Valuentum Exclusive Analysis for the Discerning Investor

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Jul 27, 2022

Walmart’s Business Update Likely Means U.S. Is In Recession, But Near-Term Weakness Is Already Baked Into Stock Market
Image Shown: Shares of Walmart Inc dropped sharply during afterhours trading on July 25 as the retailer sharply cut its adjusted operating income and EPS guidance for the current fiscal year as inflationary pressures are taking a sizable toll on its bottom-line. On July 25, Walmart Inc issued a business update that saw the retailer sharply cut its adjusted operating income and EPS guidance for fiscal 2023 (period ended January 2023), while boosting its consolidated net sales guidance. The company also adjusted its guidance for the fiscal second quarter. Shares of WMT plummeted during afterhours trading on July 25 as investors began to price in concerns over the retailer’s deteriorating margins. We anticipated ongoing weakness in Walmart’s business. On July 4, we released an audio report, “Nelson: I Have Been Wrong About the Prospect of Near-Term Inflationary-Driven Earnings Tailwinds,” highlighting our growing concerns about consumer-tied entities in the consumer staples and consumer discretionary spaces. We continue to expect troubles at the big box retailers and across the apparel space, more generally. Here’s what Nelson had to say in early July that remains applicable today: "I simply was not expecting the magnitude of such operating-income drops across consumer-tied companies, and while I think long-term inflation will eventually help drive higher nominal earnings in the longer run when conditions reach “normalization” again, the lag will be much longer than I originally thought. The numbers out of Walmart, Target, and Nike, for example, speak not only to tremendous earnings weakness, but also to the prospect of economic recession in the U.S." A recession in the U.S. is no reason for panic, however. For starters, we believe most of the fundamental weakness across retail is baked into the stock market, but more generally, investors should not worry about recessionary trends. But why? Well, implicitly embedded within a fair value estimate of a company are expectations of a “normal” economic cycle, complete with peak and trough, with the fair value estimate driven largely by mid-cycle expectations that feed into later stages of the model. The prospects for an unexpected recession in economic activity in the near term shouldn’t cause much of a change in the fair value estimate of a company either, given not only that a recession is already implicitly embedded in the fair value estimate, as noted, but also that near-term expectations don’t account for nearly as large of a contribution to the fair value estimate as long-term normalized expectations within the valuation construct. Most of a company’s intrinsic value is driven by its performance beyond year 5 in our model, or on a mid-cycle, going-concern basis. A company’s fair value estimate range (margin of safety) also captures various scenarios regarding economic activity, including a bull and bear case. With that said, recessionary tendencies may cause pricing impacts in the market in the event that consumers/investors use the stock market as a source of income by selling stocks, causing pressure on share prices, but the discounted cash flow (DCF) model already bakes in economic cyclicality and inevitable recessions, if not directly, then implicitly by targeting long-term mid-cycle expectations and via the application of the fair value estimate range. That’s why it’s great to be a long-term investor, scooping shares up when others are forced to sell in the near term, while holding them over long periods, letting compounding work its magic.

Jul 11, 2022

Valuentum's Unmatched Product Suite
We continue to be huge believers in the concept of enterprise valuation, which emphasizes the key cash-based sources of intrinsic value--net cash on the balance sheet and strong and growing future expected free cash flows. Meta Platforms, Inc. and Alphabet Inc. remain two of the most underpriced ideas on the market today, and we remain huge fans of their tremendous long-term investment prospects.

Jul 4, 2022

Nelson: I Have Been Wrong About the Prospect of Near-Term Inflationary-Driven Earnings Tailwinds
"Though I have been clearly wrong on my near-term thesis for inflation-driven earnings expansion, we still did great sorting through investment idea considerations. Through late June, for example, the simulated Best Ideas Newsletter portfolio has generated 4-5 percentage points of alpha relative to the S&P 500, as measured by the SPY. The simulated Dividend Growth Newsletter portfolio is down only modestly this year, also performing better than traditional benchmarks. The simulated High Yield Dividend Newsletter is generating “alpha” against comparable benchmarks, and the Exclusive publication continues to deliver, with both capital appreciation ideas and short idea considerations generating fantastic success rates. ESG and options-idea generation have also been great. With all this being said, in the long run, I believe nominal earnings will expand rapidly from 2021 levels, which is why I remain bullish on stocks. I believe markets tend to overestimate earnings in the near term and underestimate them in the long run. The intelligent investor knows, too, that the most money is made during recessions and bear markets, where steady reinvestment and dollar cost averaging help to better position portfolios for higher returns over the longer run. The newsletter portfolios are well-positioned for continued “outperformance,” in our view, and while we may make a few tweaks to them, we’re not making any material changes at this time."

Jun 17, 2022

Qurate Retail Faces Difficult Turnaround Process
Image Source: Qurate Retail Inc – First Quarter of 2022 IR Earnings Presentation. Executive Summary: Qurate Retail Inc is home to several well-known retail brands including QVC and HSN that operate television networks and online marketplaces that sell curated products. The company is contending with several exogenous shocks such as inflationary pressures and supply chain hurdles, while customer engagement levels are on the decline after growing during the initial phases of the COVID-19 pandemic. Qurate Retail has a massive net debt load and sizable annual financing obligations, and its margins have deteriorated substantially of late. Due to its complex share structure and management organization, weak financial position, and lackluster outlook, we are not interested in Qurate Retail’s common or preferred shares at this time. Qurate Retail is too risky for our taste.

Jun 9, 2022

Best Idea Dollar General Beats Consensus Estimates and Raises Guidance in the Face of Substantial Headwinds
Image Shown: Dollar General Corporation’s GAAP net sales rose in the first quarter of fiscal 2022 on a year-over-year basis due to growth in its net store count. Image Source: Dollar General Corporation – May 2022 8-K SEC Filing. As a discount retailer, Dollar General is contending with myriad headwinds though its underlying business is holding up quite well. We continue to view its capital appreciation upside potential quite favorably, and its dividend program offers incremental upside potential. Shares of DG yield ~1.0% as of this writing.

Apr 12, 2022

Best Idea Dollar General Roaring Higher
Image Shown: We like the niche Dollar General Corporation has carved out for itself in the competitive discount retail industry. Image Source: Dollar General Corporation – Fiscal 2021 Annual Report. Though the discount store retail industry is incredibly competitive, we like the niche that Dollar General Corp has carved out for itself by targeting towns and cities in the U.S. with populations of 20,000 or less. These are regions where e-commerce economics are not attractive due to hefty fulfillment costs, and often are underserved in terms of shopping options. Dollar General operates over 18,100 stores across 46 U.S. states and is included as an idea in the Best Ideas Newsletter portfolio. We continue to be big fans of Dollar General. Our fair value estimate stands at $234 per share of DG with room for upside as the top end of our fair value estimate range sits at $281 per share.

Jan 22, 2022

Don’t Throw the Baby Out with the Bathwater
Image: Erica Nicol. Junk tech should continue to collapse, but the stylistic area of large cap growth and big cap tech should remain resilient. Moderately elevated levels of inflation coupled with interest rates hovering at all-time lows isn’t a terrible combination. In fact, it’s not bad at all. The markets are digesting the huge gains of the past few years so far in 2022, and the excesses in ARKK funds, crypto, SPACs, and meme stocks are being rid from the system. Our best ideas are “outperforming” the very benchmarks that are outperforming everyone else. The BIN portfolio is down 6.4% and the DGN portfolio is down 3.2% year to date. The SPY is down 7.8%, while the average investor may be doing much worse. Our timing to exit some very speculative ideas in the Exclusive publication has been impeccable. Beware of “best-fitted” backtest data regarding sequence of return risks. Research is to help you navigate the future, not the past. We remain bullish on stocks for the long haul and grow more and more excited as our simulated newsletter portfolios continue to hold up very well. Don’t throw the baby out with the bath water. Stick with the largest, strongest growth names. We still like large cap growth and big cap tech, though we are tactical overweight in the largest energy stocks (e.g. XOM, CVX, XLE). The latest short idea in the Exclusive publication has collapsed aggressively since highlight January 9, and we remain encouraged by the resilience of ideas in the High Yield Dividend Newsletter portfolio and ESG Newsletter portfolio. Our options idea generation remains ongoing.

Dec 26, 2021

VIDEO/TRANSCRIPT: 2021 Valuentum Exclusive Call: Inflation Is Good
Valuentum's President Brian Michael Nelson, CFA, explains why investors should not fear inflation, why government agencies such as the Fed and Treasury are prioritizing something other than price discovery, why the 10-year Treasury rate is a must-watch metric, and why Valuentum prefers the moaty constituents in large cap growth due to their net cash rich balance sheets, tremendous free cash flow generating potential, and secular growth tailwinds.

Dec 3, 2021

Best Idea Dollar General Announces Plans to Go International
Image Source: Dollar General Corporation – Fiscal 2020 Annual Report. We are big fans of Dollar General. The discount retailer has several big initiatives underway to extend its growth runway while boosting per store sales and enhancing its margins. Shares of DG have been treading water over the past few months after surging during the 2020 calendar year, though we still room for significant capital appreciation upside potential going forward. The company is a tremendous free cash flow generator, and we like shares of DG as an idea in the Best Ideas Newsletter portfolio.

Nov 12, 2021

Hard Work and the Trust That Binds
Image: Terry Johnson. It’s easy to forget how much we’ve been through the past two years. Often, we forget how helpful the warning that markets were going to crash was the weekend before they did on February 22, 2020, “Is a Stock Market Crash Coming? – Coronavirus Update and P/E Ratios,” how we thought dollar-cost-averaging made sense at the bottom in March 2020, and how we went “all-in” in April 29, 2020, “ALERT: Going to “Fully Invested” – The Fed and Treasury Have Your Back,” when we saw the writing was on the wall for this blow off top. If nothing else, these three moves alone during the past couple years have paid for a lifetime of subscriptions.