November 2012

Imagine if you could boost the potential capital gains of your stock portfolio by tens, or even hundreds, of percentage points without taking on any additional risk.

That's why we're launching our newest trading service, Stansberry Alpha...

Written by S&A founder Porter Stansberry and his research team... the service is designed to show subscribers a simple, safe options strategy that can ratchet up the gains you can make on a stock position without taking on additional risk. It's one of Porter's favorite strategies for investing his own capital.

Porter needs no introduction to most subscribers. Since founding Stansberry & Associates Investment Research more than 14 years ago, he's built it into the largest private investment publisher in the world. His flagship publication, Stansberry's Investment Advisory, is the most widely read newsletter of its kind.

The goal with Porter's newest service is to show subscribers how to take the same research and stock analysis he uses in Stansberry's Investment Advisory... and use options to turbocharge the gains. In finance... "alpha" measures how much better an investment performs compared with vehicles with a similar risk profile. That's why we've named this new service Stansberry Alpha... Our trades carry no more risk than a simple stock purchase. But the potential gains are much bigger.

Right now, Stansberry Alpha is in "beta" format. We're still refining the details. But we wanted to give a few select subscribers an early look at what we're doing.

One last thing... we would appreciate your feedback on the issue (below). Your comments will be critical in helping us build the most useful trading advisories on the market. You can send them to


Carli Flippen
Senior Managing Editor
Stansberry & Associates Investment Research

Stealing 18.5% Right Now...
and Getting Paid 100% Later

An incredible shift in the global energy markets is going on right now... and it's about to make the United States the world's most important producer of oil and natural gas.

Most people don't realize it, of course. Americans are used to thinking of our country as dependent on shaky, hostile nations for our energy needs. But that's changing... fast.

Advanced technologies, notably hydraulic fracturing and horizontal drilling, have opened vast domestic resources. It's a trend we've been covering in Stansberry's Investment Advisory for several years... one we covered in depth in the special reports: America's Secret Shale Play, America's Big Power Shift, and Cornering the World's Next Trillion-Dollar Business. (All of these are already available to you as a subscriber.)

We won't detail the changes that are happening here. We urge you to review those reports.

But it's safe to say that despite the current historic lows in natural gas prices... We're bullish on natural gas.

Here's what we told Stansberry's Investment Advisory readers in the April issue... (just as natural gas was hitting its most recent lows)...

For most investors, the opportunity unfolding in natural gas will be one of the best investment opportunities of the next decade...

Sooner or later, the price of natural gas will rebound sharply... and not just because it always has in the past. What will propel natural gas prices over the medium term (say, five years) is an economic truism: It's impossible for a surplus of energy to exist for long. As prices fall, more and more uses for natural gas will appear. At some price, natural gas becomes competitive with other forms of energy.

In Stansberry Alpha this month, we'd like to show you the best way to leverage our view on natural gas to produce the largest possible gains. This is the very best way to make the largest profits possible... while only accepting manageable risks.

The essence of this trade is understanding why and how natural gas will become a global fuel, with a consistent global price – just like oil.

Natural gas production worldwide has increased from around 1.23 trillion cubic meters in 1973 to about 3.39 trillion in 2011. That's a 176% increase over 38 years.

In the U.S., gas production has jumped 20% in the past five years. The International Energy Agency (IEA) reports that last year, the U.S. was the world's second-largest producer behind Russia. The difference in production volumes between the two was a minuscule 3.8%. Last year, Russia produced 677 billion cubic meters (bcm) of natural gas, 20% of the world's total. The U.S. produced 651 bcm, 19.2% of world production. Russia exported about 29% of its production, which made it the No. 1 exporter.

As the world's No. 2 producer, only a fraction behind top dog Russia, you might expect the U.S. to also be among the world's largest exporters.

But we're not. We export essentially nothing.

The tiny Arab nation of Qatar – with 2 million people, its population is roughly the size of Houston – claims the title of No. 2 global exporter. It produces about 151 bcm a year. That's about 4.5% of the world's annual total... but it ships out nearly all of it – 119 bcm.

Resource-rich Australia is ramping up natural gas production for export. Experts say Australia will surpass Qatar in exports by the year 2017.

Most of the demand for natural gas imports (in the form of liquefied natural gas, or "LNG") comes from Asia.

China, the world's most populous country, produced 3% of the world's 2011 supplies. It became a net importer in 2007, as its demand for natural gas increased to meet the needs of its developing infrastructure. And while natural gas represented just 4% of China's energy consumption in 2009, the government has pledged to increase the natural gas share to 10% by the year 2020.

India, the world's second-most populous country, consumes about three times more gas than it produces. Just 7% of its energy consumption in 2010 was fueled by natural gas. As with China, it still uses coal for the overwhelming majority of its energy needs. Indonesia only produces about 2.7% of world supplies, but has the world's fourth-largest population. Japan is the largest importer... with 116 bcm in 2011. Korea is the world's fifth-largest importer.

Europe is also chronically short on gas. Italy and Germany occupy the No. 2 and 3 importer spots, respectively.

By the way... the sheer size of our economy, the amount of natural gas storage available, and the trading we support made the U.S. the fourth-largest net importer last year. That won't last long...

The prices for LNG are determined by long-term supply contracts. Little gas is available on the spot market (the market for immediately available gas). And currently, the prices on these long-term contracts are highly variable. In the U.S., natural gas sells for around $3 per thousand cubic feet (mcf). In Europe, it goes for around $11 per mcf. And in Asia, it sells for approximately $17.

The shortage is most intense in Japan. The March 2011 tsunami killed thousands of people and resulted in the closure of Japan's entire fleet of nuclear power plants. To make up for the power lost by these closures, Japan turned to LNG. According to IEA figures, Japan increased its LNG imports by 20% in 2011.

China increased its imports by a massive 31%, and experts expect volumes to increase 3.5-fold by 2020. This will be a huge fundamental driver of LNG for the next 50 years – at least.

Many other countries will follow the same path...

Germany announced its plans to shut down all the nation's nuclear power plants within the next 11 years. The European energy commissioner Guenther Oettinger said, "We want to look at the risk and safety issues in the light of events in Japan."

Germany has also been a big investor in solar power... the most expensive (and least reliable) way to power a grid. As these solar "dreams" are discovered to be fatally flawed, Germany and many other European states will turn to natural gas. Also... most people don't know this... but natural gas pipelines run into most large solar facilities because without some outside energy source, solar plants simply don't work, at all, most of the time.

The world needs a lot more LNG infrastructure. Things like LNG export terminals, LNG tankers, and storage-and-distribution facilities.

In our monthly Investment Advisory newsletter, we've written extensively on these trends. We've outlined how soaring gas production in the U.S. will be a boon to companies that transport LNG, or are preparing to export it. We've also written about how companies like natural-gas-reliant power company Calpine will benefit as more and more of the national power grid moves away from coal to gas-fired power plants.

Last May, we introduced Stansberry's Investment Advisory subscribers to a company that will be a primary beneficiary of the global LNG boom – Chicago Bridge & Iron (NYSE: CBI).

Most people don't know North America's natural-gas pipelines make up the world's largest collection of energy-related infrastructure. And CBI built most of this infrastructure. It built the first marine LNG storage terminal (1958) and the world's largest vacuum distillation tower (1999). This infrastructure, more than any other single factor, will be our greatest advantage in the global race to develop world-scale LNG export capacity. And it will be copied, by natural-gas-producing countries and importers all around the world.

Where will these other companies go for construction? They will go to CBI.

Naturally, the U.S. will maintain its edge in these markets by building even more and better natural gas infrastructure. And who will build it? CBI.

According to an estimate by trade group Interstate Natural Gas Association, North American industries need to invest $6 billion-$10 billion per year to maintain the storage network capable of handling the growth in production.

Over the past several years, CBI has built or expanded at least 10 major LNG import/export facilities in seven different countries. As of June 30, approximately 80% of its revenue so far this year came from outside of the U.S. And approximately 85% of its June 30, 2012 backlog is comprised of projects outside the U.S.

Backlog gives us insight into the company's future. It's the accumulated list of projects, orders, and contracts that the company hasn't started yet. It tells us what work a company has ahead of it and how much it'll get paid to finish the job. At the end of 2010, CBI's backlog was a robust $6.9 billion. A year later, the backlog had grown to $9 billion... and as of the latest quarterly filing on June 30, its backlog had grown to $10 billion. With CBI's annual revenues last year coming in around $4.5 billion, CBI has more than two years of pent-up revenue just waiting to be recognized.

The composition of its backlog as of June 30 was approximately 45% LNG, 15% gas processing, 15% oil sands, 10% refining, and 15% petrochemical and other end markets.

Its LNG backlog is primarily concentrated in the Asia-Pacific region, and the company anticipates significant opportunities will continue to come from this region, in addition to Russia and North America. As we mentioned earlier, Russia and the U.S. are the biggest gas producers on the planet. And Australia is ramping up, which will put it among the top five or six LNG exporters over the next several years.

CBI has a stack of experience in this region. The company's gas-processing projects are concentrated in the U.S. and the Asia-Pacific region, again, where they expect continued strength. The oil-sands backlog comes from the Canadian oil sands and the majority of the company's refining-related backlog comes from South America.

CBI's backlog not only highlights its growth potential, but also demonstrates its impressive global presence. Its contracts vary in size from $100,000 to more than $2 billion. The largest projects are the $2.3 billion Gorgon LNG export project in western Australia and a $500 million LNG storage-tank project, also in Australia.

As we said, the great thing about companies with long-tailed projects, like CBI, is you can look into their future. If a company is growing, but backlog is shrinking... that's a red flag. Its growth may be ending. Conversely, if a company's backlog is consistently growing, that's a sure sign that earnings and revenues will also grow. As you can see, CBI's backlog is growing. That is great news for investors and a bullish sign for the company.

CBI is perfectly positioned to benefit from the natural gas megatrend... and we expect Stansberry's Investment Advisory subscribers to do well holding the stock over many years.


Shortly after we recommended the stock, a situation developed that we believe offers sophisticated investors an even better opportunity in the stock...

In July, the company announced it would spend $3 billion in a 90%-cash deal to acquire power-plant builder Shaw Group. As happens frequently with acquisition announcements, news of the deal sent CBI shares lower.

Wall Street analysts who specialize in mergers and acquisitions – called "arbitrageurs" – felt CBI was paying too much for Shaw. The stock fell 15% to less than $35 at one point. This kind of merger-related selloff is common... Meanwhile, nothing fundamentally changed at the company. Nor was the price CBI agreed to pay too high. In fact, CBI's bid represented just 16% of Shaw's backlog of orders.

Before we explain how this situation sets up an exceptional trading situation... let's look at some of CBI's financial numbers...

Chicago Bridge & Iron (NYSE: CBI) Fundamentals
Market Cap
$3.7 billion
Enterprise Value
$3.2 billion
Sales (LTM)
$5 billion
Price-to-Earnings (P/E) Ratio
Price-to-Free Cash Flow Ratio
Price to Sales Ratio
Shareholder Yield
Return on Equity
Return on Assets
$550 million
$40 million
Book Value
$1.2 billion
Total Assets
$3.2 billion
$10 billion

When valuing a company, one metric we like to use is free cash flow (FCF). It's one number that doesn't lie. Free cash flow reflects the amount of cash that the company is left with after it has paid all operating and capital expenses. FCF is a valuable tool when looking at a company like CBI, which has "long-tailed" projects that can take years to complete.

Due to these long drawn-out contracts, we look at FCF over long periods of time. By evaluating FCF over longer periods – say, three-year chunks – you begin to see an accurate reflection of how well CBI has been growing its business...

Chicago Bridge & Iron (NYSE: CBI) Free Cash Flow
$302.6 million
$655.6 million
$837.3 million

You can see that between 2006 and 2008, CBI more than doubled FCF compared with the previous three-year period. The growth continued in the most recent three-year period, with FCF increasing another 28% over the previous period. Clearly, demand for CBI's services is growing. These numbers demonstrate management's ability to execute during periods of growing demand.

A Brief Glossary
of Options Terms

Ask: The lowest price option sellers are currently willing to accept.

Bid: The highest price option buyers are currently willing to pay.

Call option (or "calls"): Stock options that give the buyer of the option the right, but not the obligation, to purchase stocks at the stated "strike price" by the "expiration date." When you sell a call, you assume the potential obligation to sell shares at the strike price.

Expiration date: Options expire on the third Friday of the month. You must sell on or before the expiration date.

Exercise: You can either sell your option or "exercise" your right to buy (in the case of a call) or sell (in the case of a put) the underlying stock at the strike price.

Put option (or "puts"): Stock options that give the buyer of the option the right, but not the obligation, to sell stocks at the stated "strike price" by the "expiration date." When you sell a put you assume the potential obligation to buy shares at the strike price.

Strike price: The price at which you can "exercise" your option. This price is based on the underlying instrument. Call-option buyers have the right to buy the underlying instrument at the strike price. Put-option buyers have the right to sell at the strike price.

From a valuation viewpoint, CBI is currently trading at just 12.3 times FCF. We see this as very fairly priced, given the quality of the business and visibility we have to its future growth. We believe a multiple of 12x cash or 15x cash is likely within reason, if the company is able to execute the acquisition of Shaw without any major problems. This is a primary consideration in our options strategy with this stock.

As we mentioned, CBI is purchasing Shaw for an amount equal to merely 16% of Shaw's $18 billion backlog of orders.

That will give the combined company a total backlog of $28 billion. But today the market cap of CBI remains less than $4 billion.

Let's take a look at what this should mean for the stock.

The combined companies have around $1 billion in cash, $2 billion in equity, and $2 billion in debt. This deal will add about $1.9 million in debt to the combined balance sheet. This means the company will have $2 billion in equity against almost $4 billion in debt. For most companies, this amount of leverage (2x) is a little high – but not in this case, thanks to the massive backlogs.

Over the next five to seven years, these debts will transform into additional equity. Assuming the company can pay down its debt in seven years (we think it can, considering current FCF and the large backlog), the combined business would have almost $4 billion in new equity... or 300% more than it has today.

Right now, the firms in CBI's industry sector average a price-to-book ratio of 2.46. If we round that up and apply a 2.5x book value to CBI, it would be worth something around $15 billion. Or another metric we like to use is price-to-FCF. Today, the industry average sits above 18x. That's more than we would want to pay, so let's use a more conservative ratio of an estimated 12.5x cash flow multiple. With $1.2 billion in FCF, you end up with a market cap of $15 billion.

Either way you measure it, over the next several years, this stock should double, triple, or even quadruple. And these estimates are based purely on the existing book of business.

When you find a situation like this... where you can be certain of the future growth and cash flows, it's appropriate to take a more aggressive and leveraged position. So what's the best way to profit from our knowledge of this deal?

Our goal with Stansberry Alpha is to radically increase the returns we're able to earn on our highest-conviction ideas.

The way to leverage our ideas is by buying call options. Call options give investors huge upside potential, while limiting risk to the premium paid for the option.

We don't normally advocate buying options, as most out-of-the-money options expire worthless. However, with volatility so low right now, it's actually a good time to buy options.


We're going to pair our purchase of calls on these recommendations with the sale of a put. Doing so will allow us to finance the purchase of our call option. That will enable us to mitigate the risk of owning it.

There's no doubt that these trades will be volatile. But as we'll show you, that doesn't mean they will be risky. Let's look at the details of our trading strategy as they will be applied to Chicago Bridge & Iron.

We want to be an owner of Chicago Bridge & Iron for two fundamental reasons. First, the global build-out of LNG means this company is going to see growing sales and profits for at least the next five years – and probably a lot longer. In the near term, Wall Street traders have driven down the price because of the merger with Shaw Group. Looking at the chart, you can see that since it touched below $34 a share for a brief moment in early June, it has risen and come back down to retest $35 a share on two occasions where the price held steady. CBI shares fell to about $35 during the maximum period of pressure, just after the deal for the Shaw Group was announced.

That's where we'll sell a put. We don't believe the stock will trade for less than $35 during the duration of our trade. If we're wrong, we could be "put" the stock – meaning we'd have to buy it at $35. That's our risk. We don't think that represents an actual risk to our capital at all because we're happy to be long-term owners of the company at that price.

On the other hand, we fully expect the shares to reach a new high and continue moving up as the overhang of the merger-related trading on the Shaw deal recedes. We believe the combined company will break out to new highs of more than $50 per share.

To leverage our exposure to the upside, we recommend buying an "out of the money" call with a $45 strike price. If the stock trades for more than $45 a share by the time the call option expires... we'll have the right (but not the obligation) to buy shares of CBI at that price... regardless of the market price of the stock. This allows us to capture the gain between where the stock ends up trading in the future and the $45 strike price.

To give our ideas time to develop in the market, we recommend using January 2014 as the expiration date on both the put we're selling and the call we're buying. The trade we're recommending is...

Buy the January 2014 CBI $45 call for no more than $3.40.

Sell, to open, the January 2014 CBI $35 put for no less than $4.70.

This trade puts a minimum "net credit" of $1.30 per share of cash in your account. Remember, options contracts control 100 shares of stock. So that means for every pair of contracts you trade... you'll receive $130 in your account up-front.

Always keep this 1:100 relationship in mind... and NEVER sell contracts for more shares than you can afford to buy. For example, if you are prepared to buy 300 shares, the total investment is $10,500. If that is the total amount you are willing to invest in CBI, ONLY sell three contracts.

Do not accept any less than $1.30 in net credit to put on this trade. Accepting too little for the put or paying too much for the call increases our risk and shaves off too much of our safety net. You should have no problem getting into the trade for a net credit of $1.30.

The spread on the call – the difference between what buyers are offering and what sellers are asking – is $3.00-$3.40. The call closed Friday at $3.20. The "spread" on the put is $4.70-$5.00. You should be able to get into the trade for a net credit between $1.30 and $2.00.

We believe we can get into both options for an average of a $1.30 net credit. If you can buy the call at the lowest end of the range and sell the put at the highest, you'll receive a much higher net credit. But we can't control that. So we'll use the average entry point of $1.30 net credit for tracking purposes in our portfolio.

If you are not able to get in for a minimum net credit of $1.30 per contract, please don't chase the trade. Be patient, it may take a few days or even a couple weeks. If you wait, you should have no problem placing the trade for a minimum net credit of $1.30. Of course... the higher, the better.

You will need to have approval with your brokerage firm to sell uncovered puts. Brokerages typically require a minimum level of capital and experience before allowing clients to sell options. The application process is not onerous. It usually involves filling out a simple disclosure document.

In addition, you will need to deposit the necessary margin in the account. Since selling the put means you're accepting a potential obligation to buy shares, your broker wants to ensure you're good for it... "Margin" is simply a kind of security deposit. The amount of margin that each broker requires can vary, but most will allow you to trade options with a 20% margin requirement. This means that when you want to sell a put option, you need to put up 20% of what the total obligation would be in the event that you are put the stock.

In this case, we're looking at a $35 put. As each option contract is the equivalent of 100 shares, we're talking about a total obligation of $3,500 per contract sold. Therefore, you will need to put up 20% of that amount – in this case $700 per contract sold.

The trade can work out one of three ways by January 2014...

1) If CBI trades for less than $35 a share on January 17, 2014 (the day the options expire)... we will own it at a net cost of $33.70 (based on the above average net credit of $1.30.) It's important to realize that even in this "worst case," we're not taking on any additional risk beyond simply owning the stock. Plus, we're establishing our stock position at a lower adjusted price. So we're actually taking less risk than if we simply bought the stock outright today.

2) If CBI trades between $35 and $45 a share, both options expire worthless. We would keep the $1.30 ($130 per contract), which would result in an 18.5% gain on margin. That's an excellent return considering your money in the bank pays close to zero. And it beats most annual returns on any mutual fund or index, like the S&P 500.

3) If CBI trades for more than $45 a share at expiration, our position becomes more profitable... And the higher the closing price, the more we make. Here's how it works...

Let's say, CBI trades at $55 (a conservative target), we would keep the entire put premium we were paid at the beginning of the trade ($4.70 a share, or $470 per contract), and we'd exercise the call option to buy CBI shares at $45 each, representing an immediate $10-per-share profit. Again... since we're trading in increments of 100 shares... that's a $1,000 profit.

Once you subtract the $3.40 we paid for the call option, we'd earn $11.30 ($1,130 per contract) on our capital in the trade. (The $4.70 put premium plus $10 in capital gains on the stock equals $14.70. Subtract the $3.40 in call option premium paid and you're left with $11.30 profit.)

Our capital in this trade comes in two parts... First, we have to pay for the call upfront – that's $3.40. Secondly, your broker will require you to put up 20% of the capital necessary to execute the put option you've sold. That's 20% of $35, or $7. Thus, our capital in this trade totals to $10.40.

Making $11.30 on $10.40 in capital works out to a 108.6% return on capital.

This trade has exactly the same risk parameters as buying the stock at $35. Assuming you could buy the stock at that price (and you can't right now, it's trading for more than $37) and assuming the stock did go to $55, you'd make 57%.

We hope you can see how this strategy allows us to make more money with significantly less risk than buying the stock outright.

That's the Stansberry Alpha approach to investing.


Porter Stansberry and Brett Aitken
November 12, 2012

Published by Stansberry & Associates Investment Research.

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This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.