For more than 10 years now, we’ve been publishing the Hedge Fund Trader. During this time, over 60% of the trades have been profitable, with an average return of 6.7% per trade, held an average period of 61 days — giving us an annualized return of 47% over that 10-year period.
But it’s time for a change. Private equity has replaced hedge funds as the hottest way to make money, and we’re making the switch to take full advantage. This issue will be the final edition of the Hedge Fund Trader, and starting next week, I am introducing an exciting new service, The Private Equity Trader (PET). All Hedge Fund Trader subscribers will immediately and automatically have their subscriptions converted to the new service.
What is private equity? For most Americans, it’s a mysterious part of Wall Street shrouded in secrecy, a behind-the-scenes investment plan used by the super wealthy like Mitt Romney. His firm, Bain Capital, was highlighted during the 2012 elections. “Mitt Romney and Bain Capital made MILLIONS on the deal,” reported Reuters in 2012.
Private equity can be called many things: alternative asset managers, venture capitalists or angel investors. They are a group of investors (usually based in New York or San Francisco) that invests in debt and securities not publicly traded on a stock exchange. They finance private companies which need funds to expand, create new products or restructure the companies’ operations, management or ownership. Private equity firms engage in leveraged buyouts (LBOs), or they may invest in real estate investment trusts (REITs), corporate bond funds or buy stakes in emerging high-tech firms.
Most deals are in illiquid investments and require investors to wait years before their investment pays off. And boy do they pay off, beating the market handily in the past seven to eight years (though with greater volatility).
Until recently, private equity firms were private themselves. Even today, Bain Capital is not publicly traded. But during the past 10 years, quite a few private equity firms have gone public and consistently beaten the market and made their founders billionaires: Apollo Investments (run by Leon Black); Kohlberg Kravis Roberts, or KKR (run by Harry Kravis); Carlyle Group (run by David Rubenstein), to name just a few.
Our favorite is Blackstone Group LP (NYSE: BX), run by Stephen Schwarzman in New York. In preparation for our new service, I recommended BX last month, one of two stocks we are keeping in the new Private Equity Trader.
It’s already profitable. Last Thursday, the news got even better. Second-quarter earnings more than doubled, as the company continued to reap big gains by selling assets from its private-equity business into the rising stock market. The New York firm reported second-quarter profit of $517 million, or 85 cents a share, up from $211 million, or 36 cents a share, in the same period last year.
CEO Schwarzman reported, “Blackstone’s second quarter results marked one of our best ever. Economic Net Income (ENI), which reflects our current value creation, remains at record levels, reaching $4.3 billion for the past twelve months. Total assets under management reached a record $279 billion at quarter end, up 21% year over year.”
BX also declared a quarterly distribution of $0.55 per common unit to record holders of common units at the close of business on July 28, 2014. This distribution will be paid on August 4, 2014.
Some analysts expect BX to hit $44 a share by year end.
Let’s raise our protective stop to $34 a share here. We’re already in the money on our September $35 call options (BX140920C00035000). Let’s sell half for a 57% gain and hold the rest for additional potential profits.
In other news, we hit our protective stops last week on Occidental Petroleum (NYSE: OXY) and Seaspan Corp (NYSE: SSW), with gains in both stocks.
I also recommend we close out our position in World Acceptance Corp. (Nasdaq: WRLD) at a slight loss.
But let’s keep Silver Wheaton Corp. (NYSE: SLW), the royalty interest company based in Vancouver, in the new service. We’ll also keep the September $28 calls (SLW140920C00028000). SLW finances silver miners in return for receiving silver and/or gold production from their mines at a low fixed cost ($4.25 per ounce of silver, $350 per ounce of gold) and profits when selling the silver and gold when it’s produced. It has profit margins exceeding 48%, the best in the mining sector.
Many private equity managers are bullish on silver — and so are we.
Next week, I’ll have my first recommendation based on what private equity is bullish on now. Living in the New York area, I have access to many top private equity managers and what investment sectors they like now.
Latest Special Report
I encourage you to read the newly updated version of The Top 12 Stocks You Should Buy Right Now, which features three of my top investment recommendations for the second half of 2014, as well as bonus picks from each of my fellow investment newsletter editors at Eagle Financial Publications.
Lecture on Milton Friedman’s Birthday, Kansas City Public Library, 6 pm, July 31: I’ll be talking about “Milton’s Paradise: My Friendly Fights with Milton Friedman,” featuring some personal recollections, including the time I tore up his $20 bill. Open to the public, but you need to RSVP.
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