Valuentum Exclusive Analysis for the Discerning Investor

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Mar 18, 2020

Banking Entities: The Technicals Tell the Story
Image: The Financial Select Sector SPDR ETF has experienced a tremendous amount of pain in recent weeks.  What is clear is that temporarily shutting down large parts of U.S. economy is absolutely unprecedented, and there will be substantial knock-on effects and difficulties in getting things restarted. This is most especially true if the coronavirus re-emerges following the periods of social distancing around the world, or when the weather turns colder again in the fall, and humanity could be facing a different strand of the coronavirus. Don’t forget that all bank institutions use a lot of financial leverage by their very nature, and the Fed and Treasury can never truly stop a run-on-the-bank dynamic (i.e. that which happened to WaMu in 2008). We think BOK Financial is in particular trouble given its energy loan exposure. Others to avoid include Cullen/Frost Bankers, Cadence Bancorp, and CIT Group. The credit card entities, Capital One and Synchrony Financial may be worth avoiding. We’d stay far away from the regional banks given their exposure to small business pain amid COVID-19. We don’t think the fiscal stimulus on the table does much to help small businesses. Deutsche Bank may be the first of the big European banks to topple, and this weakness could eventually spread to the U.S. banks given counterparty risk. Most foreign banks, including Santander, Credit Suisse, UBS, ING, and BBVA remain exposed to crisis scenarios. We’re also witnessing some very troubling developments with banking preferred shares, with the bank-preferred-heavy ETF, Global X SuperIncome Preferred ETF dropping ~15% during the trading session March 18. The preferreds of HSBC and Ally Financial are top weightings in that ETF. Banking technicals are raising some major red flags across the board, and given actions by the Fed and Treasury, this crisis has all the makings of being worse than the Great Financial Crisis. In any financial crisis perhaps excepting a depression, there can come a time to invest new money in bank stocks. Though it seems likely we have not yet reached the bottom in the markets yet, the highest-ground bank franchises in the US are JPMorgan and Bank of America, in our view. While sharp declines in their equity values may be expected (no one truly knows how deep the coming flood will be), they’re likely to make it to the other side with most of their equity capital firmly intact. With all that said, however, one doesn’t have to hold banking equities. It may be time to phone Mr. Buffett before things really start to unfold.

Mar 18, 2020

US Considering $1 Trillion (Or More) Fiscal Stimulus Program
Image Source: Frank Boston. A lot has changed in a short period of time since we published our first note covering the potential for a major US fiscal stimulus program back on March 10. Due to the sheer amount of pummeling the stock and credit markets have taken over the past few weeks, along with consumer, business, and investor confidence at-large (we’ll get a better read on that over time), it seems that both Democrats and Republicans are now more open to a major fiscal stimulus program than before. The ‘Survey of Consumers’ conducted by the University of Michigan notes the ‘Index of Consumer Sentiment’ fell from 101.0 in February 2020 down to 95.9 in March 2020, and there’s room for that index to fall a lot further. Please note the next data release date is March 27. In all likelihood, this is all due to the negative impacts posed by the ongoing novel coronavirus (‘COVID-19’) pandemic to both the health of individuals (particularly the older demographics and those with preexisting conditions) and the health of the overall economy (due to the “cocooning” of households and consumers). We sincerely hope everyone, their loved ones, and their families stay safe out there as we get through this pandemic as a nation and as a global community.

Mar 17, 2020

Top Ten Ideas for Consideration Amid COVID-19
Members only content. The novel coronavirus (‘COVID-19’) pandemic continues to sweep the world, and governments are shutting down business activity, driving most of the global economy to a screeching halt. In such an environment, we don’t think investors should go bottom-fishing on some of the worst businesses that have been beaten up the most during this crisis, but rather, we think this crisis is giving investors the opportunity to consider positions in some of the strongest companies out there. In this members-only article, we cover ten high quality, “moaty” names with strong balance sheets, capital-light operations, great shareholder value creation (attractive “castles’), and ones that have business models that we think can better withstand the novel coronavirus (‘COVID-19’) pandemic. What’s more, most of these companies are 20%-30% off their most recent pricing highs! Dig in.

Mar 17, 2020

Oracle’s Strategic Shift is Starting to Bear Fruit
Image Source: Oracle Corporation – Third Quarter Fiscal 2020 Earnings Press Release. On March 12, Dividend Growth Newsletter portfolio holding Oracle Corp reported earnings for the third quarter of fiscal 2020 (period ended February 29, 2020) which handily beat consensus expectations on the both the top- and bottom-lines. Growing subscription revenues at its cloud-based businesses were key to generating this outperformance, and most importantly in our view, Oracle showcased that its outlook is improving as it shifts away from old and stale IT infrastructure offerings (i.e. enterprise data application management) and towards the IT infrastructure of the 21st Century (cloud-based services i.e. software-as-a-service and infrastructure-as-a-service). Shares of ORCL yield ~2.1% as of this writing and our fair value estimate stands at $55 per share.

Mar 17, 2020

Dollar General Holding Up Relatively Well in the Face of COVID-19
Image Shown: Shares of Dollar General Corporation, a holding in our Best Ideas Newsletter portfolio, have aggressively outperformed the S&P 500 Index over the past year as of the end of the normal trading session on March 12.  Retail firms, particularly companies that sell consumer staples products, have held up relatively well during the ongoing rout in global equities (including in the US). The novel coronavirus (‘COVID-19’) pandemic is the "black swan" event that could potentially tip the global economy towards recession, in our view, but please note this pandemic was the straw that broke the camel’s back, not the single source of this potential downside (rising non-financial corporate debt levels, slowing industrial activity, large national budget deficits and enormous public debt loads worldwide, rising geopolitical tensions and the impact trade wars have on global supply chains, and the lack of “dry powder” at major central banks are several reasons why the global economy has asymmetrical downside risk when it comes to growth). Best Ideas Newsletter portfolio holding Dollar General Corp is a prime example of a retail firm holding its own against major exogenous headwinds. As of the end of the normal trading session on March 12, shares of DG are up 18.7% while the S&P 500 index is down 11.1%. Dollar General reported earnings for the fourth quarter and full-year fiscal 2019 (period ended January 31, 2020) that beat on both the top- and bottom-line, and its same-store sales performance also beat expectations. Let's dig into the specifics in this note.

Mar 17, 2020

Buybacks and Wealth Destruction
From Value Trap: "According to S&P Dow Jones Indices, S&P 500 stock buybacks alone totaled $519.4 billion in 2017, $536.4 billion in 2016, and $572.2 billion in 2015. In 2018, announced buybacks hit $1.1 trillion. Given all the global wealth that has been accumulated through the 21st century, it may seem hard to believe that another Great Depression is even possible. However, in the event of a structural shock to the marketplace where aggregate enterprise values for companies are fundamentally reset lower, the vast amount of cash spent on buybacks would only make matters worse. The money that had been spent on buybacks could have been distributed to shareholders in the form of a dividend or even held on the books as a sanctuary of value within the enterprise during hardship. Buybacks, unlike dividends, can result in wealth destruction in a market economy, much like they can with companies. This is an important downside scenario that is often overlooked." -- Value Trap, published 2018

Mar 15, 2020

Fed Cuts 100 Basis Points, Launches More QE
“Now, stocks and other assets are being sold, some indiscriminately. It is truly becoming a stock pickers market as opposed to a quant-led and index-led market. It takes a different kind of bravery to buy on massive down days and one must have conviction in their research that the company will not go away if massive downside scenarios do in fact emerge.” – Matthew Warren. In this piece, we cover our assessment of what the global markets might be facing in a bull-case, base-case, and bear-case scenario. Our base case is a substantial recession in the US and a financial crisis of some unknown magnitude.

Mar 15, 2020

Panic Buying of Consumer Goods and Its Impact on Discounted Cash Flow Valuation
Image: Sam’s Club (Crystal Lake, IL), March 14. Water and toilet paper continue to be completely sold out at most big box retailers as COVID-19 panic buying of consumer goods continues to spread. Fear-induced purchases in the US have also helped drive up investor sentiment toward consumer staples names with a large domestic presence. We caution, however, that near-term earnings bumps emanating from “stockpiling” have little impact on a company’s intrinsic value, which is derived more from normalized conditions, and in most cases, the panic buying of consumer goods is merely pulling demand forward. “You know what’s disappearing from the supermarket shelves? Toilet paper…There’s an acute shortage of toilet paper in the United States.” – Johnny Carson, in 1973, causing a month-long shortage of toilet paper in the US at the time. The spread of COVID-19 is creating a similar panic as consumers stock up on just about everything from toilet paper to canned goods to hand sanitizer.

Mar 13, 2020

Dow Fell 9.99%, Worst Point Drop in History, More Nibbling?
Every stock in the S&P 500 fell during the trading session March 12, except one. The Dow Jones Industrial Average experienced the biggest point drop in history, Europe was crushed, gold and crypto-currencies sold off, Treasuries and munis were weak, as correlations among almost all asset classes approached one, as they often do during economic crises. Thursday, the S&P 500 closed at 2,480, near the low end of our 2,350-2,750 target range, and given the massive historical decline March 12 (the biggest point drop in history), equities are now starting to reflect a more neutral risk-reward balance at current levels, though we note downside risks remain. It may be time to consider doing some more nibbling on some of your favorite ideas. Where should you look? Our favorite ideas are always included in the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio and Exclusive publication. In particular, we think ideas that have strong net cash positions, strong economic returns ("castles"), solid moats around their operations (competitive advantages), and strong free cash flow generation are the places to look during crises.

Mar 13, 2020

Dividend Increases/Decreases for the Week Ending March 13
Let's take a look at companies that raised/lowered their dividend this week.