Valuentum Exclusive Analysis for the Discerning Investor

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Jan 28, 2021

Fourth Quarter Bank Earnings Roundup: MS, GS, BAC, C, WFC, JPM
Image Source: JP Morgan’s fourth-quarter earnings press release. Though we’re generally cautious on banking business models due to the arbitrary nature of cash-flow generation within the banking system and the difficulty in valuing such entities on the basis of a free-cash-flow-to-the firm framework, we like Morgan Stanley--and its return on tangible equity of 17.7% during the fourth quarter of 2020 speaks to solid economic-value creation. Goldman’s annualized return on total equity (ROTE) was an impressive 22.5% during its fourth quarter, helping drive the full-year measure to 11.1% for 2020. Bank of America had been an idea in the Best Ideas Newsletter portfolio in the past, but we removed the company June 11, 2020. We continue to view the banking system more as utility-like serving as an extension of the federal government, and as such, we generally don’t think they’ll be able to muster above-average returns in the longer-run. We still include diversified exposure to the financial sector in the Best Ideas Newsletter portfolio via the Financial Select Sector SPDR (XLF), but only for diversification purposes. Citigroup remains among our least favorite banking entities. Wells Fargo used to be a well-run bank, but consumer perception has certainly changed with its “fake account scandal” that cost it $3 billion to settle criminal and civil charges. JP Morgan's return metrics were solid like Morgan Stanley’s and Goldman’s, with return on equity (ROE) coming in at 19% and return on total common equity (ROTCE) coming in at 24% in the quarter. The banking system remains on stable ground.

Jan 27, 2021

ALERT: Raising Cash in the Newsletter Portfolios
Our research has been absolutely fantastic for a long time, but 2020 may have been our best year yet. With the S&P 500 trading within our fair value estimate range of 3,530-3,920 (and the markets rolling over while showing signs of abnormal behavior), we're raising the cash position in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio to 10%-20%. For more conservative investors, the high end of this range may even be larger, especially considering the vast "gains" from the March 2020 bottom and the increased systemic risks arising from price-agnostic trading (read Value Trap). The individual holdings will be reduced in proportion to arrive at the new targeted cash weighting in the respective simulated newsletter portfolios. The High Yield Dividend Newsletter and Dividend Growth Newsletter are scheduled for release February 1. We'll have more to say soon.

Dec 8, 2020

Visa Is a Great Company
Image Shown: Visa Inc’s operations are on the rebound, though meaningful headwinds remain. Image Source: Visa Inc – Fourth Quarter and Full-Year Earnings for Fiscal 2020 IR Presentation. We recently took a fresh look at our valuation of Visa, and we raised the company’s fair value estimate to $219 per share. The high end of Visa’s current fair value estimate range sits at $263 per share, indicating there is room for substantial capital appreciation upside under a more bullish/upside scenario (note that upside and and downside scenarios help inform each company's fair value estimate range). We continue to be big fans of Visa, and the firm is not only one of our top ideas in the financial-technology/payment-processing space that includes innovators in blockchain and cryptocurrency, but it is also one of our top ideas in our entire coverage universe.

Nov 19, 2020

Normalizing our Fair Value Estimates for the Money Center Banks
Image Source: Mike Cohen. During the past few weeks, positive news surrounding the Pfizer/BioNTech and Moderna vaccines means that, while times will still be tough for banks as bad loans pile up, losses and defaults perhaps won’t be as bad as we had originally predicted at the onset of the outbreak of COVID-19. The unemployment rate has steadily crept lower from the 14.7% rate it hit in April 2020 (it stands at 6.9% as of October), and businesses have been battling hard through the worst of times with help from the Paycheck Protection Program, among other stimulus efforts. There have still been many business failures, however. Several banks’ net interest margins have faced pressure, too, but 30-year rates have managed to ease a bit higher from the sub-1% mark on March 9, 2020, to 1.62% at the time of this writing (November 18). The widely-watched 10-year/3-month Treasury yield spread has also advanced to 79 basis points, representing a meaningful improvement from most of February and early March when the 10-year/3-month Treasury yield spread was negative. The probability of an adverse tail-event is also substantially reduced (if not, eliminated), given the laser-focus of the Fed/Treasury to do whatever it takes to get to the other side the COVID-19 crisis. With all of this in mind, we expect to raise our fair value estimates for the money center banks upon their next update, effective November 21. That said, we’re not changing our general views on the banking and financials sector. Banks are being used more and more these days as extensions of government fiscal intervention/policy via myriad stimulus programs (which makes them more like “utilities”), while regulatory oversight has put a limit on just how much capital they can return to shareholders. This adds a degree of unnecessary complexity for dividend growth and income investors. Returns on equity remain relatively unattractive for many banks when compared to some of the strongest Economic Castles on the market that put up ROICs north of 100%, for example, some even higher. Systemic risk remains present, too, with most lending books opaque and intertwined within a global financial system that remains far from healthy due to COVID-19.

Oct 13, 2020

JPMorgan, Citigroup Third Quarters Not Terrible, But Still No Reason to Own Financials
Image: Banks and financials were among the most aggressively beaten down groups during the COVID-19 crash, and the sector failed to participate meaningfully in the bounce back. The leveraged and arbitrary nature of banking business models makes them much less attractive than entities with strong net cash positions on the balance sheet and solid expected future free cash flows. Source: Kastner, David, Charles Schwab. “Schwab Sector Views: Changes Are Coming.” 18 June 2020. https://www.schwab.com/resource-center/insights/content/sector-views. Better-than-feared third-quarter reports are not going to change our minds on the banking and financials sector. The group has been among the worst performing sectors amid the COVID-19 market crash and failed to bounce back meaningfully since the March bottom. Banks are being used as extensions of government fiscal intervention via myriad stimulus programs, while oversight puts a limit on just how much capital they can return to shareholders. Returns on equity remain subpar for many, and systemic risk remains present with most books opaque and intertwined within the global financial system. Cash flows for the group are largely arbitrary, and most remain leveraged by the very nature of their business models. We see no reason to own most banks and financials and point to fintech via PayPal and credit card processor Visa as our favorite ideas for indirect exposure to the global financial system.

Oct 8, 2020

Nelson: I'm Not Worried About This Market
Image Source: The White House. President Donald J. Trump listens as U.S. Surgeon General Jerome Adams delivers remarks and urges citizens to wear masks in public at a coronavirus (COVID-19) update briefing. All things considered, not much has changed since our last update. I think the newsletter portfolios--Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio--are well-positioned for this market environment, our new options idea generation has been great, the Exclusive ideas have had tremendous success rates (we just closed another two winners recently), and we continue to add tremendous value in providing our work in full transparency for readers. Thanks for tuning in.

Oct 7, 2020

Apple’s Growing Financial Tech Business
Image Shown: Shares of Apple Inc, a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios, have surged higher year-to-date. We see room for additional capital appreciation upside. We continue to be huge fans of Apple, and shares of the tech giant are included as a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Our fair value estimate for Apple sits at $140 per share, comfortably above where shares of AAPL are trading at as of this writing indicating there is room for meaningful capital appreciation upside. Additionally, shares of AAPL yield a modest ~0.7% as of this writing, and we view its forward-looking dividend growth trajectory quite favorably, though please note Apple also allocates a significant amount of capital every fiscal year towards share repurchases.

Oct 6, 2020

Third-Level Thinking and "Keynesian Convergence"
Image: The analytical process of the Valuentum Buying Index rating system. At Valuentum, we seek to identify strong, competitively-advantaged companies that are underpriced [with solid cash-based sources of intrinsic value (net cash, strong expected free cash flows)] whose share prices are either 1) also advancing, 2) have strong relative pricing strength, or 3) have just started to begin to advance toward an intrinsic value estimate (with a nice growing dividend to boot, where applicable). Third-level thinking is our foundation at Valuentum, and it continues to serve investors well.

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 3, 2020

Update: Frequently Asked Questions About Valuentum Securities, Inc.
Valuentum (val∙u∙n∙tum) [val-yoo-en-tuh-m] Securities Inc. is an independent investment research publisher, offering premium equity reports and dividend reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area. Valuentum is not a money manager, broker, or financial advisor. Valuentum is a publisher of financial information. We address a number of questions from both subscribers and visitors to our site.