Porter Stansberry is out with an earnest video sales pitch that’s built around the theme, “you deserve the chance to be rich.”

And he thinks the way you get there is by buying the kinds of stocks he has generally liked for a long time, both at Stansberry Research and at the Porter & Co. imprint he started when he was squeezed out of MarketWise (he’s back in charge at his old company now, but has also held on to Porter & Co.) — which is to say, capital efficient companies which enjoy the leverage of some kind of royalty or licensing-type business, with the developer of the asset or the intellectual property profiting from the ongoing investment of other companies. That can be content or patent licensing companies, mining royalties, franchise companies, or just very strong brands that people will pay to associate with.

What he’s actually selling this time is not his Big Secret on Wall Street subscription ($1,425), but a “special report” that is a standalone purchase — no doubt he’d like you to also enjoy that special report enough that you feel compelled to subscribe to the newsletter, too, but the “ask” this time is $199 for a copy of his “Intellectual Compounders” special report.

And he hedges that, too, by saying these aren’t actually recommendations — he’s not telling you to go out and buy these six companies today, but he’s trying to educate, and to shed light on the business model. But of course, for most folks the prime motivation to pony up $199 would be that you want to find out the names of the companies and why you should own them. And the primary reason Porter & Co. would repackage these past recommendations into a “Special Report” is so they can bring in folks who wouldn’t pay $1,425, and then slowly urge those folks to become full subscribers in the future. The most valuable asset for any newsletter publisher is the name and email address of someone who has proven that they’re willing to pay for information and research, it almost doesn’t matter how much they’ve been willing to pay.

So let’s go through the limited clues, try to figure out which companies he’s talking about (I’m guessing we’ve already covered a few, since these “Special Reports” are almost always full of recycled favorite ideas, probably ones he has teased before), and give you the ten-cent explanation of what these companies do, and how they fit that “capital efficient” or “licensing/royalties” model Porter is talking about.

His shtick is that he’s doing the video from his wine cellar (to remind you that he’s rich, and therefore smart, an advertising tactic that has worked for generations — though this is a classier pitch than the “look at me in my Ferrari and/or Yacht” promos some pundits use), and he ties that into his “licensing” idea by showing an antique corkscrew emblazoned with the Anheuser-Busch name, one of the early uses of brand licensing (I’d say that’s more like advertising, frankly, but you get the idea — and Anheuser-Busch, like Coca-Cola and many beverage companies, did expand in part by licensing production of its brands to other companies in various ways).

The spiel starts with one “freebie” company… here are some quotes I pulled from the ad (no transcript for this one, sadly):

“Companies that monetize intellectual property are among the most capital efficient on the market. You want to find the companies who are capital efficient and have great long-term prospects…

“One man has taken the practice of licensing to an entirely new level.

“With a new way to apply licensing to the pharma industry…

“Analyze thousands of drugs that pharma companies can’t afford to put through clinical trials, then acquire them and put them through clinical trials and get them approved. He has turned pharma into a capital efficient business….

“And he’s an American dream story, a second-generation immigrant who has created an entirely new licensing model, and built the world’s most robust biotech incubator. Licensing drugs that have been pushed aside, and building subsidiaries to develop them, each with its own management team.

“They acquired Pfizer’s ulcerative colitis drug for $45 million, which they developed and later sold to Roche for $7 billion

“The company also has $7 billion in cash, a $2 billion stake in another public company, no real debt, more drugs slated for approval that could be big, and lawsuits over the IP of the COVID vaccines which might bring in billions more in retroactive 3-6% royalties on those sales.”

As I noted, though, this is the “freebie” idea — he’s talking up Roivant Sciences (ROIV), whose founder is Vivek Ramaswamy, who is more of a political figure now but did build this “incubator” of neglected drugs, spinning each one off into a separate “Vant” company to do the clinical trials and development, and enjoying the returns of the ones that work out.

Porter says it’s extremely undervalued at $11. Analysts have targets in the $18-20 range. An interesting idea I’ve never looked at before, and it is cheap and looks like a value pick on the surface, though Ramaswamy is certainly likely to continue to be a lightning rod, and a prominent spokesperson in the Trump orbit through the rest of the campaign, which probably some investors will love and some will loathe.

And Vivek Ramaswamy has been recycling this “buy cheap drugs, develop them when others weren’t going to, commercialize them and sell them for tons of cash” routine for a long time, starting in his 20s… with enough success that there’s clearly some “there” there. If you want to get a sense of that history you can check out this Forbes article from 2015 and a more recent one from the NY Times last year.

I have no idea what skeletons might be lurking in the ‘Vants, or what Ramaswamy’s future plans are, but he has accumulated a massive cash pile at Roivant, and it’s entirely possible that he can explode that higher if he make some more great deals for drugs he can get developed and approved.

So that’s the freebie, which appears in the special report as “Intellectual Compounder #7″… what are the other six stocks?

This is from the order form:

“Intellectual Compounder #1: On course to making $2 billion a year by licensing games to online casinos and collecting 10% of the profits.

“Intellectual Compounder #2: Gets paid 5% of total sales from 2,800 stores that sell discount brand clothing and household goods.

“Intellectual Compounder #3: Has zero employees and zero capital expenditures but collects royalties on 9,000 oil wells.

“Intellectual Compounder #4: Makes $1 billion a year funding lawsuits and collects, on average, 30% of the proceeds from the cases it wins.

“Intellectual Compounder #5: Owns 20 million acres of land across America and makes money from the oil and gas wells that are constructed on its land.

“Intellectual Compounder #6: Streams financing deals to the largest mining companies on the planet and makes over $1 billion a year with just 40 full-time employees.”

He drops a few other clues during the video presentation, so I’ll run through each of these in order:

“Intellectual Compounder #1: On course to making $2 billion a year by licensing games to online casinos and collecting 10% of the profits.”

That’s clearly Evolution (EVO.ST, EVVTY), the Swedish leader in online live casino gambling, and developer of most of the popular game shows and table games that are licensed by casino companies. The capital efficient part for them is that they don’t have to spend the money acquiring customers, a huge cost borne by the developers of fancy casino properties and online casinos with massive advertising budgets. They just provide the video studio and live host/dealer, stream the games to the customer (sometimes branded with that customer’s dealer uniforms and logos, sometimes shared across smaller casinos), and collect a subscription fee from the casino operator and a share of the winnings from that game. They really dwarf all the potential competitors, with 20,000 employees, the vast majority of whom are dealers or online hosts, and it’s in part a hit-driven business, like other areas of entertainment, but they spend heavily enough on new product development that they are likely to continue to develop the games casinos really want… and it seems to me that nobody can really compete with their product development at this scale.

I also own this one, and I covered Porter’s original tease of the recommendation back in December. I also added to my Evolution position a few weeks ago, here’s an excerpt of what I wrote at that time:

“Evolution (EVO.ST, EVVTY, EVGGF) continues to drift lower this year, following a first quarter that looked pretty weak because they did a lot of hiring and bumped to a higher tax rate. Given their continued dominance of the live online video casino business, and the gradual growth of legalized gambling around the world, it still looks quite appealing to buy Evolution at a relatively low valuation (~18X likely 2024 earnings now), particularly given their growing dividend (current yield about 2.7%, they pay once a year and pay out 50% of their earnings as dividends), and the fact that the bottom-line earnings growth rate is likely to look better next year, once we’ve lapped the reset in the tax rate….

“I think we’re in a lull, mostly because of the slowdown from the crazy growth pandemic years and the one-time impact of the reset in their tax rate on earnings growth (they’ll keep paying that higher tax rate, of course, but the rate won’t bump higher again next year, so we won’t see a repeat of the negative margin impact on the growth rate). Even if the business slows down to 10-15% earnings growth in the future, which is possible but seems a very conservative estimate, the current valuation is very reasonable. If they’re able to sustain earnings growth in the 20% neighborhood, the current valuation is a bargain. That’s roughly the range of likely future outcomes, I think, absent some big bad news, and I want to own more as we test the lows… particularly because they’re also likely to do more buybacks if the price remains depressed.”

The report tomorrow, so this story could change quickly.

Next?

“Intellectual Compounder #2: Gets paid 5% of total sales from 2,800 stores that sell discount brand clothing and household goods.”

My other notes from the video summed up:

Discount franchiser, almost 3000 businesses. Collects 5% sales royalty and other fees. 10 year franchise term. These discount stores can thrive in good and bad times. Revenue growth 14% in 2008, indicative of how well they do during recessions. $900,000 profit per employee.

So… hoodat? Thinkolator says our most likely answer is Winmark (WINA), which has been an unlikely but extreme success — built on franchising stores that sell used clothing and equipment. They don’t have 2,800 stores or 3,000 stores, but they do say they have 2,800 opportunities… and there are about 1,300 stores currently in operation under their different brands. The brands are Play it Again Sports (used fitness equipment, mostly), Plato’s Closet (used teen clothes), Once Upon A Child (kids’ clothes and toys), Music Go Round (instruments and equipment), and Style Encore (women’s fashions). I guess there are no men’s fashion franchises, because everyone knows we just wear whatever clothes fit until they turn into rags (kidding! I’m sure many of you are much better-dressed than your friendly neighborhood Gumshoe).

It’s an appealing business socially, since it keeps stuff out of landfills, and there are good margins in the “used stuff” business if you can make it scalable and efficient, and apparently they can help their franchisees do that. They are neither a high revenue growth company, nor a highly profitable company in GAAP terms, but they generate great cash flow and great returns on their assets — and like Domino’s Pizza (DPZ), they don’t need any cash on their balance sheet to do so, so they actually have a negative book value (more debt than assets).

That means they’re almost capital efficient to a fault, which I guess is part of what appeals to Porter, and they’ve been using their cash to pay down their small amount of debt and buy back shares (though haven’t bought back shares in the past year, perhaps because they’ve gotten more expensive). Investors have begun to appreciate WINA more in the past year or two, it routinely traded for about 20X cash flow in the past (dipping below that during COVID), but is now up to about 35X cash flow from operations… again, kind of like Domino’s, another value-focused franchise retailer that might do well when family budgets are strapped, but looks kind of expensive itself. (Domino’s came to mind mostly because I own a small position, and that stock collapsed today, after a mild downgrade to their earnings forecast — so that’s a reminder that companies with high margins often trade at higher valuations, even if they don’t have extreme growth, and can be very volatile when they disappoint.)

Maybe this will surge again in the next economic downturn, perhaps worth keeping an eye on, though I don’t see enough growth to justify the current valuation. You can make your own call there. Or let me know if you think Porter is hinting at somebody else.

Next!

“Intellectual Compounder #3: Has zero employees and zero capital expenditures but collects royalties on 9,000 oil wells.”

Porter says in the video that this is an energy trust with mineral rights on 9,000 wells in the most prolific field in the US… and that he can’t see energy prices going down anytime soon. And he says they’re immune from price volatility, and have had revenue growth of 1,000% since going public… with an average profit margin/free cash flow margin of 77%.

This one is Viper Energy (VNOM), which was spun out of Diamondback Energy (FANG) almost a decade ago (when the oil price was crashing) to own many of its producing locations, essentially taking those assets off the books of FANG but rewarding VNOM with a royalty on those lands in return. They have had revenue growth of about 1,100% since that spinoff, though the total return to shareholders has only been about 220% (including dividends). They are very cash efficient, sometimes more than 90% efficient, but they did have a 77% cash from operations margin last year.

This acts like one of the royalty trusts partnerships, but is actually taxed as a corporation, so you don’t have to deal with K-1 forms and the like, but the negative flip side of that is a smaller dividend, so the yield is only about 5%. Should be a solid play on oil, given that all their assets are in the Permian, which has been the most productive field in the US by far, and they say they’ve only drilled about a third of their locations, so there’s plenty of growth potential as Diamondback continues to invest in more production. The downside of being a passive royalty company is that they also don’t get to choose how Diamondback response if there’s a meaningful decline in oil prices, so production could always be cut back at some point, but they’re doing well right now.

I covered Porter’s original pitch for VNOM back in late 2022, when it was one of the add-on picks for his “Gods of Gas” promo. Here’s what the total return has been since then, in purple, compared to their partner Diamondback Energy (green), the S&P 500 (orange), and the WTI crude oil spot price (blue):

Turning around for home now, more than halfway!

“Intellectual Compounder #4: Makes $1 billion a year funding lawsuits and collects, on average, 30% of the proceeds from the cases it wins.”

In the video he mentions that they’ve won 92% of their cases, and he mentions their big win against Argentina which turned $66 million into $3 billion… and that they earn profits on 84% of the capital they deploy, so they’re good at choosing winning cases to finance.

I’ve never covered a tease of this one before… but I did buy shares back in June, interestingly enough, so I can tell you that this is a pitch for Burford Capital (BUR), the main publicly-traded lawsuit financier (there are a bunch of hedge funds who do this, too, but BUR is really good at it). Here’s a little excerpt of what I wrote to the Irregulars when I invested in this one as a counterpart to my investments in insurance companies (insurers face pressure from “social inflation,” which generally just means more people suing for damages and higher awards given by juries, so in some ways Burford hedges that as a “social inflation beneficiary”):

Burford Capital (BUR) has turned itself into the leading private credit lender for law firms… that essentially means they’ll finance a lawsuit in exchange for part of the potential reward from a settlement or a victory in court (these are big commercial lawsuits, generally, Burford isn’t funding the “were you in an accident” billboard lawyers). They were founded by lawyers, but they’re really an investment company that decides how much a potential claim is worth, and what rate of return they’d need to invest in covering the litigation costs up front to earn a share of the return. That’s a key service for law firms, since they are generally partnerships that have high cash flow, but not much in the way of assets or surplus cash or the appetite to eat big litigation costs on contingency cases… and for corporations who want to pursue large claims, but don’t have the cash to really push a lawsuit aggressively, especially if it’s against a much bigger company (or don’t want that legal spending to hit their income statement, and cause their investors to get grouchy).

Burford is at an interesting valuation now, and there’s been a strong recovery of revenue and earnings now that the COVID logjam in the court system has largely been cleared (there are still above-average delays, it sounds like, lots of pre-2020 cases are still in the pipeline, and delays increase the cost of litigation, but there aren’t as many real roadblocks, and there have always been delays).

The stock seems to be heavily reliant on Argentina for the moment, because they’ve got their share of a huge lawsuit for state expropriation yet to earn (Argentina was required to offer a buyout to the private shareholders of YPF, the state oil company, when they took control in 2012… and they didn’t, so those private shareholders won their lawsuit in New York, with Burford’s funding, last year, 11 years after the event), and there are (perhaps rightly) plenty of folks who are concerned they might not get the money from Argentina, or might not get it all, but the basic business is pretty impressive….

… they’ve clearly got something very effective going here, with a very high win rate and, perhaps more importantly, a massive gulf between how much they lose when they lose, and how much they win when they win (246% ROIC on won cases, 59% ROIC on settlements, -85% ROIC on lost cases, leading to that overall 82% ROIC)….

I get the same feeling when I look through Burford’s numbers as I got from my updated look at Kinsale (KNSL) last summer: They shouldn’t be able to be this consistent, and make this much money, in a tough field like commercial litigation… but it’s beginning to look like either the field is a lot more lucrative than I would have expected, or they are just better than everyone else in their niche business (the competitors are mostly hedge funds, and subsidiaries of giants like Blackrock and Brookfield, so we don’t have any really good publicly detailed comparisons — the only public company I’m aware of is Omni Bridgeway (OBL.AX, IMMFF), which is 1/20th the size and hasn’t really grown over the past decade).

That’s most of the story, I think — though they also have an asset management business. The company itself is essentially a fund that invests in legal cases, so they pushed that a step further and also manage other peoples money that is invested in these same cases, for a typical hedge fund management fee. That gives them a little leverage, and a little less of their own capital at risk, but really it’s just about how effective they’ve been at building this business to be the go-to for litigation finance, and how successfully they choose their cases.

And right now, the stock is trading at only about 1.3X book value — there aren’t many analysts covering the stock, but the limited consensus indicates that they think it’s trading around 10X likely 2024 earnings, with 30% earnings growth next year. It’s very unlikely to be steady, and there will probably be big ups and downs, with lots of other risks (like if we see a big movement for tort reform in the US… stop laughing, it could happen someday!)… but it looks like they should have a pretty massive tailwind.

I imagine this one will remain quite volatile, particularly as any news comes out about Argentina actually trying to settle, or Burford and the other litigants make progress in trying to seize assets (neither seems imminent), but the price is still pretty close to what I paid last month.

Moving on…

“Intellectual Compounder #5: Owns 20 million acres of land across America and makes money from the oil and gas wells that are constructed on its land.”

That’s another royalty company, Black Stone Minerals (BSM) — this one has a much broader royalty portfolio, with mineral rights on those 20 million acres around the US, but they are spread out, without a ton of exposure to the Permian… and they are much more reliant on natural gas than is VNOM, with lots of Marcellus and Haynesville acreage, so they’ve suffered with lower gas prices and haven’t gotten as big a boost from the sometimes-rising oil price. They are also a partnership, so you get K-1 forms and a much higher yield — they did just cut the distribution last quarter (as natural gas revenue fell), to 38 cents, so the expected yield has come down from 12-14% earlier in the year to about 10% now.

I covered this one when Porter included it in his “Big A.I. Die Up” pitch last Fall, if you want more detail. I’ve owned this one in the past, and I like that they’re probably the broadest footprint energy royalty partnership available, with a good yield, but do not own any shares today.

And last one…

“Intellectual Compounder #6: Streams financing deals to the largest mining companies on the planet and makes over $1 billion a year with just 40 full-time employees.”

It’s theoretically possible that this could be Wheaton Precious Metals (WPM), which is actually the biggest precious metals royalty company right now and has 41 employees… but I very much suspect that Porter is still focused on the company that has been the “blue chip” in gold royalties for much longer, Franco-Nevada (FNV), which does report having 40 employees. Both are similar in terms of revenue, bringing in a little over a billion dollars a year these days, and both are hyper-efficient in turning that revenue into free cash flow, since they are really just royalty owners and financiers of mining projects, they don’t actually participate in the expensive and cash-burning task of building a mine or sending men underground to find goodies.

I certainly agree that royalty firms are the way to invest in precious metals, particularly if you don’t want to become an expert on mining operations and build a diversified portfolio of miners — the actual miners are far more profitable during bull markets, but they also tend to build expensive mines at the worst times, and collapse during bear markets, and it’s a really dirty, difficult and capital-intensive business. It’s a lot safer and cleaner to be the financier — and top-line mining royalties and streaming deals, which essentially give the holder a percentage of the production from a mine, with no deduction for operating costs, are fantastic because they also tend to be perpetual, so they provide leverage not just to the potential for the price of gold or silver (or whatever) to rise, but, even more importantly, they provide royalties on mineral assets that aren’t even really part of the initial mine plan. Most miners start out with a fairly limited ambition, they just want to find enough reserves to justify building a mine, there’s no great reward for finding more gold or silver or maximizing things, and that further exploration would be expensive… but once they’ve been mining for a few years, and generate some cash flow, then they are motivated to expand that mine, to keep it going for longer and generate more returns from the giant fixed investment they made to build the mine and hire all those people and buy the equipment. A mine that might be financed with the idea that it will operate for ten years, can often actually find more reserves and operate for many more decades, continuing to pay those top-line royalties the entire time.

It’s a hit-driven business, like anything else, and most royalty companies own exposure to hundreds of “maybe potential someday” projects that will probably never turn into mines… but a few big mines can make a company. Franco-Nevada is the most famous of these royalty pioneers because of the extreme nature of their foundational deal: founder Pierre Lassonde bought a royalty on a little project in the Carlin Trend in Nevada, way back in 1986, he thought it was a royalty on a small heap leach operation that could produce 600,000 ounces, and paid $2 million… but the property was later bought by Barrick, explored for a few years, and they found a much larger ore body underground (20+ million ounces, later to expand to more than 50 million), and that turned out to be the Goldstrike mine — which is still adding more than $20 million a year to Franco-Nevada’s bottom line.

Franco-Nevada has been clobbered over the past year, largely because the biggest investment they’ve ever made, a billion-dollar streaming deal for a big chunk of the production at Cobre Panama, had to be written down last fall when the Panamanian government shut down the mine. If that stays closed, and FNV never gets any compensation or any further revenue from Cobre Panama, that will hurt, it was something like 20% of their net asset value and revenue in 2023… but they do own a lot of other assets, and they’ll likely end up being OK. That bad news brought FNV shares down to their lowest valuation in a long time, an oddity for the gold royalty company that has almost always traded at a stiff premium to its competitors, so I would imagine that’s why it again floated into Porter’s attention again, but he has written about it a ton over the years.

I tend to be over-excited about gold royalty companies, so I try to keep a firm valuation “line in the sand” when buying these stocks — I try to pay less than 20X cash flow from operations. Among the relatively large royalty companies, the ones who meet that valuation criteria right now are Royal Gold (RGLD) and Triple Flag (TFPM), along with the beaten-down Sandstorm Gold (SAND)… but FNV is pretty close (they’re at about 24X right now). I wouldn’t talk you out of trying to chase what has historically been the best company in this space, particularly because a “buying quality” strategy has worked in this sector, and they’re also a lot cheaper than the now-larger Wheaton Precious Metals (WPM) (which has been helped by having more exposure to silver, the more volatile precious metal), and all of these companies will do very well if this gold bull market continues… but I do tend to err on the “cheaper” side, personally. Might just be stubbornness.

So there you have it — six “capital efficient” companies that Porter Stansberry is touting as “Intellectual Compounders” — and they’re all at least somewhat appealing because of those high margins and (mostly) predictable cash flows, and those companies tend to thrive through very long cycles… though they aren’t often high-growth stories that will take off and double in a month, so there is some risk in paying up to buy the more expensive of these types of companies, especially if you’re not inclined to be very patient. I like and own several of these stocks… but the more you pay, the more patient you have to be.

That’s just what I think, though, and what I’m doing with my money — with your money, you get to make the call, and we’d all like to know if you find any of these seven firms attractive, or have similar companies you think are a better buy in the “licensing” or higher-margin space. Do let us know with a comment below… and thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of Evolution, Burford Capital, Sandstorm Gold, Royal Gold, and Domino’s Pizza. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.