Valuentum Exclusive Analysis for the Discerning Investor

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Mar 6, 2020

ALERT: Re-establishing "Crash Protection"
Anecdotally, we are hearing lots more talk of algorithmic trading, and how it is becoming harder to sell any volume of equities without moving the markets. We have established a target range on the S&P 500 of 2,350-2,750 and explain how the COVID-19 crisis can catalyze into an all-out financial crisis (see here), and conditions have all the makings of another crash from here (see here). We're still only a few percentage points from all-time highs on most major indexes.

Mar 6, 2020

Dividend Increases/Decreases for the Week Ending March 6
Let's take a look at companies that raised/lowered their dividend this week.

Mar 5, 2020

Buffett Makes Another “Unforced Error” in Airlines
“Buffett said once that he had an 800 number that he would call anytime that he wanted to buy an airline stock again. Maybe that number has been disconnected after all these years, as Berkshire Hathaway is once again an owner of airline equities. Though the structural characteristics of an industry can and do change over time, I’m very skeptical the airline business has changed permanently for the better. Today’s airline business may be more oligopolistic in nature and much more profitable thanks to consolidation and the right-sizing of capacity, but it retains a notoriously cyclical passenger-demand profile, ties to the level and volatility of energy resource prices, considerable operating leverage, all the while barriers to entry remain low, exit barriers remain high, and fare pressure endures. The next downturn may not see as many bankruptcies as prior economic cycles due to lower unit-cost profiles, but it may turn out to only be modestly “less bad” for equity holders." – Value Trap, published December 2018

Mar 5, 2020

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?
Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that the decrease in spending is very real, and we’ve yet to see the brunt of the impact yet. We have written extensively about our valuation expectations and target on the S&P 500 in the past, so please don’t mistake this reference as the extent of our thinking. We do not think a sell-off on the S&P 500 to the range is 2350-2750 is too far-fetched, as it really only gets the broader markets back to late 2018 levels (a mere year ago or so), and reflects a reasonable 16x forward expected earnings, as of February 14, hair cut by 10% as a result of the impact of COVID-19. The Fed put may not matter much anymore in the wake of this “biological” crisis, and increased fiscal spending may not be enough to offset what could be sustained weakness across the global economy.

Mar 5, 2020

AT&T Provides Another Key Update
Image Shown: The blue line represents the share price performance of AT&T Inc and the orange line represents the performance of the S&P 500 Index. Shares of T have outperformed the index on a year-to-date basis as of this writing. One of our favorite high yield ideas out there is AT&T Inc --- ~5.6% yield --- given its stellar free cash flow profile and ongoing corporate initiatives: serious debt reduction, share buybacks, upcoming launch of HBO Max, the rollout of 5G services across the US, cost structure improvements, and upside from AT&T’s public-private partnership FirstNet (billed as the first nationwide network in the US dedicated to entities/groups operating within the realm of public safety i.e. first responders like law enforcement, firefighters, and emergency medical services providers). On March 3, AT&T provided an update on some of its recent initiatives, news that has offered resiliency to shares.

Mar 4, 2020

A ~0.1% Probability Since 1896
Image Source: Wikipedia Commons. "The market crash in the past two weeks has been truly historic: its probability of occurrence is ~0.1% since 1896; the velocity of the plunge and of the VIX surge is the fastest on record; and the 10-year [Treasury yield] is at all-time low. (Hao Hong, BOCOM International, a subsidiary of Bank of Communications, March 1)" -- Howard Marks' memo, Nobody Knows II

Mar 4, 2020

Analyzing Three Names Within the Retail Industry
In this note, we cover one quality retailer and two retailers that were facing a myriad of problems long before the novel coronavirus (‘COVID-19’) epidemic reared its head: Best Buy, Kohl's and Macy's.

Mar 3, 2020

Covering Oil Markets Ahead of the Upcoming OPEC/OPEC+ Meetings
Image Source: Exxon Mobil Corporation – 2019 IR Presentation. On March 5, the Organization of Petroleum Exporting Countries (‘OPEC’) is holding an “extraordinary” meeting in Vienna, Austria, which will be followed up by a ministerial meeting between OPEC and non-OPEC members the next day. The group had already agreed to cut oil supplies by an additional 0.5 million barrels of per day (‘bpd’) back in December 2019 through an agreement that would last through March 2020 (that was on top of an existing deal to keep 1.2 million bpd off of the market which runs through the end of March 2020 as well). As part of that deal, Saudi Arabia offered to “voluntarily” reduce supplies by an additional 0.4 million bpd; however, that hasn’t been enough to prop up oil prices (even though ~1.7-2.1 million bpd of oil supplies are effectively removing removed from the market at 100% compliance). As of this writing, the internationally-oriented May 2020 Brent contracts are trading near $52 per barrel, down from the high $60s level seen at the end of 2019. The US-oriented WTI contracts haven’t fared any better, and April 2020 deliveries are trading near $47 per barrel as of this writing.

Mar 3, 2020

Fed Cuts 50 Basis Points, Expect More Market Volatility Ahead
Image Source: FOMC. The emergency 50-basis point Fed rate cut announced March 3 was largely expected by the marketplace in light of growing economic concerns due to COVID-19, but it does nothing to immunize against COVID-19 and little to stabilize the situation. We continue to monitor the situation closely, and we expect ongoing volatility in the coming days and months as the situation with COVID-19 remains fluid. Having moved to defensive positions in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in January and having capitalized on the “crash protection” put, we are preparing for our next move. For now, we’re watching and waiting, and we encourage readers that have not yet picked up their copy of Value Trap to do so.

Mar 2, 2020

Analyzing Parsons: A Defense, Intelligence, and Critical Infrastructure Solutions Company
Image Source: Parsons Corporation – February 2020 IR Presentation. Parsons Corp is a provider of technical design, engineering, and software solutions to markets within the realm of defense, intelligence, threat detection and mitigation, cybersecurity, critical and transportation infrastructure, mobility solutions, connected communities, and more. The company went public in May 2019 and has since used those IPO proceeds to fund its growth story, including the acquisition of OGSystems during the first half of 2019 (which focuses on “geospatial intelligence, big data analytics, and threat mitigation”) and QSR in the second half of 2019 (which “specializes in radio frequency spectrum survey, record and playback; signals intelligence; and electronic warfare missions”). Parsons has a compelling product line-up that is aligned with strong and growing end markets. The company generates material free cash flow, and its balance sheet remains strong, with 0.4x net leverage and a strong liquidity position. Its valuation isn't too stretched, and the firm has a deep bench in the executive suite. We like Parsons and will have more to say when the firm reports its fourth quarter earnings for fiscal 2019 before the market opens on March 10.