Porter Stansberry serves as Chairman of Porter & Co., a boutique investment research firm that offers in-depth market analysis and insights. His company’s purview includes everything from energy stocks to high yield bonds to biotech to what he calls “battleship” stocks. He joins the ETF Think Tank to offer his thoughts on the current market environment and what the next few years could look like.
Stansberry has spent considerable time in recent years identifying dislocations in the market whether that’s due to fraud or some other reason. The biggest red flag he sees in the market today is Boeing. He says that the kind of financial engineering that’s happening right now is the same kind of accounting gymnastics that occurred at GE which he believes could lead to cataclysmic consequences for shareholders. With businesses, he says, culture is destiny. You can’t succeed unless the entire leadership team is committed to integrity within its operations and Boeing has none of this right now. Some people say that Boeing can’t go bankrupt, but fundamentally broken companies can certainly go under. Stansberry likes short situations where there is no reasonable way out.
Stansberry, not surprisingly, sees artificial intelligence as revolutionary, but he doesn’t think the current leaders will be the leaders when the revolution is finished. There are all sorts of businesses whose margins are about to improve thanks to AI and, if he were an investor, he would find companies whose basic goods and services can be transformed by AI. Blockchain can similarly transform industries, such as healthcare and financial services, but he doesn’t think it will happen as quickly as many hope. It’s going to be a long slog because the financials are very regulated and going to fight anything that could cost them margins or market share.
While the AI revolution is currently benefiting the large companies, Stansberry thinks that eventually the small companies will be the innovators. During the advent of the internet, none of the innovations came from the big news organizations. It’s always the outsiders. The large and entrenched companies often aren’t able to put it to work quickly, but the small upstarts can because the tech is changing so quickly. In the end, AI can transform the way business is conducted, especially for those heavily involved in data analysis.
Stansberry has been on record believing that the thesis of a credit event was accurate. In particular, he believed that Bank of America was insolvent, but they played with the accounting and got a liquidity injection from the Fed so there wasn’t a run on the bank. The amount of liquidity and stimulus cash that the Fed has been putting into the economy is enormous. In the near-term, he doesn’t believe we’ll have a recession, but we could have 4%+ inflation for a long time. In the end, he expects Treasury yields to increase and that’s why small-caps are underperforming here. He does think we could be entering a melt-up scenario.
Stansberry also notes that when yields get higher, P/E multiples need to get compressed. If the high growth companies can justify a high P/E, multiples can remain higher, but most aren’t going to be able to. The staples, for example, that can’t post eye popping growth are going to see their multiples contract. Over the next few years, he feels we’ll see most stocks trading at 12-14 multiples, not 24.
Other key takeaways:
- Stansberry isn’t sure that we’ll have as much inflation now as we did in the 1970s because there’s so much more productivity today.
- It’s great that we have a challenging market. It creates a lot of opportunities and there’s nothing wrong with that.
- Stansberry thinks that the Fed did see the trouble in the financial system a year ago. There’s a reason why Bank of America got so much liquidity.
- One of the biggest beneficiaries of the AI revolution will be biotech.
- These markets where the quality of the company matters are a great thing. He thinks we’re going to see a lot more discrepancy in quality because it’s going to matter a lot more in a high interest rate environment. In Stansberry’s estimation, quality is the growth of free cash flow. There are a lot of high quality, super cheap small-cap stocks, but you have to buy them and you have to wait for it to happen. It won’t happen fast.
- In particular, he’s bullish on energy and very bullish on natural gas, citing it as the only viable bridge between coal and renewable energy. He believes there’s a world class opportunity in energy as long as you’re an investor.
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