Valuentum Exclusive Analysis for the Discerning Investor

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Aug 10, 2022

Best Idea Berkshire Hathaway Continues to Impress
Image Shown: Berkshire Hathaway Inc is a stellar cash flow generator in almost any operating environment. Image Source: Berkshire Hathaway Inc – 10-Q SEC filing covering the Second Quarter of 2022. Berkshire Hathaway Inc reported second quarter 2022 earnings that saw its ‘operating earnings’ metric surge higher versus the year-ago level. This metric removes realized and unrealized gains/losses in its large equity portfolio from the picture to provide investors with a better understanding of the company’s underlying performance. Due to the downturn in equity markets seen during the first half of this year, Berkshire Hathaway’s GAAP net income swung to a large net loss last quarter. We include shares of Berkshire Hathaway Class B (ticker: BRK.B) in the Best Ideas Newsletter portfolio, and our fair value estimate sits at $320 per share with room for upside.

Aug 8, 2022

Exxon Mobil Surging Higher with Room for Upside
Image Shown: Exxon Mobil Corporation put up stellar results when reporting its second quarter earnings in late July 2022. Image Source: Exxon Mobil Corporation – Second Quarter of 2022 IR Earnings Presentation. Exxon Mobil Corp posted second quarter 2022 earnings that flew past consensus top- and bottom-line estimates. The tailwind provided by elevated raw energy resources prices, rising oil & gas production volumes, ongoing cost structure improvement initiatives, and strong “crack spreads” (refining margins) more than offset headwinds arising from its decision to exit Russia in March 2022 and foreign currency headwinds due to a strong U.S. dollar. Exxon Mobil is one of our favorite energy ideas, and we include shares of XOM in several of the newsletter portfolios as it offers investors a nice combination of dividend growth and capital appreciation upside potential. Shares of XOM yield ~3.6% as of this writing, and our fair value estimate sits at $105 per share of Exxon Mobil.

Aug 8, 2022

Loving Stocks Here! Meta and Alphabet Setting Up Nicely for Long Term Investors!
Image: Nelson still remains bullish. We wouldn't be surprised to see the markets make new highs as they have done time and time again over the stock market's storied history of bull and bear markets, crashes and rip-your-face off rallies, and economic booms and recessions! There are myriad risks, but we're not overthinking this market. We like stocks for the long haul. One of the hardest parts of investing is keeping your head when others around you are running for the exits. That's exactly what we did for members (we don't manage money), and the stock market has come roaring back since the mid-June bottom! Anyone who has read our book Value Trap knows that the rapid fall in the 10-year Treasury yield to ~2.8% today from the mid-3% range in mid-June has helped support this stock market advance (due to a lower cost of capital in discounted cash-flow models -- enterprise valuation is the key driver behind stock market performance, in our view, as it has been revealed time and time again). After calling the COVID-19 crash when others doubted the impact that the coronavirus would have on the markets, and then calling the tremendous bull run that followed, we still remain bullish on these markets, and the simulated newsletter portfolios have done fantastic on a relative basis so far this year.

Jul 27, 2022

Walmart’s Business Update Likely Means U.S. Is In Recession, But Near-Term Weakness Is Already Baked Into Stock Market
Image Shown: Shares of Walmart Inc dropped sharply during afterhours trading on July 25 as the retailer sharply cut its adjusted operating income and EPS guidance for the current fiscal year as inflationary pressures are taking a sizable toll on its bottom-line. On July 25, Walmart Inc issued a business update that saw the retailer sharply cut its adjusted operating income and EPS guidance for fiscal 2023 (period ended January 2023), while boosting its consolidated net sales guidance. The company also adjusted its guidance for the fiscal second quarter. Shares of WMT plummeted during afterhours trading on July 25 as investors began to price in concerns over the retailer’s deteriorating margins. We anticipated ongoing weakness in Walmart’s business. On July 4, we released an audio report, “Nelson: I Have Been Wrong About the Prospect of Near-Term Inflationary-Driven Earnings Tailwinds,” highlighting our growing concerns about consumer-tied entities in the consumer staples and consumer discretionary spaces. We continue to expect troubles at the big box retailers and across the apparel space, more generally. Here’s what Nelson had to say in early July that remains applicable today: "I simply was not expecting the magnitude of such operating-income drops across consumer-tied companies, and while I think long-term inflation will eventually help drive higher nominal earnings in the longer run when conditions reach “normalization” again, the lag will be much longer than I originally thought. The numbers out of Walmart, Target, and Nike, for example, speak not only to tremendous earnings weakness, but also to the prospect of economic recession in the U.S." A recession in the U.S. is no reason for panic, however. For starters, we believe most of the fundamental weakness across retail is baked into the stock market, but more generally, investors should not worry about recessionary trends. But why? Well, implicitly embedded within a fair value estimate of a company are expectations of a “normal” economic cycle, complete with peak and trough, with the fair value estimate driven largely by mid-cycle expectations that feed into later stages of the model. The prospects for an unexpected recession in economic activity in the near term shouldn’t cause much of a change in the fair value estimate of a company either, given not only that a recession is already implicitly embedded in the fair value estimate, as noted, but also that near-term expectations don’t account for nearly as large of a contribution to the fair value estimate as long-term normalized expectations within the valuation construct. Most of a company’s intrinsic value is driven by its performance beyond year 5 in our model, or on a mid-cycle, going-concern basis. A company’s fair value estimate range (margin of safety) also captures various scenarios regarding economic activity, including a bull and bear case. With that said, recessionary tendencies may cause pricing impacts in the market in the event that consumers/investors use the stock market as a source of income by selling stocks, causing pressure on share prices, but the discounted cash flow (DCF) model already bakes in economic cyclicality and inevitable recessions, if not directly, then implicitly by targeting long-term mid-cycle expectations and via the application of the fair value estimate range. That’s why it’s great to be a long-term investor, scooping shares up when others are forced to sell in the near term, while holding them over long periods, letting compounding work its magic.

Jul 26, 2022

Johnson & Johnson’s Underlying Performance Remains Strong
Image Source: Johnson & Johnson – Second Quarter of 2022 IR Earnings Presentation. Johnson & Johnson reported second quarter 2022 earnings that beat both top- and bottom-line estimate consensus estimates. Johnson & Johnson maintained the midpoints of its full-year non-GAAP adjusted operational sales and earnings per share guidance during its latest earnings update but reduced its reported sales and earnings guidance due to headwinds stemming from a strengthening US dollar. We continue to like Johnson & Johnson as an idea in both the Best Idea Newsletter and Dividend Growth Newsletter portfolios. Shares of JNJ yield ~2.6% as of this writing. Please note that Johnson & Johnson is in the process of spinning off its ‘Consumer Health’ segment as a separate publicly traded entity by 2023 through a tax-free transaction. The firm is still working out the details and intends to finalize the organizational design of the new enterprise by the end of this year.

Jul 11, 2022

Valuentum's Unmatched Product Suite
We continue to be huge believers in the concept of enterprise valuation, which emphasizes the key cash-based sources of intrinsic value--net cash on the balance sheet and strong and growing future expected free cash flows. Meta Platforms, Inc. and Alphabet Inc. remain two of the most underpriced ideas on the market today, and we remain huge fans of their tremendous long-term investment prospects.

Jul 7, 2022

2022 Oil & Gas Market Update: “The Outlook for Crude Oil Prices Remains Quite Bullish”
In our view, the outlook for crude oil prices remains quite bullish which in turn should enable Chevron and Exxon Mobil, two of our favorite newsletter portfolio ideas, to churn out “gobs” of free cash flow over the coming quarters. Additionally, both Chevron and Exxon Mobil have substantial exposure to natural gas prices, in part through their enormous LNG export facilities in Australia, which should further support their cash flow generating abilities. We will caution here that a key downside risk the global energy complex faces is potential demand destruction as consumers adjust their lifestyles accordingly to reduce their energy and fuel bills. With that in mind, we have yet to see energy demand falter in a meaningful way, though we are keeping a close eye on the state of the global economy.

Jun 30, 2022

Big Changes in the Auto Industry as Chip Shortages, Supply Chain Issues, and Rising Input Costs Complicate Matters; Tesla and Ferrari Our Two Favorite Names
Image: Ferrari’s fundamental momentum has been strong of late. Image Source: Ferrari N.V. 2022 Globe Newswire. The auto industry perhaps has changed more than any other industry the past five years. First, it was Ford that said it wouldn’t make passenger cars anymore, except for its iconic Mustang. Then, the European Union said that it would eventually end the internal combustion engine (ICE) by 2035. Then, Tesla reached over $1,200 per share and over a $1 trillion market capitalization. Can you imagine a world where Ford is not making sedans, the once modern-marvel of the internal combustion engine is dying, and where one car maker is worth as much as the next nine car makers combined? Certainly, a lot has changed in the auto industry during the past decade, and we haven’t dabbled much in the auto sector as it relates to idea generation due in part to the industry’s fast-changing backdrop. That doesn’t mean that we’re not fans of the auto space and its promising long-term opportunities, particularly with electric vehicles (EVs). It just means that we think there are better stories elsewhere, as in ideas in the simulated newsletter portfolios. However, if we had to pick two of our favorite auto names to consider, they would be Tesla and Ferrari, even as we note General Motors and Ford both trade at mid-single-digit earnings multiples. That said, investors don’t necessarily have to take on the risks of automakers, especially as the group deals with chip shortages, supply chain issues, and margin pressures from higher input costs. The cyclicality of many of the operators and the reality that operating leverage cuts both ways (and is quite painful during difficult economic times) are risks that perhaps won’t ever go away. That said, exposure to the auto space via Tesla or Ferrari could work nicely in a broadly diversified equity portfolio should risk-seeking investors be so inclined. These two names remain on our radar.

Jun 29, 2022

We're Considering FedEx for the Dividend Growth Newsletter Portfolio
Image Source: Valuentum. During the past several weeks, we've grown increasingly concerned about the health of consumer-tied entities across the consumer staples and consumer discretionary spaces. Many consumer staples entities, while raising prices, aren't raising them fast enough to drive operating-income and bottom-line expansion, while many consumer discretionary companies may be facing higher freight and logistics costs and weaker performance in Greater China, as that exposed in Nike's most recently-reported quarter, where inventory advanced 23%. The tell-tale sign about the health of the consumer may be Amazon Prime Day, which is coming up on July 12-13, but based on many of the reports we've monitored this past earnings season, consumers may be willing to spend a bit more to help business revenue, but businesses are having a difficult time leveraging the price increases into operating income and earnings-per-share expansion. Perhaps we were somewhat in denial that pressure on S&P 500 earnings growth might materialize when Walmart and Target disappointed a number of weeks ago, but the Nike earnings report, released June 27, all but sealed the deal that the probability of a recession in the U.S. is material. When we look at Walmart and Target, the story was similar. Top-line growth ensued but consolidated gross margins faced pressure, and operating income tumbled. Full-year earnings per share at Walmart is now expected to be down about 1%, as the company's top-line growth just isn't enough to keep earnings moving in the right direction. For Target, the company originally guided its second-quarter operating income margin rate well below consensus estimates at the time, to 5.3%, due to pressure on gross margins from higher freight and transportation costs and measures to reduce inventory. However, just a few weeks later, Target reduced that second-quarter operating margin target again to just 2% as it is being forced to work through excess inventory with aggressive markdowns.  What does all this mean for FedEx's trajectory? Well, it all depends. Clearly, consumer-tied businesses, whether consumer staples or discretionary, are facing tremendous cost pressures, but some of those cost pressures are freight and logistics expenses, which might play into the hands of FedEx and rival UPS. For example, for its fiscal 2023 (ends May 2023), FedEx issued guidance for diluted earnings per share to the range of $22.45-$24.45, which when issued June 24, was above the consensus estimate of $22.40 at the time. FedEx was able to drive its fiscal fourth-quarter 2022 operating income higher due to a "favorable net impact of fuel," but it did note that it experienced "lower shipment demand due to slower economic growth and supply chain disruptions." We think FedEx is better positioned to pass along costs than many of the retailers, and for that reason, we think it will hold up better should the U.S. enter a recession. The same rings true for rival UPS, which reported first-quarter 2022 results on April 26. In UPS' first quarter, consolidated revenues jumped 6.4% from the same period last year, while it grew consolidated operating profit 17.6% (12.1% on an adjusted basis). We think transportation stocks such as FedEx and UPS, which are able to pass along price increases in the form of surcharges for higher fuel costs are much better positioned than the broader retailer landscape, which may face continued earnings pressure as they deal with higher input costs and larger inventory balances. We value FedEx at $295 per share, well above where shares are trading at the moment (~$240), and while the company is not immune to recessionary characteristics, its flexible pricing surcharges mean it can handle cost adversity better than most S&P 500 entities, in our view. Shares of FedEx yield ~1.9% at the moment, and while the company's Dividend Cushion ratio could be stronger, we give it high marks for both dividend strength and dividend growth potential.

Jun 28, 2022

High Yield: Diversified Refiner Phillips 66 A Good Replacement for Broad Consumer Staples Exposure
Image Source: Phillips 66 Investor Update May 2022. Phillips 66 is a top-notch operator in the downstream space with impressive refining and petrochemical assets supported by various midstream operations. Its investment-grade credit rating (A3/BBB+), with stable outlooks, better enables Phillips 66 to tap capital markets at attractive rates, something that we especially like when considering new ideas in the high yield dividend space. A growing global middle class and a growing global population supports Phillip 66's longer term outlook for refined product demand. We like the company as a high yield dividend consideration.