Valuentum Exclusive Analysis for the Discerning Investor

Symbol Keyword

Jan 29, 2021

Dividend Increases/Decreases for the Week January 29
Let's take a look at companies that raised/lowered their dividend this week.

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 28, 2021

Apple, Facebook, and Tesla Report Earnings
Image Shown: Facebook Inc continues to steadily grow its active user base, primarily by leveraging and expanding its international presence. Image Source: Facebook Inc – Fourth Quarter of 2020 Earnings IR Presentation.  We continue to witness unusual trading activity in the markets driven in large part by investors that are apparently communicating with each other over online forums such as Reddit. This trading activity is then being exacerbated by quantitative trend and momentum funds, generating levels of volatility in some names never before seen. On January 27, we sent out an alert to members noting that we shifted our newsletter portfolios to a 10%-20% cash weighting. Should numerous hedge funds start to fail due to short squeezes, that would put a tremendous amount of pressure on financial markets, at large, as investor confidence would start to erode. This, in turn, may beget more selling, creating an avalanche effect much like that of Long-Term Capital Management in the 1990s. Keeping this in mind, we continue to be big fans of top tier-tech giants, several of which have recently reported earnings that we will cover in this note. Companies with large (net) cash piles, resilient business models, promising long-term growth outlooks underpinned by secular tailwinds and strong cash flow profiles continue to be the best way to ride out the storm caused by the coronavirus (‘COVID-19’)--and more recently, very strange (if not downright manic) trading activity. Though the levels of volatility witnessed in dozens of companies may be unexpected by many, we had outlined the hazards of the volatility driven by price-agnostic trading (implicitly inclusive of Reddit and Robinhood trading) in the conclusion ("A Call to Action") of our book, Value Trap.

Jan 28, 2021

Three Newsletter Portfolio Ideas Post Stellar Earnings Updates: JNJ, LMT, MSFT
Image Source: Johnson & Johnson – Fourth Quarter of Fiscal 2020 Earnings IR Presentation. Earnings season is now underway and so far, we are quite impressed with the performance of the ideas included in the newsletter portfolios. Johnson & Johnson and Lockheed Martin are both on the rebound while Microsoft continues to be an “unstoppable” growth juggernaut. All three of these firms have stellar free cash flow generating abilities and have promising growth outlooks, which underpins why we are big fans of each company.

Jan 28, 2021

Earnings Roundup of Three High-Yielding Firms: MMM, RTX, VZ
Image Source: 3M Company – Fourth Quarter of 2020 Earnings IR Presentation. The coronavirus (‘COVID-19’) pandemic generated substantial headwinds for the global economy in 2020 and for most businesses large and small, save for many firms operating in the IT sector. However, several large industrial and telecommunications companies are reporting that the outlook for 2021 looks quite bright, relatively speaking, as ongoing vaccine distribution efforts indicate the pandemic will be brought to an end sooner than expected. In this article, let's examine the recent earnings reports from 3M, Raytheon Technologies, and Verizon Communications. Our fair value estimate on S&P 500 stands at 3,530-3,920.

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.

Jan 27, 2021

Fourth Quarter Earnings Reports Coming In: INTC, GGG, KMB, STLD
Image Source: Kimberly Clark Corporation – Second Quarter of Fiscal 2021 Earnings IR Presentation. Fourth quarter 2020 earnings season is upon us. In this note, we walk through the reports of four companies issuing results: Intel, Graco, Kimberly Clark, and Steel Dynamics. Intel is making the right call by seeking to outsource some of its production needs given its inability to produce certain current- and next-generation chips. For companies operating in the industrial sector, it appears that after a challenging first half of 2020, things are now recovering in earnest. The industrial economy appears to have entered 2021 with momentum, keeping short-term headwinds in mind. Consumer staples entities experienced strong demand growth in 2020, though it appears that many companies operating in the space now expect their organic sales growth to moderate in 2021 as the uplift from “pantry stockpiling” fades.

Jan 26, 2021

Procter & Gamble Remains a Great Free Cash Flow Generator
Image Shown: Shares of Procter & Gamble Co have started to shift back down towards the top end of our fair value estimate which sits at $120 per share of PG. In our view, investors have begun to factor in expectations that the firm’s growth rate of late will be incredibly hard to sustain over the coming years. Procter & Gamble is a solid company with great free cash flow generating abilities, but the run up in its share price during the second half of the 2020 calendar year was a tad overdone, in our view. On January 20, Procter & Gamble reported solid earnings for the second quarter of fiscal 2021 (period ended December 31, 2020) as its GAAP revenues grew by 8% year-over-year while its GAAP operating income climbed higher by 20%, aided by economies of scale and GAAP gross margin expansion. The company reported strong organic sales growth across all of its core product categories, with its ‘Fabric & Home Care’ and ‘Health Care’ products leading the way. Pricing strength combined with organic volume growth and a favorable product mix played a big role in boosting Procter & Gamble’s margins. It appears consumers are willing to pay up for its products, which tend to be the more expensive items in supermarkets, grocery stores, convenience stores, and similar venues. Looking ahead, Procter & Gamble increased its guidance for fiscal 2021. P&G forecasts it will post annual sales growth (on both a net and organic basis) of 5%-6% and annual diluted EPS growth of 8%-10% this fiscal year, underpinned by its strong performance during the first half of fiscal 2021.

Jan 26, 2021

Recent Fair Value Estimate Changes
Let's cover a few recent fair value estimate changes in this note: APD, F, GM, EOG, LMT, CVS.

Jan 25, 2021

ALERT: Bull Raids, Short Squeezes and Highly Unusual Market Activity
Image: Shares of GameStop have been on an irrationally wild ride recently driven by what looks to have been an orchestrated and highly unethical (and perhaps illegal) short squeeze on the stock. According to some reports, during the pre-market session January 25, GameStop’s shares were up ~80%, and turned red during the trading session, with no fundamental news.In late 2018, Valuentum published Value Trap, a book that warned to all that would heed its warning that a collapse in the traditional quant value factor was coming and that excessive volatility in the markets caused by price-agnostic trading--or those that aren’t paying attention to fair value estimate calculations--would only build and build to eventually reach extreme and irrational levels. The book, while hugely successful winning award after award, was largely ignored by the media, despite our best efforts to get the word out. Now, the chickens are coming home to roost.