Valuentum Exclusive Analysis for the Discerning Investor

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Mar 10, 2020

Fiscal Stimulus Coming to the US?
US equity markets started up strongly initially on Tuesday, March 10, likely due to reports coming out that the Trump Administration was considering recommending payroll tax cuts, paid leave, and special loans to small businesses to offset the negative impacts of the novel coronavirus (‘COVID-19’) epidemic. There are over 560 reported cases of COVID-19 in the US as of this writing, and unfortunately, that includes roughly two dozen fatalities. This remains a serious epidemic.

Mar 9, 2020

Oil Markets Get Decimated
Image Shown: Oil prices have been decimated year-to-date. The outlook for independent upstream names has become dire. In an industry that’s generated little to no free cash flow since 2010, and instead has relied heavily on capital markets to stay afloat; for all the hype surrounding surging US production of raw energy resources there hasn’t been much shareholder value creation to show for it. Consumers and certain US states have been big winners, sure, but equity holders and now potentially credit holders have largely taken it on the chin. We will continue following the space for our members going forward, and please note there’s a very good reason we removed the Energy Select Sector SPDR ETF from our newsletter portfolios back in August 2019 (link here), the outlook for the energy space (particularly oil & gas) was lackluster at the time and has since become dire.

Mar 9, 2020

S&P 500 Circuit Breakers Tripped, Dow Jones Opens Down 2,000+ Points
Image: The market remains under selling pressure, but the massive sell off the past couple weeks has only amounted to but a blip since the beginning of 2010. There could be more pain ahead. After a pre-market session March 9 that locked futures at “limit down” (futures are limited from dropping more than 5%), most investors were laser-focused on the moves of the S&P 500 ETF (SPY), which pre-market had been hovering around the $276 per-share range, off about 7%. Shortly after market open, circuit breakers were then tripped with the S&P 500 falling 7%, stopping trading for 15 minutes. The Dow Jones Industrial Average fell more than 2,000 points. We are maintaining our S&P 500 target range of 2,350-$2,750, or $235-$275 on the SPY at this time.

Mar 9, 2020

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?
From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as downside probabilities such as a liquidity event are baked into the market price and at a higher probability. Because debtholders are higher up on the capital structure than equity holders, shareholders can sometimes get nothing in the event of a bankruptcy filing. Entities that are extremely capital-market dependent, or those that require ongoing access to new capital to fund operations, often face the greatest risk of the worst equity price declines during deteriorating credit market conditions.” Value Trap: Theory of Universal Valuation, published 2018

Mar 8, 2020

Coronavirus Crisis Deepens, Italy on Lockdown
Image: WHO. The epidemic curve of confirmed COVID-19 cases that have been reported outside of China is steepening. Italy remains a hotspot. The situation with COVID-19 remains dire. A vaccine may not be available for another 12-18 months, which is simply too long before what could be an overwhelming of healthcare systems around the globe. The WHO has already revised the expected mortality rate of COVID-19 higher, now 3.4%, and its catastrophic impact on the large economies of China and Italy is already being felt. The US equity markets have largely lulled investors to complacency the past decade or so, and many have been conditioned to largely ignore major events as a result, employing the buy-the-dip-at-any-price mentality and championing “stocks always go up” doctrine. However, the situation with COVID-19 could be setting the stage for an all-out financial crisis, as we outline in this piece here. With the S&P 500 at 2,972, the market continues to largely ignore the long-term risks that may come from changed behavior as a result of COVID-19. We’re reiterating our near-term 2,350-2,750 target on the S&P 500, and we encourage long-term investors to evaluate long-term charts to assess how far we have come since the March 2009 panic bottom, and how even a modest 10-20% sell-off from here (supported by reasonable forward multiples and earnings) would be largely a blip over the long term. This blip, however, may cause an outright panic, made worse by price-agnostic trading. The Fed, for example, made an emergency 50 basis-point rate cut with the market just a few percentage points off all-time highs. Emotions are running high, and investors are simply not ready for COVID-19. All else equal, panic selling is not selling with the S&P 500 at 2,972, today's levels. Just because stock prices have fallen doesn't make them cheaper. Panic selling, for example, might be selling with the S&P 500 at 2,000 (if it ever reaches those levels), and that's if reasonable valuation expectations don't warrant those levels at that time. Today, we're still at relatively overpriced valuation levels on broader market indices, and the sell-off to this point has been more reasonable than overdone, in our view. Please stay safe out there!

Mar 6, 2020

ALERT: Re-establishing "Crash Protection"
Anecdotally, we are hearing lots more talk of algorithmic trading, and how it is becoming harder to sell any volume of equities without moving the markets. We have established a target range on the S&P 500 of 2,350-2,750 and explain how the COVID-19 crisis can catalyze into an all-out financial crisis (see here), and conditions have all the makings of another crash from here (see here). We're still only a few percentage points from all-time highs on most major indexes.

Mar 6, 2020

Dividend Increases/Decreases for the Week Ending March 6
Let's take a look at companies that raised/lowered their dividend this week.

Mar 5, 2020

Buffett Makes Another “Unforced Error” in Airlines
“Buffett said once that he had an 800 number that he would call anytime that he wanted to buy an airline stock again. Maybe that number has been disconnected after all these years, as Berkshire Hathaway is once again an owner of airline equities. Though the structural characteristics of an industry can and do change over time, I’m very skeptical the airline business has changed permanently for the better. Today’s airline business may be more oligopolistic in nature and much more profitable thanks to consolidation and the right-sizing of capacity, but it retains a notoriously cyclical passenger-demand profile, ties to the level and volatility of energy resource prices, considerable operating leverage, all the while barriers to entry remain low, exit barriers remain high, and fare pressure endures. The next downturn may not see as many bankruptcies as prior economic cycles due to lower unit-cost profiles, but it may turn out to only be modestly “less bad” for equity holders." – Value Trap, published December 2018

Mar 5, 2020

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?
Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that the decrease in spending is very real, and we’ve yet to see the brunt of the impact yet. We have written extensively about our valuation expectations and target on the S&P 500 in the past, so please don’t mistake this reference as the extent of our thinking. We do not think a sell-off on the S&P 500 to the range is 2350-2750 is too far-fetched, as it really only gets the broader markets back to late 2018 levels (a mere year ago or so), and reflects a reasonable 16x forward expected earnings, as of February 14, hair cut by 10% as a result of the impact of COVID-19. The Fed put may not matter much anymore in the wake of this “biological” crisis, and increased fiscal spending may not be enough to offset what could be sustained weakness across the global economy.

Mar 5, 2020

AT&T Provides Another Key Update
Image Shown: The blue line represents the share price performance of AT&T Inc and the orange line represents the performance of the S&P 500 Index. Shares of T have outperformed the index on a year-to-date basis as of this writing. One of our favorite high yield ideas out there is AT&T Inc --- ~5.6% yield --- given its stellar free cash flow profile and ongoing corporate initiatives: serious debt reduction, share buybacks, upcoming launch of HBO Max, the rollout of 5G services across the US, cost structure improvements, and upside from AT&T’s public-private partnership FirstNet (billed as the first nationwide network in the US dedicated to entities/groups operating within the realm of public safety i.e. first responders like law enforcement, firefighters, and emergency medical services providers). On March 3, AT&T provided an update on some of its recent initiatives, news that has offered resiliency to shares.