Valuentum Exclusive Analysis for the Discerning Investor

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Mar 1, 2020

COVID-19 Crisis Intensifies
Image Source: CDC. Coronavirus Disease 2019 (COVID-19). The world is being challenged today by what some including Bill Gates believe might be a "once-in-a-century pathogen." We do not know the eventual outcome, whether the impact of this illness ends up being as profound as the Spanish Influenza of 1918-1919 (which inflicted a death toll in the tens of millions), but we maintain our view the markets have yet to come to grips with the impact of COVID-19 on economic activity and potential ramifications on the global economy and the banking system. What is currently a "biological" crisis may turn into an all-out global financial crisis, one that could end up worse than the 2008/2009 mortgage meltdown. Instead of toxic mortgages putting a halt to lending activity across the globe as they did over a decade ago, today's crisis stems from an illness that very few of the top health officials in the world know much about--not only in the duration of COVID-19's incubation period, but also in how easily it seems to be spreading, and how deadly it may eventually become, particularly if health systems around the world become overwhelmed.

Feb 27, 2020

Has the Stock Market Crash Begun?
Image: CDC. Transmission electron microscopic image of an isolate from the first U.S. case of COVID-19, formerly known as 2019-nCoV. The spherical viral particles, colorized blue, contain cross-section through the viral genome, seen as black dots.According to the latest Situation Report from the CDC, dated February 25, there are now more new cases reported from countries outside of China than from China. Globally, there are currently 80,000+ confirmed cases in nearly 40 countries, with China, South Korea, Italy and Iran the major hotspots. Up until now, investors have been anxiously waiting for the other shoe to drop (i.e. community spread in the United States), with the CDC even saying, “It's not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country (United States) will have severe illness.” Well, that “when” is now. The CDC just confirmed February 26, 2020, a possible instance of community spread of COVID-19 in the US.

Feb 24, 2020

ALERT: Adding Market Crash 'Protection,' Removing MSFT, BKNG
Image source: Centers for Disease Control and Prevention.  We're adding out-of-the-money put options to both the Dividend Growth Newsletter portfolio and Best Ideas Newsletter portfolio. We're removing Microsoft from the Dividend Growth Newsletter portfolio, and we're removing Booking Holdings from the Best Ideas Newsletter portfolio. We reiterate that, had the Dow Jones Industrial Average already swooned a couple thousand points on news of the COVID-19 outbreak, we might have considered some undervalued stocks with strong momentum potential "buying opportunities." However, to this point in time, the markets have largely ignored COVID-19, with major US indices still sitting near all-time highs. We could be in for a wild ride in the coming weeks and months, and an outright market crash is not out of question. For those looking for short-idea considerations, please consider the Exclusive publication here. We remain fully-invested in the High Yield Dividend Newsletter portfolio given its yield and income focus.

Feb 22, 2020

Is a Stock Market Crash Coming? -- Coronavirus Update and P/E Ratios
Image Source: World Health Organization, Coronavirus disease 2019 (COVID-19), Situation Report -- 32. We don’t think this is the environment to put new capital to work, and we remain highly cautious of what COVID-19 means for global economic growth not just in the first quarter of 2020 but for the rest of this year (maybe longer). Right now, the US markets are not really factoring in anything related to COVID-19, and perhaps may be adjusting to China’s stimulus in artificially propping up the markets as if the outbreak is somehow a “positive thing.” With the S&P 500 trading at 19.0 forward earnings estimates--estimates that are likely too high given the evidence we are seeing with respect to a slowdown due to COVID-19--and corporate debt levels more elevated than ever before (note, a high net debt level should depress the P/E in enterprise valuation--US corporate debt has advanced 50% over the past decade, to $10 trillion), it is our contention that the current market reflects a “situation-equivalent” forward P/E (i.e. rightsizing for new net debt relative to the dot-com peak and adjusting for lower forward earnings expectations compared with current forecasts) perhaps greater than 24.4, which was recorded at the peak of the dot-com bubble. Though interest rates are lower than they were at the time of the dot-com crash, suggesting a modest reasonable bump to normalized forward P/E ratios of ~15 times to reflect “fair valuations,” we could seriously be in for fundamental-driven crash soon, as both the earnings multiple and earnings estimates contract aggressively. Hypothetically, a contraction to a 16x forward multiple on earnings estimates just 10% lower than currently forecast implies an S&P 500 of 2,566, or a swoon of about 20%-30% from current levels--and that would just get us down to 16x still-respectable forward numbers. How quantitative-driven price-agnostic trading may impact this scenario is not known either, and all of this could be setting up for a wild ride in the coming weeks and months. Fasten your seatbelts. We’ll have a few newsletter portfolio alerts coming Monday.

Jan 23, 2020

Resetting Your Mental Model
Image Source: affen ajlfe. Having the right mental model and using the right information can be the reason why you win or lose in investing.

Nov 13, 2019

Keurig Dr Pepper Is Moving in the Right Direction
Image Source: Keurig Dr Pepper – September 2019 IR Presentation. Unlike some of its peers, Keurig Dr Pepper is not trading at a hefty premium to its intrinsic value. Our fair value estimate for shares of KDP stands at $25, with the top end of our fair value estimate range sitting at $30 per share. As of this writing, KDP trades near ~$29 per share, which is within reason in our view. Investors are pricing in Keurig Dr Pepper’s nice underlying sales growth forecast, merger-related synergies, and serious deleveraging efforts which is why KDP trades at the upper end of its fair value estimate range, in our view. We aren’t adding KDP to either of our newsletter portfolios at this time, but should deleveraging activities continue in earnest, that may change our view of the company.

Nov 11, 2019

Our Reports on Stocks in the Nonalcoholic Beverages Industry
Image Source: Mike Mozart. We've reallocated our resources to cover more recession-resistant stocks.

Oct 21, 2019

Coca-Cola Posts a Nice Quarter But Shares Too Pricey
The top end of our fair value estimate range for Coca-Cola sits at $48 per share, significantly below where shares of KO are trading at as of this writing as we think the market has gotten ahead of itself on this one. While Coca-Cola is targeting higher growth areas, like ready-to-drink coffee beverages, that growth trajectory isn’t strong enough to support its current valuation, in our view.The top end of our fair value estimate range for Coca-Cola sits at $48 per share, significantly below where shares of KO are trading at as of this writing as we think the market has gotten ahead of itself on this one. While Coca-Cola is targeting higher growth areas, like ready-to-drink coffee beverages, that growth trajectory isn’t strong enough to support its current valuation, in our view.

Oct 4, 2019

PepsiCo Posts Solid Quarterly Report, Targets Powerful Long-Term Growth Trends
On October 3, PepsiCo reported third quarter earnings for fiscal 2019 (12 week period ended September 7) that were positively received by the market as the beverage and snack company beat both consensus top and bottom line estimates. PepsiCo still has its eyes on the ball in the face of exogenous shocks (i.e. the US-China trade war and the potential for an EU-US trade war) as management targets secular growth trends in emerging and developing markets, but we still think the company’s valuation is stretched after its impressive year-to-date rally. Shares of PEP yield ~2.7% as of this writing.

Aug 20, 2019

Owens-Illinois’ Debt Load Is Daunting, We Are Staying Away From This Value Trap
Image Source: Owens-Illinois Inc -- IR Presentation. Due to Owens-Illinois’ onerous leverage, guidance cut, and signs that the global economy is slowing down, we are staying far from the name. While shares of OI trade decently below the low end of our fair value estimate range we caution that the market is likely right on this one. Owens-Illinois is another example of a Value Trap.