Valuentum Exclusive Analysis for the Discerning Investor

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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 4, 2020

Analyzing Three Names Within the Retail Industry
In this note, we cover one quality retailer and two retailers that were facing a myriad of problems long before the novel coronavirus (‘COVID-19’) epidemic reared its head: Best Buy, Kohl's and Macy's.

Jan 31, 2020

Dividend Increases/Decreases for the Week Ending January 31
Let's take a look at companies that raised/lowered their dividend this week.

Jan 23, 2020

Why Natural Gas Prices are So Low and Will Likely Remain So for Some Time
Image Source: Cabot Oil & Gas Corporation – November 2019 IR Presentation. Domestic natural gas strip prices in the US are trading at rock bottom levels as of this writing, and we expect the pain will only continue. There are many reasons why natural gas prices in the US are quite low right now including surging associated production (gas supplies produced alongside oil, condensate, and natural gas liquids) from unconventional upstream plays where natural gas is viewed more so as a nuisance than a marketable product given the liquids-oriented economics of those plays, surging non-associated production (natural gas supplies are the only product) out of Appalachia over the past decade (the growth in natural gas production in Pennsylvania, Ohio, and West Virginia has been astounding due to the Marcellus and Utica shale plays), and the lack of the kind of serious weather-related demand this winter season (such as a very cold winter in North America, especially in the Midwest and East Coast) that can quickly drain flush storage facilities.

Dec 6, 2019

Dollar General Remains in Command
Image Source: Mike Mozart. Dollar General is a holding in the Best Ideas Newsletter portfolio. The company reported strong third-quarter results December 5 that showed better performance than rival Dollar Tree. Discount retail continues to feel the ill-effects of tariffs that are raising cost of goods sold, but Dollar General is taking the headwinds in stride.

Sep 30, 2019

Economic Commentary: US-Listed Chinese Names, 60-40 Stock-Bond Allocation and More
Image shown for informational/illustration purposes only.  There’s an interesting saying that I came across recently...that hits at the most important component of any fiduciary approach: capital preservation. The saying was “Friends don’t let friends buy and hold.” We’ve always employed the Valuentum strategy, which we believe is much more promising that a traditional buy and hold strategy. – Brian Nelson, CFA

Sep 19, 2019

DGN Holding Microsoft Continues to Deliver
Image Source: Microsoft - IR Presentation. We continue to like Microsoft in our Dividend Growth Newsletter portfolio and think the firm is well positioned to ride out any storm that may arise due to the synchronized slowdown in global economic growth. As a true free cash flow king sitting on a pile of (net) cash, there’s a lot to like about Microsoft’s income growth story.

Sep 17, 2019

DGN Holding Cracker Barrel Posts a Solid Quarter, Issues Promising Fiscal 2020 Guidance
Image Source: Cracker Barrel - IR Presentation.  Dividend Growth Newsletter portfolio holding Cracker Barrel Old Country Store reported fourth quarter earnings for its fiscal 2019 (ended August 2) on September 17 that were positively received by the market. We like Cracker Barrel’s dividend growth trajectory as its payout expands alongside its free cash flows.

Sep 16, 2019

Economic Roundtable: Quant Quake, “Quac-cidental Correlation,” and Economic Moats
Image Source: Anders Sandberg. Last week, the markets may have revealed that internals aren’t all that healthy. Major equity markets experienced a “rotation” that reminded many investors of the “quant quake” from August 2007. As Valuentum’s Brian Nelson wrote in Value Trap, “just a few bad days in the market caused a rapid unwinding of many quant long-short strategies (back then). Goldman’s chief financial officer said at the time that the firm was witnessing ‘25-standard deviation moves, several days in a row.’” On the surface, markets last week seemed relatively calm, but as the episode in 2007 revealed the activity last week may just be the calm before the storm. Many are pointing to overcrowded trades in betting against certain factors, while others are saying that many were forced to deleverage. We’re not so sure, and we think it may be the opposite: after years of suffering from lagging “value” returns, we think several quant shops stepped in to take on leverage, betting on a return to “value.” Let's talk about last week's quant quake, spurious correlations (the “guac-cidental correlation, in fact), economic moats and much more.

Sep 13, 2019

Kroger Posts Solid Quarter, Issues Weak Guidance
Image Shown: Kroger Company – IR Presentation. Kroger’s same-store sales growth was a welcome sight as it relates to the current strength of the US consumer, but we are staying away from the retailer for a reason. Its large net debt load puts the company’s payout at risk during adverse economic conditions, and we think management should be battering down the hatches considering how late we are in the business cycle. Management ending Kroger’s incremental operating profit forecast is a troubling sign.