In the News: Facebook Optimistic, Visa Resilient, Dollar General’s Outlook Not Bad and More
publication date: Mar 19, 2021
author/source: Brian Nelson, CFA
By Brian Nelson, CFA
As the world continues to heal from the coronavirus (“COVID-19”) pandemic, the pace of news has not slowed. The S&P 500 (SPY) is now trading above/near the high end of our fair value estimate range, so we expect some profit taking to ensue in the coming months. The Reddit and meme-stock short-squeezes (with GameStop (GME) as their poster child) have only raised awareness of the hazards and systemic risks of price-agnostic trading and its potential impact on market health.
Democrats have called on the Securities and Exchange Commission (SEC) to regulate the “gamification” of investing apps, and we hope that such regulation and oversight eventually advances to other questionable areas, including variants of quant and index investing, to ensure long-term market health and integrity. We maintain our view that the similarities of individual investors trading collectively on the factor “short interest as a percentage of float” is no different than professional quant investors trading on the academic quant “book to market” value factor or other factor variants that do not consider intrinsic values.
We hope regulators make this important connection and work to ensure market integrity for posterity.
With that said, a number of news items have hit the wire that we want members to be aware of. First, we’re reiterating our $413 per share fair value estimate of Facebook (FB)—shares are trading less than $300 at the moment. Facebook’s equity is severely underpriced, in our view, and CEO Mark Zuckerberg’s commentary on a recent discussion on audio platform Clubhouse put many concerns regarding its relationship with Apple (AAPL) and changes on iOS 14 to rest--or at least painted them in a more optimistic light. Here is what Zuckerberg had to say:
I think the reality is that I'm confident that we're gonna be able to manage through that situation. And we'll be in a good position. I think it's possible that we may even be in a stronger position. Apple's changes encourage more businesses to conduct commerce on our platforms, by making it harder for them to basically use their data in order to find the customers that would want to use their products outside of our platforms.
We weren’t reading too much into concerns over the impact of Apple’s iOS 14 changes on Facebook in the first place, despite scary media headlines, because Facebook has so many open-ended opportunities from cryptocurrency to e-commerce and beyond that it’s possible that our $413 per-share fair value estimate may be too conservative. Facebook’s shares were trading nearly 4.5% higher during the session March 19 on the more optimistic Apple-related news. Both Facebook and Apple remain key holdings in the Best Ideas Newsletter portfolio.
One of the challenges of being a behemoth in the credit-card processing industry is that one might get flagged for anti-competitive behavior. On March 19, the WSJ reported that the “Justice Department is investigating whether Visa Inc. (V) is engaging in anticompetitive practices in the debit-card market.” The crux of the argument seems to rest on “whether Visa, the largest U.S. card network, has limited merchants' ability to route debit-card transactions over card networks that are often less expensive.” Both Visa and Mastercard (MA) are trading down on the news March 19, and we’ll be following related developments closely. We're not overreacting by any stretch.
In other news, airline stocks (JETS) have been rallying thanks in part to expectations that U.S. travel restrictions will start to loosen in mid-May. Many airlines such as Alaska Airlines (ALK), Delta Air Lines (DAL) and United Airlines (UAL) have noted improving cash flow and bookings trends, but much of this should already be expected. We view the airline sector and individual airlines more as trading vehicles than long-term investments, and COVID-19 was only the latest iteration of near total disaster following a long line of bankruptcies. No industry has more bankruptcies than that of the airline business. We’ll continue to watch from the sidelines.
On March 18, Best Ideas Newsletter portfolio holding Dollar General (DG) reported decent fourth quarter 2020 results (ended January 29, 2021) that came with a dividend increase of 17% and a bigger buyback program, but most of the Street was focused on the company’s newly-issued fiscal year 2021 guidance (ending January 28, 2022), which came in a little light relative to expectations. Management guided net sales to be down 2% to flat, while it is targeting same-store sales to uncharacteristically drop 4%-6% during the current fiscal year.
The outlook came a bit as a disappointment to the markets because fiscal 2021 would then put an end to its streak of positive same-store sales growth at 31 years, but the reasons for the expected weakness in fiscal 2021 are more a result of difficult year-over-year comparisons caused by significant sales benefits during the COVID-19 pandemic than anything truly fundamentally deteriorating.
For example, same-store sales advanced an impressive 16.3% during fiscal 2020 compared to fiscal year 2019, and the company’s bottom-line target for fiscal 2021 in the range of $8.80-$9.50 still reflects a “compound annual growth rate between 15% and 20%...over a two-year period.” Dollar General’s business fundamentals remain strong. Here’s what Valuentum’s Callum Turcan had to say about recent developments:
Some of Dollar General's operational updates were quite promising. Larger store formats have been a success and the initial performance of its pOpshelf branded stores encouraged Dollar General to speed up its rollout of the concept. The dividend increase and ramp up in its share buyback program highlights management's commitment to investors.
Dollar General’s shares are trading roughly in line with our fair value estimate of them, but we could see upside to the high end of our fair value estimate range of $223 per share in the event management exceeds what may turn out to be conservative guidance given the strength of its recently-completed fiscal 2020. The company’s Dividend Cushion ratio will remain rock-solid even after the nice dividend hike, now $1.68 per share on an annualized basis (about a 1% annualized dividend yield on a forward basis).
The equity markets, as measured by the S&P 500, are trading above/near the high end of our fair value estimate range, but we remain focused on the long run, and there are many individual ideas that present tremendous long-term capital appreciation potential. By far, Facebook is the most undervalued stock on the market, in our view, and recent news has painted its relationship with Apple in a more positive light. The Justice Department is investigating Visa for anti-competitive behavior, but we don’t think its dominant position and lucrative business model will be challenged.
Successful vaccines for coronavirus (“COVID-19”) have breathed life into shares of airline equities, but we still don’t view them as long-term investments. Dollar General will see its yearly streak of consecutive same-store sales growth come to an end in fiscal 2021 (ends January 28, 2022), but we’re still positive on the name. Some of our best ideas continue to be in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. For investors seeking higher-yielding ideas, please consider the High Yield Dividend Newsletter publication.
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Brian Nelson owns shares in SPY, SCHG, QQQ, and IWM. Brian Nelson's household owns shares in HON. 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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