I have also found myself going back and restudying courses that I did not need to use for years and then needed to know as background to working with other engineers or to solve an engineering problem that I was having on a project. An example was going back to fluid dynamics to relearn types of flow and pumps, to help resolve a structural vibration problem.”

“The message I take away from Jim Rickards and The 5 is: Sooner or later, gold is going up five times or more… when priced in dollars.

“If gold is thought of as ‘real money,’ having a relatively constant ‘value,’ in terms of what goods and services an ounce of it will buy… then… what is really going on is that paper money has become five times less valuable… in terms of what a dollar will buy.

“This would not be good at all… but… having some newly five times more-valuable (in terms of dollars) gold, if it can be later sold for diminished-in-value dollars without being taxed to death, would definitely ease the pain … somewhat, anyway.

“Love The 5.”

The 5: Jim has some more thoughts for frustrated gold holders coming in today’s Daily Reckoning. Watch your inbox…

“I figure if people can write in and complain about Jim Rickards, then I’m going to write in and complain how I got screwed over by an Agora Financial service that I had bought a lifetime membership to.

“I was alerted over the holiday that Trend Following With Michael Covel was being dropped and as compensation for life time members like me, we were going to be moved into The Rude Awakening PRO. That is all well and good, except that I already have a subscription with the Rude PRO, so basically, I’m not being compensated at all.

“Now, I understand business is business and not every venture is going to be successful, but when I put my faith and loyalty and money into a service that was highly touted by Agora and paid up for a ‘lifetime membership,’ then I think it’s only right and honorable to refund a portion of my subscription fee when that service is abruptly dropped.

“In future ads in which Agora pitches lifetime subscriptions, maybe a disclaimer should be added that ‘lifetime’ doesn’t necessarily mean lifetime, depending on the whims of the seller. I dare you to print this! Heh.”

The 5: What’s the old joke about “my lifetime, not yours”?

Seriously, though, in those rare instances like yours, we’re happy to make it up to you, even if we have to improvise a solution. Get in touch with our crack customer service team and they’ll figure out something so you’ll come away happy.

Best regards,

Dave Gonigam
The 5 Min. Forecast

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