Valuentum Exclusive Analysis for the Discerning Investor

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Oct 22, 2020

News Brief: Stay at Home Stocks, REITs, Housing, Oracle, and AT&T
Image: Number of COVID-19 cases reported weekly by WHO Region, and global deaths, 30 December 2019 through 18 October 2020. Source: WHO. The COVID-19 pandemic continues to rage on, though the healthcare community has become more adept at reducing the incidence of death given the many treatments now available to battle the disease. We continue to stay the course with the newsletter portfolios. Many of our favorites include Apple, Microsoft, Facebook, Alphabet, and PayPal, among other moaty, net-cash-rich, free-cash-flow generating powerhouses tied to secular growth trends. Our focus remains on the long haul. The business models of many stay-at-home stocks are solid as they continue to reap the rewards of the accelerated trends of home office use and e-commerce proliferation. Housing-related names are also benefiting as consumers adjust their lifestyles to accommodate a post-COVID-19 world. Many pockets of the economy still remain ill, and the slow fading of the attractiveness of commercial / office / apartment space may rear its ugly head as this new decade continues. As was the case with the department stores, they may hang around for years (decades) with myriad fits and starts, but it will be an uphill battle for REITs operating in these areas. We see little reason to bottom fish in airlines, cruise lines, or fickle mall-based retail, for example, but there may be select opportunities in the restaurant arena with Chipotle and Domino’s. The financials and energy sectors are two areas we continue to avoid, more generally, and they have continued to underperform.

Sep 3, 2020

3 Lessons in Portfolio Management Over 10 Years
Image Source: http://www.epictop10.com/. "When I left as director in the equity and credit department at Morningstar in 2011, I thought I knew a whole heck of a lot about investing. I felt like I was one in the top 5-10 in the world as it relates to the category of practical knowledge of enterprise valuation (maybe include Koller at McKinsey, Mauboussin at Counterpoint, and Damadoran at Stern on this list). After all, I oversaw the valuation infrastructure of a department that used the process extensively, and the firm was among just a few that used enterprise valuation systematically. Then, at Valuentum, our small team would go on to build/update 20,000+ more enterprise valuation models. There can always be someone else out there, of course, but I don't think anybody has worked within the DCF model as much as I have across so many different companies. That said, through the past near-10 years managing Valuentum's simulated newsletter portfolios, I've also learned a number of things to become an even better portfolio manager." -- Brian Nelson, CFA

Sep 1, 2020

Experience and Judgment
"Think of a DCF model like a baseball bat. It's not so much the bat, itself, that matters, but rather it's the hitter that uses the bat that matters. Two hitters can use the same bat and arrive at a completely different outcome. In my near-10 years working at Valuentum, this concept is the most important one I've sought to emphasize. The DCF model is a tool, much like the baseball bat is the instrument by which the slugger hits home runs. That same bat can lead to a triple crown or set the league record in strike outs." -- Valuentum's Brian Nelson, CFA

Jul 30, 2020

Visa Remains Resilient in the Face of COVID-19
Image Shown: Visa Inc remained a free cash flow cow last fiscal quarter in the face of the pandemic. Image Source: Visa Inc – Third Quarter of Fiscal 2020 IR Earnings Presentation. On July 29, Visa reported third quarter fiscal 2020 earnings (period ended June 30, 2020) that missed consensus top-line estimates and beat consensus bottom-line estimates. The ongoing coronavirus (‘COVID-19’) pandemic weighed on travel-related purchases across Visa’s cardholder base, a dynamic that held down cross-border transactions which tend to be more lucrative for the payment processor. Keeping pandemic-related headwinds in mind, the company noted its performance was improving in several key markets around the world. We continue to like Visa as a top-weighted holding in the Best Ideas Newsletter portfolio given its high quality cash flow profile, strong balance sheet, and very promising post-pandemic growth outlook. The top end of our fair value estimate range for Visa sits at $214 per share.

Jul 30, 2020

PayPal Posts a Tremendous Quarterly Report, Reinstates Guidance
Image Shown: PayPal Holdings Inc put up tremendous performance during the first half of 2020 as consumers are increasingly shopping online. In the second quarter of 2020, PayPal continued to grow at a decent clip even in the face of the ongoing pandemic. Image Source: PayPal Holdings Inc – Second Quarter of 2020 IR Earnings Presentation. After the market close July 29, PayPal reported second quarter 2020 earnings that beat consensus top- and bottom-line estimates. Shares of PYPL moved sharply higher after the report was published, and we continue to like PayPal as a holding in the Best Ideas Newsletter portfolio. Our fair value estimate sits at $200 per share of PYPL, comfortably above where PayPal is trading at as of this writing. There is room for meaningful capital appreciation upside as the top end of our fair value estimate range sits at $240 per share of PayPal. Even in the face of the ongoing coronavirus (‘COVID-19’) pandemic PayPal continued to grow, and we appreciate the resilience of its business model. The firm’s cash flow profile is of high quality, supporting its ability to generate meaningful free cash flows in any economic environment. Additionally, having a pristine balance sheet provides PayPal with ample financial flexibility to ride out the storm.

Jun 21, 2020

Warren: Four Ways to Play the Market at This Juncture
Image Source: Daniel Lobo. In this piece, we examine where the economy and stock markets have been recently, where we are now, and where we are going next. We also highlight four key ways to play this volatile market. We think this is a helpful way to think about overall portfolio construction, especially so that one does not overly expose themselves to a particular set of risks that could come to fruition—like an extended downturn in the economy or a rapid discovery of a vaccine for Covid-19 on the other hand.

Jun 16, 2020

Reiterating Our Bullish Long-Term View on Stocks
Image: The NASDAQ 100 Index remains resilient, bouncing off support, after breaking out to new highs recently. Some of our best ideas are included in the NASDAQ 100, and our favorite concentrations include exposure to big cap tech and large cap growth. We continue to be bullish on equities for the long run. In addition to unlimited quantitative easing and "whatever it takes, squared" Fed policy, today, June 16, the Trump administration announced that it is weighing a $1 trillion stimulus bill to help support the economy. While uncertainties remain regarding specifics of the bill (it might include state assistance, extension of unemployment benefits, etc.), the move is consistent with the outsize spending we expect to further bolster the bull case, "ICYMI -- Stay Optimistic. Stay Bullish. I Am." We continue to emphasize that, in light of unlimited QE and runaway fiscal stimulus, the longer-duration components of intrinsic values are expanding considerably, and as a result, fair values, themselves, are actually rising during this recession and pandemic [a good estimate of the value of the S&P 500 today may be between 3,530-3,920, as outlined in the following: "Scribbles and More Newsletter Portfolio Changes.]."

Jun 15, 2020

ICYMI: Survey Coming Later Today, More Market Volatility Expected
Image: The market's levels of volatility so far in 2020 have been among the greatest in history. Expectations for increased volatility in the marketplace as a result of the proliferation of price-agnostic trading (indexing and quantitative trading) is a key theme of Valuentum's text, Value Trap: Theory of Universal Valuation. We continue to emphasize the importance of due diligence, enterprise valuation, behavioral thinking, the information contained in prices, and stock selection across equity portfolios. Page 256. This week is setting up to be yet another volatile week of trading, but nothing too surprising. We've talked extensively about outsize levels of volatility in the book Value Trap, and many of our predictions regarding the magnitude of volatility have come to fruition, as described in this note here. But as we've also noted in Value Trap, we don't think increased volatility is a transient development. The Fed and Treasury have only further emboldened price-agnostic trading (indexing/quant) with recent bailout actions, and volatility and momentum funds, which exacerbate the swings, will only grow as a percentage of trading volumes. The magnitude of market volatility during the COVID-19 crisis has certainly been immense. During March for example, the Dow Jones Industrial Average had 8 consecutive days with a 4% move in either direction (this is the first time in history this happened--not even during the tumultuous times of the Crash of 1929 or Black Monday of 1987 or the Great Financial Crisis did this happen). Intra-day volatility has also been considerable, and it has become commonplace for equity futures to swing wildly before market open. Now, more than ever, investors need a steady hand at the wheel.

Jun 12, 2020

*ALERT* Scribbles and More Newsletter Portfolio Changes
Image: Why are stock prices increasing while the near-term economy and near-term earnings outlook isn't as bright as before...How unlimited quantitative easing, runaway government spending, increased inflation expectations impact equity values...Why this year's earnings expectations or next year's earnings expectations don't matter much...Why Valuentum thinks equity values are rising today, even as the near-term outlook remains unclear. Scribbles on page 76 of Value Trap. "I know it sounds crazy to say so during a global pandemic and during a recession, but the right multiple and the right earnings to use to value this market is an 18-20x multiple on $196 earnings, putting a fair value range on the S&P 500 today of 3,530-3,920. The S&P 500 is trading at about 3,000 today." -- Brian Nelson, CFA

Jun 11, 2020

Valuentum Research Update
"Hope you all are doing great! I must say I couldn't be more pleased with the research we've been putting out, and thank you very much for your continued interest. In this piece, I wanted to get some of our latest work to you. First, please note that we've done a great job holding the line on many of our fair value estimates (ranges) on our website. Many stocks have been bouncing back, and we're glad we didn't rush through any updates. Updating fair value estimates (ranges) too frequently doesn't make much sense to us. We're after the right answer, not any answer." -- Brian Nelson, CFA