Valuentum Exclusive Analysis for the Discerning Investor

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ICYMI -- Stay Optimistic. Stay Bullish. I Am.
Image: My great-grandfather (second from left) and his buddies in the 88th Division of the United States Army during World War I, at the time of the Spanish Flu pandemic of 1918-1919. He would serve under Major General William Weigel, become proficient in the 37mm gun, and take part in the largest offensive in U.S. military history, the Meuse-Argonne Campaign. As a corporal, he would survive the Great War and the Spanish flu pandemic, returning to the U.S. in May 1919 from the port of Saint-Nazaire, France on his way to Omaha, Nebraska. First of all, I wanted to reiterate how bullish I am on equities for the long haul. There are no risk-less investments when it comes to the stock market, of course, but this "win-win" scenario we seem to find ourselves in today appears to be one-of-a-kind in history. Here's what it boils down to. If the U.S. economy re-opens and everything turns out to be "fine," or at least better-than-expected, it's hard not to be bullish on stocks. We can then possibly look to pre-COVID-19 earnings numbers for 2021 and 2022 with some adjustments here and there, and that means the bull market is on (and new heights may be in sight). On the other hand, if the U.S. economy re-opens and economic numbers don't live up to expectations, which could happen, there will likely be even more stimulus--but investors might be bullish in this scenario, too. For starters, there's been more money created during the past few weeks or so than during the entire year following Lehman Brothers' failure (there's even talk of more money creation with another round of stimulus). We cannot forget that, while stock values are calculated on the basis of future free cash flow expectations, they are priced nominally (not inflation-adjusted), and stock investing is one way to combat the risk of inflation as strong companies price goods ever higher to outpace rising costs to reap in ever-higher earnings. Even if this excess money in the economy is not translated into inflation in physical goods and services, however, it may translate into inflating equity prices specifically, as has arguably (or perhaps undeniably) been the case during the period of 2010-2019. But there's more to this line of thinking...

Earnings Roundup for the Week Ended June 6
Image Shown: We highlight the operational and financial performance of four companies that recently reported earnings, which included periods of time where the ongoing coronavirus (‘COVID-19’) pandemic was present. US equity markets are melting upwards, and we remain “fully invested” in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios. We continue to prefer companies with high-quality cash flow profiles and net cash balances as the best way to navigate the COVID-19 pandemic.

Cisco Systems Makes a (Potentially) Transformative Acquisition
Image Shown: Over the past five years, shares of Cisco Systems have significantly outperformed the S&P 500 (SPY), before taking dividend considerations into account. When including dividend considerations, Cisco’s outperformance would likely grow even further given shares of CSCO carry a juicy yield. We include shares of the networking infrastructure giant Cisco Systems as a holding in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Its high quality cash flow profile, pristine balance sheet, and growing subscription-based revenue streams make Cisco quite appealing. As of this writing, shares of CSCO yield ~3.1% and our Dividend Cushion ratio sits at 2.7, earning the firm a “GOOD” Dividend Safety rating. Should that Dividend Cushion ratio climb a tad higher, Cisco would be in a position to earn an “EXCELLENT” Dividend Safety rating. Our fair value estimate of $54 per share indicates Cisco has room to move higher from current levels (~$47 per share as of this writing), supported by its technical strength of late. We want to draw attention to a recent acquisition that could have major implications for Cisco’s medium- and long-term growth trajectory.

Campbell Soup Sees Its Sales Surge
Image Source: Campbell Soup Company – Third Quarter of Fiscal 2020 Earnings IR Presentation. On June 3, Campbell Soup reported third-quarter earnings for fiscal 2020 (period ended April 26, 2020) and raised guidance for the full fiscal year to reflect the surge in demand for consumer staples goods due to the ongoing coronavirus (‘COVID-19’) pandemic. The firm beat consensus bottom-line estimates but missed consensus top-line estimates. Campbell’s net organic sales (a non-GAAP figure) jumped up by 17% year-over-year (GAAP revenues were up by 15%) and its adjusted diluted EPS (a non-GAAP figure) climbed higher by 57% year-over-year (GAAP diluted EPS was up 34%).

Dow Jones Surges Past 27,000; Bull Market Continues!
"What a bull market off the lows we are having. I don't think we're finished, as I have pounded the table time and time and time again about how bullish I am. In the words of Frank Sinatra, "The Best Is Yet to Come," and I truly believe that. Yesterday, I explained to readers why we're seeing this huge rally, "Stay Optimistic. Stay Bullish. I Am." If you understand the duration and composition of equity value (page 74-83 in Value Trap), you can start focusing on what drives share prices and returns. How else could a market rally this much with 13% unemployment, right? How wonderful it would be if everyone understood the duration of stock value composition! What would happen to ambiguous, backward-looking factor investing? Finance could then start talking about things that make sense again." -- Brian Nelson, CFA

BHP Benefiting from an Industrial Rebound in China
Image Source: BHP Group – Fiscal 2019 Annual Report. In recent months, iron ore futures prices have surged higher due to an ongoing recovery in China’s industrial sector and supply concerns in Brazil, which has culminated into the Dalian Commodity Exchange’s September 2020 iron ore deliveries hitting a record high since the futures contract was first launched in 2013. Pivoting to copper, three-month copper futures prices based on trading activity on the London Metals Exchange have also perked up on the back of an apparent recovery in Chinese economic activity. Rising metals prices bodes well for major and minor miners around the globe, including BHP Group.

Encouraging Trends at Cracker Barrel, Consumers Coming Out to Spend
Image Source: Cracker Barrel. Cracker Barrel has one of the best dining experiences around, and we expect it to make a strong recovery thanks in part to a differentiated brand, loyal guests, and menu pricing power. Despite the dividend cut, we didn’t remove the company from the Dividend Growth Newsletter portfolio as we were expecting a huge bounce in the share price, which has happened. While it may take some time for Cracker Barrel to reinstate its dividend, we think it will happen sooner than later, and we are leaving the company in the Dividend Growth Newsletter portfolio for the foreseeable future as its share price continues on the path to pre-COVID-19 levels. The high end of our fair value estimate range stands at $119, but there may be meaningful upside in the event consumer willingness to revisit full-service restaurants (coupled with a return to economic “normalcy”) go better than expected.

Our Thoughts on SelectQuote Going Public
Image Source: SelectQuote Inc – S-1 filing. On May 22, the digitally-oriented insurance comparison company SelectQuote went public, and shares of SLQT have performed quite well since then as of this writing, jumping meaningfully from the reference price of $20 per share. The company intends to use some of the proceeds for debt reduction, as it is obligated to allocate at least a quarter of the net proceeds (up to $150 million) of the IPO towards paying down its term loan due November 2024. What SelectQuote offers is an online way for consumers to compare prices and policies for various insurance plans including life, auto, home, and senior healthcare insurance products. SelectQuote does not underwrite the insurance policies but sells these products on behalf of its various partners and takes a commission for each sale. Thus, SelectQuote does not have any underwriting risk. SelectQuote has licensed insurance agents in all 50 states, and at the end of 2019, the firm had 1,850 “full-time equivalent employees” including 636 core agents and 392 flex agents.

June Dividend Growth Newsletter & Intrinsic Value Investing
"But how, you will ask, does one decide what [stocks are] "attractive"? Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth,"...We view that as fuzzy thinking...Growth is always a component of value [and] the very term "value investing" is redundant." -- Warren Buffett, Berkshire Hathaway annual report, 1992

Dollar General Posts a Tremendous Fiscal First Quarter Earnings Report
Image Source: Dollar General Corporation – Fiscal 2019 Annual Report and Fiscal 2020 Proxy Statement. Dollar General is one of our favorite retail plays given its focus on smaller cities and towns (with populations of 20,000 or less) in the US as that gives it an immense edge over e-commerce giants such as Amazon due to the logistical hurdles involved with expanding into these regions. Shares of DG have run up above the top end of the fair value range as of this writing; however, given its strong technical and fundamental performance of late, we're keeping Dollar General as an idea in the Best Ideas Newsletter portfolio as we like to let our winners run. It isn’t until a company’s technicals turn against it that we consider removing shares from our newsletter portfolios. Shares of DG yield ~0.8% as of this writing, which offers incremental income upside to Dollar General’s capital appreciation upside. In March 2020, Dollar General opened its first store in Wyoming which represented the 45th state the company had a retail presence in. In April 2020, Dollar General opened its first store in Washington state, growing its retail presence to 46 US states. Beyond same-store sales growth, Dollar General sees room for upside by expanding its physical store count.