Valuentum Exclusive Analysis for the Discerning Investor

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Jan 26, 2022

Lockheed Martin On the Road to Recovery, Improved Free Cash Flow Visibility
Image: Heath Cajandig. Lockheed Martin is a great play on rising geopolitical uncertainty, and after a “big bath” of a third quarter, the company’s most recently reported fourth-quarter 2021 results, released January 25, offered investors much better greater clarity on free cash flow coverage of its dividend while revealing sequential improvement in its backlog. Though its deal with Aerojet Rocketdyne may not pass muster with the FTC, we’re okay with that. Lockheed Martin already has a sizable net debt position, and given the recent disappointment in the third quarter of last year, we’re not against management focusing more on righting the ship from an organic basis than trying to push through business combinations that could jeopardize the regained fundamental momentum. Lockheed Martin remains an idea in the Dividend Growth Newsletter portfolio, yielding ~3% at the moment. The stock could continue to catch favor as geopolitical tensions intensify.

Jan 25, 2022

Johnson & Johnson’s Pending Split-Up, Talc Liabilities, New CEO Add Complexity to a Once-Clean Dividend Growth Story
Image Shown: J&J continues to face legal liabilities due to talcum powder lawsuits. Image Source: Mike Mozart. We prefer simple dividend growth stories. Unfortunately, J&J is no longer one of them. A split of Johnson & Johnson’s consumer products division from its medical device and pharma divisions in the next 18-24 months means that dividend growth investors will have added complexity as a new CEO takes the helm, all the while the board manages its growing talc liabilities during a global pandemic. Shares of J&J haven’t been as strong a performer as other stocks on the market the past five years, but we still like its firm foundation and nice combination of dividend yield and potential dividend growth for now. That may change in the coming months to years, however.

Jan 23, 2022

Netflix’s Subscriber Growth Is Slowing Down, Competition Heating Up
Image Shown: Netflix Inc’s paid subscriber base is expected to grow at a slower pace in the near term compared to the performance seen in recent years. Image Source: Netflix Inc – Shareholder letter covering the fourth quarter of 2021. On January 20, Netflix reported fourth-quarter 2021 earnings after the bell. The video streaming giant met consensus top-line estimates and beat consensus bottom-line estimates last quarter as original content such as the South Korean TV show Squid Game (released September 2021) proved to be quite popular in markets around the globe and helped Netflix retain interest in its service. During Netflix’s latest earnings call, management noted that the violent Squid Game TV show had been renewed for a second season when asked by an analyst about the issue. However, the near-term guidance Netflix provided in conjunction with its latest earnings update signaled that growth in its paid subscriber base was expected to slow down in the first quarter of 2022 on both a year-over-year and sequential basis. During regular trading hours on January 21, shares of NFLX were pummeled.

Jan 23, 2022

RH’s Financials, Long-Term Potential Great But Housing Market and Deteriorating Wealth Effect Pose Risks
Image Shown: Shares of RH have exploded higher since the news broke that Berkshire Hathaway Inc had taken a stake in the firm’s equity back in 2019, though shares of RH have shifted lower in recent months. RH is an innovative home furnishing company that pairs its products with interior/exterior design services to offer a comprehensive package. The company primarily targets affluent households in the U.S., Canada, and the U.K. RH has tremendous pricing power and its margins have increased significantly in recent fiscal years, even during the COVID-19 pandemic, and its net revenues are trending higher as well. The firm is expanding into the high-end hospitality industry and has several projects that are set to come online in 2022 and beyond. RH is a stellar free cash flow generator with a manageable net debt load. Though the company has been executing nicely of late, as witnessed by its stellar financial performance and recent guidance increases, shares of RH have sold off in recent months. In our view, the recent selloff is a function of broad based market weakness, but it also may be due to investors growing more concerned about the impact higher interest rates and a deteriorating wealth effect may have on housing and home furnishing demand and on its push into the hospitality space, respectively. We continue to view RH’s long-term capital appreciation upside potential favorably, however.

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.

Jan 21, 2022

Valuentum's Brian Nelson in CFA Institute's 'Enterprising Investor'
"The DCF model is not only relevant to today’s market, it remains an absolute necessity." -- Enterprising Investor

Jan 20, 2022

Dividend Growth Idea UnitedHealth’s Growth Story Expected to Continue
Image Shown: Shares of dividend growth idea UnitedHealth Group Inc have surged higher over the past year. The company put up solid performance in 2021 and its guidance for 2022 indicates that its growth trajectory is expected to continue. On January 19, UnitedHealth Group reported fourth-quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The company’s health insurance business is covered by its ‘UnitedHealthcare’ segment, and its health care provider business is covered by its ‘Optum’ segment. Virtually all of the firm’s revenues come from the U.S. It also reaffirmed its guidance for 2022 in its fourth-quarter earnings report. We continue to be impressed with UnitedHealth and include shares of UNH as an idea in the Dividend Growth Newsletter portfolio. Shares of UNH yield ~1.3% as of this writing.

Jan 19, 2022

Microsoft Is Buying Activision On Way to Becoming Video Game Giant
Image Shown: Microsoft Corporation is buying Activision Blizzard Inc, the largest buyout for a US tech firm ever. Image Source: Microsoft Corporation – January 2022 IR Presentation covering its acquisition of Activision Blizzard Inc. On January 18, Microsoft Corp made history by making an all-cash offer to purchase Activision Blizzard Inc for $95 per share. The boards of both companies have already approved the deal. Inclusive of Activision’s net cash position, the deal is worth $68.7 billion which makes it the largest buyout ever for a US tech firm according to CNBC. This deal is expected to close in fiscal 2023 (Microsoft’s fiscal year ends in June). Once it closes, assuming the deal pasts antitrust muster, Microsoft views the acquisition as being accretive to its non-GAAP earnings per share. Our fair value estimate of Activision will be updated to reflect a modest discount to the buyout price to incorporate the small probability the deal won't be completed due to antitrust concerns.

Jan 13, 2022

Governance: The G in ESG Investing
Image: The Valuentum Environmental, Social and Governance (ESG) Scoring System shows how “Governance” considerations are analyzed. No discussion of ESG investing would be complete without addressing the role of corporate governance (“stewardship”) in equity investing. As with the other aspects of ESG investing, corporate governance covers a lot of ground. It can include pretty much anything related to how a company is run, including leadership, executive compensation, audits and accounting, and shareholder rights. These areas are just the tip of the iceberg, however. A company with good corporate governance is one that is run well with the proper incentives and with all stakeholders in mind, from employees to suppliers to customers to shareholders and beyond. Good corporate governance practices decrease the risk to investors as it cuts through conflicts of interest, misuse of resources, and a general lack of concern for all stakeholders. A company that fails at implementing good corporate governance is at increased risk of litigation or scandal, which could wreck the share price. With the turn of the century, the dot com bust probably exposed most prominently the need for good corporate governance practices. Fraud was rampant. Whether it was the former CEO of Tyco International receiving millions in unauthorized bonuses, the actions of those at the top of Enron that created one of the biggest frauds in corporate history, the scandal at accounting and auditing firm Arthur Andersen, the demise of MCI/Worldcom, or the questionable practices that led to the Global Analyst Research Settlement, Wall Street had lost its way. In fact, a big reason why our firm Valuentum was founded is based on ensuring that investors get a fair shake and that someone is keeping a watchful eye not only on companies, but also on the sell-side stock analyst research that may still be full of conflicts of interest. As a result of the Global Analyst Research Settlement, all the big investment banks from Goldman Sachs to J.P. Morgan to Morgan Stanley to UBS Group and beyond had to pay stiff fines for producing conflicted, if not fraudulent research. In this note, we talk about the considerations that go into the G in ESG investing.

Jan 11, 2022

Raising Our Fair Value Estimate on Berkshire Hathaway, Our Thoughts on the Insurance Industry
Image Source: AIG. Shares of the SPDR S&P Insurance ETF (KIE) have trailed the performance of the S&P 500 (SPY) during the past 15 years. Our favorite insurer remains Berkshire Hathaway (BRK.B), and we recently raised our fair value estimate of its B shares to $320, as of the latest update (effective January 12, 2022). The high end of our fair value estimate range for Berkshire Hathaway is $384 per share. Berkshire Hathaway is included in the simulated Best Ideas Newsletter portfolio as of this writing. American International Group (AIG) serves as an important cautionary tale of what could happen to an insurer that doesn't manage its risks effectively, and we wouldn't expect to add any pure-play insurer to the simulated Best Ideas Newsletter portfolio.