Valuentum Exclusive Analysis for the Discerning Investor

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Mar 22, 2023

Quick Take: Fed Raises 25 Basis Points; This Banking Crisis Is Far from Over
Image: FOMC Chairman Powell answers a reporter's question at the March 20, 2019 press conference. On March 22, 2023, the Federal Reserve raised its benchmark rate 25 basis points, to the range of 4.75%-5%, a move that we think reflects a government agency that is now more or less a deer caught in headlights--given the nascent regional banking crisis in the United States. The bottom line is that the U.S. banking system does not have enough cash on hand to redeem all deposits (it never has), and with respect to U.S. banks, deposit insurance is only up to $250,000 per depositor, per FDIC-insured bank, per ownership category. The U.S. public has grown concerned, and that may spell continued panic (and deposit flight). The bank business model is inherently flawed, in our view, necessitating outsized risk and enormous amounts of leverage. From where we stand, the U.S. banking system will likely continue to be tested until it is resolved that any deposits held at any financial institution in the U.S. are completely safe by explicit government guarantee. Without this explicit guarantee, it may mean continued deposit flight from the regional banks to the large money center banks -- the Too-Big-to-Fail ("TBTF") banks -- or it could mean potentially higher deposit insurance levels that go far beyond the current $250,000 threshold, which itself was raised from $100,000 during the Great Financial Crisis in 2008 (and made permanent in 2010). One might hope that the markets can perhaps avert another all-out banking crisis if deposit insurance thresholds are raised once again, but this explicit move remains to be seen.

Mar 21, 2023

The Power of Expectations: How Financial Advisors Can Improve Client Retention
Image Source: Frédéric Glorieux. This could make the difference between a happy client and a lost client.

Mar 16, 2023

The Transaction Log of the Best Ideas Portfolio
Image Source: GotCredit. View the transaction log of the portfolio of the Best Ideas Newsletter in this article. The Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Results are hypothetical and do not represent actual trading.

Mar 13, 2023

ALERT: We’re ‘Raising Cash’ in the Newsletter Portfolios
Image: American Union Bank, New York City. April 26, 1932. Public Domain. Almost a decade ago now, we wrote the following: “We firmly believe that an investment in a bank must come with the acknowledgement of the distinct possibility that another financial crisis may occur at an unknown time in the future. Why? Banks do not keep a 100% reserve against deposits. Our good friend George Bailey knew this very well when he tried to discourage Bedford Falls residents from making a “run” on the famous and beloved Building and Loan.” – Brian Nelson, CFA, September 4, 2013

Mar 9, 2023

SVB Financial, Silvergate Capital, Credit Suisse Reveal Cracks in Global Financial System
Image: SVB Financial looks to be collateral damage of the Fed’s rate-hiking cycle, and we can’t rule out that other regional banks could have also managed interest-rate risk wrong. Shares of SVB Financial have collapsed, and other banks could be facing similar issues that have yet to come to light. Image Source: TradingView. SVB Financial announced March 8 what looks to be an emergency equity offering to the tune of $2.25 billion in common stock and convertible preferred shares. The company also announced that it had sold almost all of its available-for-sale (AFS) $21 billion securities portfolio, which resulted in an after-tax loss of ~$1.8 billion during the current quarter. This looks to be an effort to shore up liquidity while it can, and we would not be surprised to see some bad bets at the bank come to light. SVB Financial’s client cash burn has accelerated, and the executive team noted that the “challenging market and rate environment has pressured Q1 performance, with implications to (its) 2023 outlook.” It’s difficult to know just how bad things are at SVB Financial, but the bank seems to have mismanaged interest rate risks and its asset sensitivity. SVB is reconstructing its AFS portfolio with short-duration fixed rate U.S. Treasuries. Though this may be the right move, the stark scenario for the bank is that if market participants lack confidence in the institution, there is more downside to come.

Mar 3, 2023

Dividend Increases/Decreases for the Week of March 3
Let's take a look at firms raising/lowering their dividends this week.

Feb 24, 2023

Dividend Increases/Decreases for the Week of February 24
Let's take a look at firms raising/lowering their dividends this week.

Feb 23, 2023

This Remains a Technically-Driven Stock Market
Image: We expect the S&P 500 (SPY) to test support at both its technical uptrend and the 200-day moving average. In the event the SPY breaks through technical support, we’d be looking to “raise cash” across the newsletter portfolios. S&P 500 companies will end 2022 with roughly a 4%-5% decline in fourth-quarter 2022 earnings, but earnings season has come in better-than-feared. We expect the Fed to continue to raise rates given recent producer price inflation readings and a continued strong labor market. The 10-year Treasury continues to pose headwinds to asset values, and while many are talking of “disinflation,” we expect the market to remain technically driven and begin to test support at the 200-day moving average across major indices. We believe 2023 will be a choppy year, as we look ahead to better times in 2024.

Feb 20, 2023

Phillip Morris’ Acquisition of Swedish Match Accelerates Smoke-Free Push
Image Source: Phillip Morris. On February 9, Phillip Morris reported fourth-quarter 2022 results. The company’s performance continues to be impacted by the War in Ukraine. Net revenue growth came in at 0.6% for the quarter, while operating income fell 0.8%. However, excluding sales in Russia and Ukraine, net revenue growth advanced 7.9% in the quarter, while operating income growth advanced 10.3%, a much better showing on an adjusted basis. Smoke-free products accounted for ~36.0% of total net revenue in the period. We continue to like Phillip Morris as an income idea, with shares yielding ~5% at the time of this writing. Our fair value estimate stands at ~$105 per share.

Feb 19, 2023

Online Sports Betting Surges But DraftKings’ Cash Burn Continues to Intensify; We Prefer More Conservative Gaming Plays Such as Churchill Downs
Image: Online sports betting platform DraftKings continues to burn through hundreds of millions of dollars each year. Data: SEC Filings, Seeking Alpha. Over the past 52 weeks, Churchill Downs’ stock has advanced ~10%, while DraftKings’ stock is down ~7% and Penn Entertainment’s shares have fallen over 34%. Online sports betting will only grow as more and more states pass laws in favor of its adoption and more and more consumers take up gambling as a hobby, but the best risk-adjusted opportunities may still rest with the more traditional gaming operators that aren’t burning through hundreds of millions in free cash flow every year to chase growth. We don’t like the moral underpinnings of the gambling industry at all, but we cannot deny the long-term growth potential of the industry. Churchill Downs may not be levered to online sports gaming anymore, but the company remains free cash flow rich with a tremendously lucrative asset base, and for that, it’s one of our favorite picks in the group.