At Valuentum, we task ourselves with a tall order. While most investment newsletters compare themselves to a market benchmark, we go one step further. We want to deliver positive returns to you, our subscriber, year after year, in addition to outperforming the market benchmark.
As part of your upgraded subscription to Valuentum, you will receive in your inbox our monthly Best Ideas Newsletter, which reveals our best picks and pans constructed in a portfolio. This portfolio of best ideas contains long positions as well as put and call options, strategies easily executed in your own online trading account.
We update our portfolio at least monthly (additions/removals and performance), write commentary associated with the names in the portfolio and on stocks in the news, and notify you immediately via email if our thoughts or opinions have changed on any company or position.
Consistent with our investment methodology, the Valuentum Buying Index, our best ideas may span investing disciplines, market capitalizations and asset classes in order to maximize the return while minimizing the risk of the portfolio.
Since inception, our performance has been nothing short of fantastic, and our subscribers and clients have followed along and tracked our every move. Very few newsletters apply a time-tested (yet innovative) process, embrace transparency, and put your interests first. We can proudly say that we are among the few.
Click here to subscribe now and receive the next edition of our monthly Best Ideas Newsletter in your inbox and gain access to all premium commentary on our site.
Below we outline a few very brief summaries of companies that we currently hold in our Best Ideas portfolio. Please note that these are just a few examples, and our Best Ideas Newsletter showcases many more timely and undervalued opportunities with each and every monthly edition. Join Today!
At Valuentum, we often use a discounted cash-flow model as a means to back into the current share price of firms in order to ascertain whether the market is unfairly pricing their stock relative to reasonable long-term growth and profitability assumptions. In Apple's case, we believe the market is merely pricing in inflation-like expansion beginning toward the middle of this decade. Although in the land of technology, competition adapts quickly and a few years from now can be viewed as the distant future, we think the iPad-maker represents a compelling risk-reward opportunity at current levels based on our analysis. Often, evaluating a firm via a discounted cash-flow model and re-engineering its stock price can provide a better understanding of a company's investment potential on a risk-reward basis than even the most clearly written prose.
Precision Castparts (PCP)
Metal-bender Precision Castparts has long been a favorite of ours. The firm makes the structural castings (metal blocks) and the rotating airfoils (blades) that form aircraft jet engines. Though a structural casting has a relatively longer useful life, a jet engine's airfoil components frequently need to be replaced upon maintenance (think razor, razor-blade model). Precision's components are also critical to flight safety, so it retains a high degree of pricing power with its long-time customers, which can't afford the risk of switching to unproven rivals.
We think the growth rate of aircraft deliveries (and jet engines) during the next five years will be truly remarkable. Both Airbus and Boeing are ramping up production of their workhorse A320 and 737 programs, respectively, to thwart potential cancellations as competition heats up from global rivals in the narrowbody market. Boeing recently increased the monthly production rate of its 777 and plans to accelerate deliveries of its revolutionary, mostly-composite 787 Dreamliner. Rival Airbus has increased rates on its A330 platform and continues to target a higher production pace for its A380 double-decker in the years ahead. And once the growth of large commercial aircraft deliveries begins to slow in 2014-2015, we'll be at the beginning of yet another new product cycle with Airbus' long-awaited A350, which is scheduled to enter into service in 2013 (though a 2014 target is more likely). Needless to say, investors should expect a boom in commercial aerospace deliveries during the next half-decade -- at levels we haven't witnessed in the past 20 years.
It’s hard to find anything wrong with Visa’s business model. The company offers a secure, payment network that is accepted virtually everywhere in the United States. The firm makes money every time a Visa user swipes his or her debit or credit card. The only competition Visa faces is cash and mobile payment solutions, which V.me will address and has yet to take a stranglehold.
Visa benefits from two fantastic competitive advantages: a network effect and costly initial investment. The network effect is incredibly strong for Visa. As of its last update, Visa had nearly 1.9 billion cards outstanding accepted by retailers across the world. That’s more than double the number of Mastercards and over 20 times the amount of American Express cards outstanding. This network effect took years, as well as billions of dollars to create—something that won’t easily be replicated.
Though the Durbin Amendment capped debit card rates, Visa’s major financial institution partners like JP Morgan Chase, Bank of America, and PNC have done an excellent job of incentivizing the movement of credit card spending back to credit cards via rewards and cash-back programs. And we think fears of outsize regulation remain mostly unfounded.
Most importantly, the company generates incredible operating margins in the 60% range, leading to large levels of free cash flow generation. The firm repurchased its stock in large quantities when shares were considerably undervalued, and it has since increased its dividend. Visa continues to possess valuation upside and is one of the most shareholder-friendly companies in our coverage universe.
About Our Dividend Growth Newsletter
View a previous edition of our Dividend Growth Newsletter here.
At Valuentum, we seek to deliver to our subscribers the best investment ideas. And our Dividend Growth Newsletter does just that for income investors. We provide the following in each edition of our monthly newsletter:
The Benefits of Dividend Growth Investing
History has revealed that the best performing stocks during the previous decades have been those that shelled out ever-increasing cash to shareholders in the form of dividends. In a recent study, S&P 500 stocks that initiated dividends or grew them over time registered roughly a 9.6% annualized return since 1972 (through 2010), while stocks that did not pay out dividends or cut them performed poorly over the same time period.
Such analysis is difficult to ignore, and we believe investors may be well-rewarded in future periods by finding the best dividend-growth stocks out there. As such, we've developed a rigorous dividend investment methodology that uncovers firms that not only have the safest dividends but also ones that are poised to grow them long into the future.
How did we do this? Well, first of all, we scoured our stock universe for firms that have cut their dividends in the past to uncover the major drivers behind the dividend cut. This is what we found out: The major reasons why firms cut their dividend had to do with preserving cash in the midst of a secular or cyclical downturn in demand for their products/services or when faced with excessive leverage (how much debt they held on their respective balance sheets).
The Importance of Forward-Looking Dividend Analysis
Armed with this knowledge, we developed the forward-looking Valuentum Dividend Cushion™, which is a ratio that gauges the safety of a dividend over time.
Most dividend analysis that we’ve seen out there is backward-looking – meaning it rests on what the firm has done in the past. Although analyzing historical trends is important, we think assessing what may happen in the future is even more important. The S&P 500 Dividend Aristocrat List, or a grouping of firms that have raised their dividends for the past 25 years, is a great example of why backward-looking analysis can be painful. One only has to look over the past few years to see the removal of such big names from the Dividend Aristocrat List like General Electric (GE) and Pfizer (PFE) to understand that backward-looking analysis is hardly worth your time. After all, you’re investing for the future, so the future is all you should care about.
We want to find the stocks that will increase their dividends for 25 years into the future, not use a rear-view mirror to build a portfolio of names that may already be past their prime dividend growth years. The Valuentum Dividend Cushion™ measures just how safe the dividend is in the future. It considers the firm’s net cash on its balance sheet and adds that to its forecasted future free cash flows and divides that sum by the firm’s future expected dividend payments. At its core, it tells investors whether the firm has enough cash to pay out its dividends in the future, while considering its debt load. If a firm has a Valuentum Dividend Cushion™ above 1, it can cover its dividend, but if it falls below 1, trouble may be on the horizon.
In fact, the Valuentum Dividend Cushion™ would have caught every dividend cut made by a non-financial, operating firm that we have in our database, except for one (Marriott). But interestingly, our Valuentum Dividend Cushion™ indicated that Marriott should have never cut its dividend, and sure enough, two years after the firm did so, it raised it to levels that were higher than before the cut.
Here are the results of our study (a Valuentum Dividend Cushion™ below 1 indicates the dividend may be in trouble). The Valuentum Dividend Cushion™ score shown in the table below is the measure in the year before the firm cut its dividend, so it represents a predictive indicator:
The Valuentum Dividend Cushion continues to save investors from blunders well beyond our academic study. Please check out this article: Why Dividend Growth Investing Needs to Be Forward Looking.
At the very least, using the Valuentum Dividend Cushion™ can help you avoid firms that are at risk of cutting their dividends in the future. And we are the only firm out there that does this type of in-depth analysis for you. Plus, we not only provide the actual Valuentum Dividend Cushion™ number for our subscribers in our dividend reports and newsletter, but we also scale the safety of a firm’s dividend in simple terms: Excellent, Good, Poor, Very Poor.
Here’s a glimpse of the Valuentum Dividend Cushion™ score (as of November 2011) for a sample set of firms in our coverage universe. Please note that the current score on these and hundreds more are available with a membership to our website:
But What about the Growth of a Firm’s Dividend?
It takes time to accumulate wealth through dividends, so dividend growth investing requires a long-term perspective. As a result, we assess the long-term future growth potential of a firm’s dividend. And we don’t just take management’s word for what they will do with their dividend. Instead, we dive into the financial statements and make our own forecasts of the future to see if what they’re saying is actually achievable. We use our Valuentum Dividend Cushion™ as a way to judge the capacity for management to raise its dividend – how much cushion it has – and we couple that assessment with the firm’s dividend track record, or management’s willingness to raise the dividend.
In many cases, we may have a different view of a firm’s dividend growth potential than what may be widely held in the investment community. That’s fine by us, as our dividend-growth investment horizon is often longer than others. We want to make sure that the firm has the capacity and willingness to increase the dividend years into the future and will not be weighed down by an excessive debt load or cyclical or secular problems in fundamental demand for their products/services.
Plus, we don’t use fancy language for what we think of its future growth. We scale our assessment in an easily-interpreted fashion: Excellent, Good, Poor, Very Poor.
What are the Dividend Ideas We Seek to Deliver to You in Our Newsletter?
First of all, we’re looking for stocks with dividend yields that are greater than the average of the S&P 500, or about 2% (but preferably north of 3%). This excludes many names, but we think such a cutoff eliminates firms whose dividend streams aren’t yet large enough to generate sufficient income. Second, we’re looking for firms that register an 'EXCELLENT' or 'GOOD' rating on our scale for both safety and future potential growth. And third, we’re looking for firms that have a relatively lower risk of capital loss, as measured by our estimate of the company’s fair value.
About Our Name
But how, you will ask, does one decide what [stocks are] "attractive"? Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth,"...We view that as fuzzy thinking...Growth is always a component of value [and] the very term "value investing" is redundant.
-- Warren Buffett, Berkshire Hathaway annual report, 1993
At Valuentum, we take Buffett's thoughts one step further. We think the best opportunities arise from a complete understanding of all investing disciplines in order to identify the most attractive stocks at any given time. Valuentum therefore analyzes each stock across a wide spectrum of philosophies, from deep value to momentum investing. And a combination of the two approaches found on each side of the spectrum (value/momentum) in a name couldn't be more representative of what our analysts do here; hence, we're called Valuentum.
Valuentum has developed a user-friendly, discounted cash-flow model that you can use to value any operating company that you wish. Click here to buy this individual-investor-friendly model now! It could be the best investment you make.