Valuentum Exclusive Analysis for the Discerning Investor

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Apr 10, 2022

Cash-Based Sources of Intrinsic Value for Meta Platforms and PayPal Remain Strong
Image Shown: Shares of Meta Platforms Inc (blue line) and PayPal Holdings Inc (orange line) have staged a nice comeback during the past month, as of the start of April 2022. Rising interest rates and the impact that has had on the market's discount rate implicitly used within the enterprise cash flow pricing process has pressured the value of equities with long free-cash-flow growth tails--stocks that are expected to grow at a meaningful premium over global economic growth over the coming decades. The rapid increase in the 10-year Treasury rate, no doubt, has had a profound impact on the equity values of long-duration cash-flow companies such as those held in the ultra-speculative ARK Innovation ETF, for example. However, established big cap tech firms and many fintech entities shouldn't necessarily be as impacted by rising interest rates as those of many currently money-losing speculative innovation names that won't generate meaningful levels of free cash flow for 5 to 10 years, maybe longer. For example, shares of companies such as Apple Inc. or Microsoft Corp. should only have but a muted impact from rising rates; these companies have huge net cash positions and are already generating strong free cash flow. It can even be argued that higher inflation/rates will afford Apple and Microsoft pricing power to raise product and software prices. While we might expect the ARK Innovation ETF to be down nearly 40% year-to-date and more than half during the past 52 weeks, we don't think it makes a lot of sense for some of the strongest, large cap growth names to be off ~12%, on average, year-to-date. We think the market, in many instances and especially within the area of technology, is throwing the baby out with the bathwater. Shares of Meta Platforms Inc, formerly Facebook, and PayPal Holdings Inc are two such names that the market has been beating down too much, in our view. Though some weakness in Meta Platform's and PayPal's shares can be expected in the current market environment, year-to-date declines of 30%+ and 40%+, respectively, are a bit much. That said, during the past few months, we have reduced our fair value estimates for both Meta Platforms and PayPal for good reasons. For starters, Meta Platforms is investing heavily in the metaverse, a digital universe, and is scaling up its data center capacity to support its efforts on this front (which is driving its capital expenditure and operating cost expectations up sharply in the medium-term). Meta Platforms is not expected to make a meaningful amount or any money on these investments for some time. PayPal is facing headwinds from hefty customer acquisition costs to grow its active user base amid rising competitive threats. We also think that we may have been too aggressive within our valuation model when we built in too much earnings leverage during the next five years at PayPal. Said another way, the fintech company’s mid-cycle operating margin is not what we once though it was--as PayPal will find it difficult to meaningfully expand its margins in the current environment. However, putting it all together, these pressures and others have all been reflected in our current fair value estimates (and fair value estimate ranges) for Meta Platforms, which sits at $367 per share, and PayPal, which sits at $152 per share. Both companies are included as ideas in the Best Ideas Newsletter portfolio, and we are beginning to see signs of a rebound underway. For long-term investors, we think Meta Platforms is a no-brainer at current prices, though we may be a bit more cautious on PayPal, which is now more of a "show-me" story, given recent hiccups. All this having been said, let's dig in to why we still like Meta Platforms and PayPal.

Apr 7, 2022

Best Biotech Idea Vertex Pharma Outperforming Struggling Peers, Its New Treatment for Pain a Game Changer in the Fight Against the Opioid Epidemic
Image: Vertex Pharma has advanced more than 18% since the beginning of 2021, trouncing the performance of the SPDR S&P Biotech ETF by an incredible margin. The outperformance gap stands at more than 50+ percentage points at the time of this writing. We were blown away by the phase II results released March 31 at Vertex Pharma for its non-opioid, non-addictive pain killer, the NaV1.8 inhibitor VX-548, and we think the molecule has the potential to provide a solution to the widespread opioid crisis in a meaningful way. According to the U.S. Department of Health and Human Services, tens of thousands of deaths each year are “attributed to overdosing on synthetic opioids.” The company’s phase II results for VX-548 provide “proof of concept” in order to push the study to more advanced studies, and we are highly encouraged. We also note that the long-term revenue and earnings potential for VX-548 is not included in our valuation model for Vertex Pharma and would offer pure incremental upside to our fair value estimate. VX-548 could be a game-changer in the fight against the opioid epidemic, in our view.

Mar 29, 2022

Dividend Growth Idea Newmont Surging Higher
Image Shown: Shares of dividend growth idea Newmont Corporation have surged higher since January 2020. Rising geopolitical tensions have pushed COMEX gold prices to the $1,900-$2,000 per troy ounce range as of this writing in late March 2022. We added the gold miner Newmont Corp to the Dividend Growth Newsletter portfolio back in January 2020 to gain modest exposure to the gold industry. Shares of NEM are trading near the high end of our fair value estimate range of $78 per share as of this writing after surging ~31% over the past year. Newmont has a variable dividend policy that includes a base and variable payout. Shares of NEM yield ~2.8% on a trailing twelve month basis, and we continue to be big fans of the name.

Mar 14, 2022

Valuentum Weekly: Yields on New Series I Savings Bonds Have Soared!
The Dow Jones, S&P 500 and NASDAQ futures are all indicated up Sunday night (March 13), but that may not mean much when trading kicks off tomorrow. The start to 2022 has been one of the worst stretches during the past decade, but broader market indexes still aren't down much, even after factoring in several expected rate hikes by the Fed and economic sanctions on Russia due to the war in Ukraine. According to data from Seeking Alpha, the S&P 500 (SPY), Dow Jones Industrial Average (DIA), and Nasdaq (QQQ) are off ~12%, ~10%, and ~19% so far this year, respectively. However, this weakness compares to (and is inclusive of) incredible 5-year price-only returns on the SPY, DIA, and QQQ of ~77%, ~58%, ~146%, respectively, so it's hard for stock investors to be disappointed in much of anything, even if all they were able to do was match the returns of the S&P 500 the past 5 years. Many, however, unfortunately, diluted those 5-year returns with hefty bond and international exposure and sometimes large AUM fees, so the weakness in 2022 is probably more painful for some than perhaps it should be. In any case, we remain bullish on stocks for the long run, with a heavy bent toward large cap growth and big cap tech with tactical overweight "positions" in big cap energy.

Mar 7, 2022

Valuentum Weekly: Outsized Energy Exposure Continues to Buoy Newsletter Portfolios
Image: Light crude oil futures once traded for roughly -$40 (negative $40) during the COVID-19 crisis, but have now rocketed to more than $120 in recent trading. Image Source: TradingView. The S&P 500, as measured by the SPY, is down 9% year-to-date, a modest pullback, in our view, particularly in light of the fantastic performance the past few years. Though not necessarily welcome, a down year every now and then for the broader market indexes and a modest bear market can only be expected, at times. The Dow Jones Industrial Average, as measured by the DIA, is down more than 7% year-to-date (not too bad), while the Nasdaq--as measured by the QQQ--and 'disruptive innovation' stocks--as measured by the Ark Innovation ETF--have fallen more than 15% and 36%, respectively, so far this year (data from Seeking Alpha). We like how the simulated newsletter portfolios are positioned. Energy resource prices continue to surge (with WTI crude oil prices skyrocketing north of $120 per barrel at last check), and they are bringing energy equities higher along with them. The simulated Best Ideas Newsletter portfolio, simulated Dividend Growth Newsletter portfolio, and simulated High Yield Dividend Newsletter portfolio are all materially overweight energy equities relative to the energy sector’s weighting in the S&P 500, and we expect to maintain such high tactical "exposure." Both the Energy Select Sector SPDR ETF and the Vanguard Energy ETF soared to 13-year highs last week. Our favorite energy ideas are the largest two energy majors, Exxon Mobil and Chevron, and both have hefty 'weightings' in each of the three aforementioned simulated newsletter portfolios. Russian equities, as measured by the RSX, are down nearly 80% so far this year, and we're pleased to say that we've largely avoided the fall out. We continue to like the broader areas of U.S.-heavy, large cap growth and big cap tech when it comes to long-term secular exposure, and we continue to like energy as a tactical overweight for the foreseeable future across the simulated newsletter portfolios, as much as we did even prior to the huge advance in energy resource prices and the invasion of Ukraine by Russia.

Mar 2, 2022

Evaluating the Exposure of Chevron and Exxon Mobil to Russia’s Energy Industry
Image Shown: Shares of Chevron Corporation (blue line) and Exxon Mobil Corporation (orange line) have skyrocketed over the past six months. Chevron Corp and Exxon Mobil Corp, our two favorite large cap energy firms included as ideas in the newsletter portfolios, have relatively modest exposure to Russia. Peers such as BP plc and Shell plc have publicly stated that they would effectively abandon their stakes in Russian operations, and there is a decent chance Chevron and Exxon Mobil will follow suit. Let's talk about the potential impact.

Feb 28, 2022

Our Report on Stocks in the Utilities (Mid/Small) Industry
Our report on stocks in the Utilities (mid/small) industry can be found in this article. Report includes AEE, ALE, CNP, CMS, DTE, ES, LNT, MGEE, NI, PEG, PNW, SCG, SJI, SR, SRE, WEC.

Feb 28, 2022

Our Report on Stocks in the Utilities (Large) Industry
Image Source: doggo. Our report on stocks in the the Utilities (Large) industry can be found in this article. Report includes AEP, D, DUK, ED, EIK, ETR, EXC, FE, NEE, NGG, PCG, PPL, SO, XEL.

Feb 25, 2022

Update: Analyzing Valuentum’s Economic Castle Index: A Walk Forward Case Study
There are two things generally wrong with a pure economic moat assessment, or economic “moat factor.” First, it is much easier to assess outsize economic returns in the near-term than it is to assess outsize economic returns over the long haul. Quite simply, nobody can predict what will happen tomorrow, and they certainly don’t know what will happen 20 or 30 years from now. Second, a rational investor should generally prefer expected near-term outsize economic returns than expected long-term ones given the uncertainty of the latter--somewhat related to our first point, a bird in the hand (or large economic returns in the near term) is worth two in the bush (or large economic returns in the long run that may not materialize). The time value of money reinforces this notion. Near-term economic returns are generally worth more than long-term ones in real terms, even if they may be smaller nominally. This is where our Economic Castle rating comes in. The goal of the Economic Castle rating is to identify those companies that are likely to generate a lot (or not so much) shareholder value over the foreseeable future. Instead of pondering a guess as to how the landscape will look 20 or 30 years from now, something not even the Oracle of Omaha can do with any sort of certainty (e.g. IBM, KHC), the Economic Castle rating ranks companies based on near-term expected economic returns, or returns that are more likely to be realized as opposed to those that may be built on “castles in the air” over 20-30 time horizons. By evaluating companies on the basis of the spread between their forecasted future return on invested capital (‘ROIC’) excluding goodwill less their estimated weighted-average cost of capital (‘WACC’), we measure a company’s ability to generate an “economic profit” over the foreseeable future, which we define as the next five fiscal years. Companies that generate a forecasted spread of 50 percentage points or more are given a “Very Attractive” Economic Castle rating and firms that are forecasted to generate a spread of 150 percentage points or higher are considered “Highest-Rated”. Firms that carry an Unattractive Economic Castle rating are those that are forecasted to generate a forward ROIC (ex-goodwill) less estimated WACC spread that’s meaningfully below zero (firms near economic parity can receive a Neutral Economic Castle rating, assigned by the Valuentum team).

Feb 16, 2022

The Castle Trumps the Moat
Berkshire Hathaway’s Warren Buffett has popularized the concept of an “economic moat,” perhaps best described in common language as sustainable competitive advantages. Whereas economic moat analysis focuses on the duration of a firm’s economic profit stream, as measured by return on invested capital less the costs of which to attain that capital, economic castle analysis focuses on the magnitude of economic profit creation over the realizable near term. Unlike the substantial duration risk inherent to predicting economic profits 20, 30 or more years into the future, the economic castle framework posits that the strongest performing companies during certain phases of the economic cycle will be those that generate the most economic value over the foreseeable future. The results in this paper showcase the aggregate outperformance of a select number of outsize economic-profit creators within the Valuentum Economic Castle Index relative to both S&P 500 firms and companies with “wide” economic moats.