Valuentum Exclusive Analysis for the Discerning Investor

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Summary

Removed META

Added to XLE: now 4%-6%, was 1%-2%

Added MCD: 4%-6%

Added PEP: 4%-6%

By Brian Nelson, CFA

As long-term investors, the hardest part is knowing when to get back into the market with “recently-raised” cash. We’ve done a good job year-to-date through the last “performance” measurement in August. [We’ll continue to update members periodically on simulated newsletter performance across all newsletter portfolios.] But with the markets being punished since August 19, when we “raised” cash, we’re going to go back to “fully invested.”

Let’s explain what this means.

First, we’re still bearish on the broader markets. We’ve carved out some “alpha” we would have missed had we not captured the latest downdraft, and we really only let the market breathe about ~10% lower from their highs this year before we went bearish on stocks. So -- we did a pretty good job in one of the worst markets I’ve seen in my career. However, the volatility the past several weeks has been consistent with our views in Value Trap, and it does speak to some irrational trading.

Remember – almost all stock trades these days are driven by indexers, quants, and algorithmic trading. We’ve been talking about this dynamic for years, and we don’t want to sit out a massive and unsupported rally off the potential for the Fed to “pivot” its monetary policy. Such a move shouldn’t be as material as the market is making it out to be (given that we’re really only talking about 100-200 basis points difference in the discount rate between hawks and doves, a sensitivity that is just part of any sound investor’s margin of safety).

But it is to many market participants that aren’t looking at the DCF – and that has us concerned. The market is laser focused on the Fed, and while we’re seeing some cracks in the economy that suggest third-quarter earnings season could be a rough one, again, this market is not one that is trading as much on fundamentals as we would like. One only has to look at the 60/40 stock/bond portfolio, which is down more than 30% on an annualized basis this year, or U.S. Treasuries (TLT), which are down more than 30% on a year-to-date basis.

There really hasn’t been anywhere to hide this year as an investor, with perhaps energy as only one of the strongest sectors – an area that we have "overweighted" across the simulated newsletter portfolios. We don’t like this market at all, and while inflation started to tick up in the middle of last year, it has changed from a positive catalyst to business pricing in 2021 to a negative one on consumer financial health in 2022.

We’re cautiously making a few changes in the simulated Best Ideas Newsletter portfolio.

First, we’re removing Meta Platforms (META). We’re as shocked as anyone how fast many an investors’ thesis fell apart on this name, and we recently wrote up a post-mortem here. We can’t be afraid of removing losing equities (and perhaps some may benefit from tax loss harvesting on this one), no more than we can be afraid of adding to winners in the energy space. We continue to receive some "sad" news with respect to the metaverse, and that’s just going to do it for us with this name, the latest from the WSJ “Company Documents Show Meta’s Flagship Metaverse Falling Short.”

We’re as disappointed as anybody on Meta Platforms, and frankly, we still can’t believe how fast this story fell apart. But one can't be focused on any one or two names within a portfolio setting. That's not investing -- that's just gambling on one or two names. We've talked extensively about how investors should have no fewer than 15-20 diversified securities in this video here. An investment portfolio has to work in aggregate, and while META hasn't done well, other names have done well to offset its weakness.

With META's removal, we’ll have a 12%-14% cash “weighting” in the simulated Best Ideas Newsletter portfolio that we're now fully "re-allocating." Though Warren Buffett has been adding to Occidental Petroleum (OXY) this year, we’ve been heavy on Exxon Mobil (XOM) and Chevron (CVX), while retaining exposure to the XLE, which we plan to add to in this note. The XLE is currently a 1%-2% “weighting” in the simulated Best Ideas Newsletter, but we’re going to take that up to ~4%-6% range.

"Overweighting" energy has been one of the best moves we've done the past couple years.

With the balance of remaining cash, we’re going to allocate ~4%-6% to each of McDonald’s (MCD) and Pepsi (PEP). We think these two stocks are particularly well-positioned for the current market environment. McDonald’s has a tremendous value offering for consumers (its 2 for $2 special is a hit in this inflationary environment), and the high end of the fair value estimate range for the company stands at $300 per share. Its ~2.5% dividend yield isn’t too shabby either. We’ll also be adding Pepsi (PEP) to the simulated Best Ideas Newsletter portfolio, too, with the company having potential upside to $197 per share, the high end of our fair value estimate range. Its dividend yield stands at ~2.7%.

Concluding Thoughts 

This market is not going to get easier, in our view, and we still believe that 2023 may mark the bottom before a return to the path toward new highs again. However, the erratic volatile trading the past few weeks has us thinking that this is not a market focused on fundamentals, and therefore, we have to hedge our bets accordingly. With “alpha” otherwise we would have missed carved out by "raising" cash in late August before the latest swoon, we’ll now approach newsletter portfolio protection with put option considerations going forward. The changes made today will be reflected in the November 15 edition of the Best Ideas Newsletter. Please let us know if you have any questions.

Let's stay focused on the long haul.

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities 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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