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ALERT: We’re Still Bullish! Some Portfolio Tweaks

publication date: Jan 12, 2021
author/source: Brian Nelson, CFA

By Brian Nelson, CFA

Hi everybody:

Trust you’re doing great, and hope you are enjoying your membership to Valuentum! We’ve received a number of questions from members during the past several weeks, and we’d like to address them briefly in this note. We will write a follow-up note in the coming days that goes into our broader outlook for 2021 and beyond. However, we want to get these takeaways to you as soon as possible, as our inboxes have been overflowing. For starters, if you haven’t read our market/analysis recap for the year 2020, please do so, “2020 Won’t Soon Be Forgotten.”

Now on to the questions.

First question: Is the stock market in a bubble? Answer: Absolutely not. We peg a fair value estimate range of the S&P 500 of 3,530-3,920 (the S&P is trading at 3,792 at the moment). See the aforementioned 2020 recap article for how we derive that fair value estimate range. Second question: Is Tesla (TSLA) in a bubble? Answer: No. The stock is overpriced, but its valuation has a reasonable basis. We value shares of Tesla at ~$700 per share at the high end of our fair value estimate range, but we also are using a rather high discount rate (~9.4%) to value shares. The market may be using a more generous, but still reasonable, discount rate.

Third question: Interest rates are rising. Is that bad for the stock market? Answer: Not necessarily. There are both “numerator” and “denominator” impacts within the enterprise valuation construct from rising interest rates (read Value Trap), but generally rising interest rates can be mostly positive for asset-light entities with pricing power tied to long-term secular growth trends, and can be mostly negative for capital-intensive, debt-heavy entities that cannot price ahead of inflation. We continue to believe the asset-light, net-cash-rich areas of large cap growth and big cap tech (i.e. NASDAQ) will continue to perform well, regardless of the trajectory of interest rates (absent any abnormal shocks).

Fourth question: Is Bitcoin (GBTC) overvalued? Answer: Cryptocurrencies do not have fundamental intrinsic value in the traditional sense, and therefore, the question, itself, is a bit misleading. Bitcoin, in some ways like gold (GLD) many years ago, is marketed as a currency, but cryptocurrencies do not function well as a store of value or medium of exchange given their enormous volatility. Further, unlike gold, Bitcoin is not used as an input to produce finished goods such as jewelry or industrial applications. Bitcoin’s price is therefore a function of “greater fool theory,” with those buying it hoping they can find a “greater fool” to take them out at a higher price. The Financial Conduct Authority recently warned consumers that when it comes to cryptoassets, “they should be prepared to lose all their money.”

Fifth question: What are our latest thoughts on the energy sector? Answer: Energy is now a much smaller part of the S&P 500 than just a decade ago (~3% versus ~15%), so its impact on the broader stock market has become incrementally muted, though input costs are still critical within the enterprise valuation construct for many relevant companies. Energy is still an important part of the investor mindset, too--one of our favorite clean energy plays recently was Ameresco (AMRC). Perhaps the most appropriate allocation for the sector, however, is within the high-yield dividend space/strategy given the size of the yields of many of the oil majors and midstream MLPs, “Energy Sector In Shambles, Looks to Recover But Headwinds Persist.” Small exposure to the sector in a capital-appreciation focused portfolio may make sense, but solely for diversification benefits, in our view.

With all this said, we’re making a few changes to the Best Ideas Newsletter portfolio today. First, we’re removing the SPDR S&P Dividend ETF (SDY). We still like the long-term benefits of dividend growth investing, of course, but this ETF, in particular, is a better fit in the Dividend Growth Newsletter portfolio, where it already retains the highest weighting. With the SDY’s removal, that frees up about ~7% more cash in the newsletter portfolio, and combined with the newsletter portfolio's existing 5% cash position, that sums to ~12% to allocate to new ideas, which are the following. Second, we’re adding a 2% position in Korn/Ferry (KFY). The company registers a 9 on the Valuentum Buying Index, and we think shares are significantly underpriced. Shares yield ~0.8%, too.

Third/fourth, we’re adding 2% weightings to each Chipotle (CMG) and Domino’s (DPZ). These two were clearly the stand-out performers across the restaurant space in 2020, and we want exposure to this arena as the economy continues to recover and then expand. Fifth, we’re adding a 2% weighting to one of our favorite speculative biotechs, Vertex Pharma (VRTX). The company has a strong balance sheet, a solid pipeline for the treatment of cystic fibrosis (CF), and an intriguing relationship with CRISPR Therapeutics (CRSP) for not only CF, but also TDT (transfusion-dependent beta thalassemia) and SCD (severe sickle cell disease). CRISPR technology may be the way of the future; you can read more about it in our CRSP report download here (pdf).

Finally (sixth/seventh), to round out the portfolio, we’re adding a 2% weighting to each of the Energy Select Sector SPDR (XLE) and the Financial Select Sector SPDR (XLF). These two areas have been material underperformers during the past several years, but we’re moving to more of a market-neutral stance on energy, while slightly increasing our weighting across traditional banking and insurance. We view the newsletter portfolio’s existing positions in PayPal (PYPL) and Visa (V) as consumer financial tech exposure. At this time, we’re also reiterating our favorite idea as 10-rated Facebook (FB) on the Valuentum Buying Index, and we think Alphabet’s (GOOG) shares remain significantly undervalued.

That’s it for now. The January edition of the Best Ideas Newsletter will be released January 15, and the newsletter’s portfolio will reflect the changes in this note at that time--the January edition of the Dividend Growth Newsletter was released January 1 here (pdf). The Gold level quarterly publications--the Ideas100, the Dividend100 and the DataScreener--will also be released on the 15th of this month, too. Our team will have more to share soon, but please let us know if you have any questions in the meantime. Please don’t forget to read the recap for 2020 if you haven’t already >>

Thank you for your membership!


Related: COIN

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Brian Nelson owns the SPY, SCHG, DIA, QQQ, VOT, and IWM. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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