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Latest Valuentum Commentary
Dec 31, 2020
2020 Won’t Soon Be Forgotten
2020 won’t soon be forgotten. The tumultuous year brought with it the greatest shock to the U.S. economy in modern history, ushering in the largest-ever decline in U.S. real annualized gross domestic product of 31.4% in the second quarter of the year (surpassing the prior record of a 28.6% collapse in the second quarter of 1921). Strict lockdowns to help contain the outbreak of COVID-19 created the biggest global health emergency in a century, driving a self-inflicted economic collapse worse than the Great Recession, the Great Depression, and any other recession before it (the Depression of 1873-1879, the Panic of 1893, etc.). Millions were put out of work. During the month of April alone, the economy lost a record 20.8 million jobs, with some estimating that the “real” unemployment rate during the depths of the COVID-19 crisis reached nearly 23%. The official 14.7% unemployment rate in April would obliterate prior post-World War II era records, and while it fell short of the peak Great Depression unemployment rate estimated at 24.9%, the pain of many families and households was no less severe as they battled both a financial and health crisis that materialized in a matter of weeks, with little lead time to prepare for what was to come. Pantry stuffing and panic buying of consumer goods became a sign of the times, and a great debate about the efficacy of wearing masks raged across mediums.
Dec 21, 2020
Our Reports on Stocks in the Technology Giants Industry
Our reports on stocks in the Technology Giants industry can be found in this article. Reports include FB, AAPL, GOOG, AMZN, MSFT, CSCO, V, MA, PYPL, INTC, ORCL, QCOM, TWTR, IBM, ADBE, NVDA, CRM, AMD, AVGO, BABA, BKNG, BIDU, TSM, FFIV, TXN, EBAY, ADP, PAYX, MU, KFY, MAN, KLAC, LRCX, AMAT, ADI.
Nov 30, 2020
Analyzing Valuentum’s Economic Castle Index: A Walk Forward Case Study
There are two things generally wrong with a pure economic moat assessment, or economic “moat factor.” First, it is much easier to assess outsize economic returns in the near-term than it is to assess outsize economic returns over the long haul. Quite simply, nobody can predict what will happen tomorrow, and they certainly don’t know what will happen 20 or 30 years from now. Second, a rational investor should generally prefer expected near-term outsize economic returns than expected long-term ones given the uncertainty of the latter--somewhat related to our first point, a bird in the hand (or large economic returns in the near term) is worth two in the bush (or large economic returns in the long run that may not materialize). The time value of money reinforces this notion. Near-term economic returns are generally worth more than long-term ones in real terms, even if they may be smaller nominally. This is where our Economic Castle rating comes in. The goal of the Economic Castle rating is to identify those companies that are likely to generate a lot (or not so much) shareholder value over the foreseeable future. Instead of pondering a guess as to how the landscape will look 20 or 30 years from now, something not even the Oracle of Omaha can do with any sort of certainty (e.g. IBM, KHC), the Economic Castle rating ranks companies based on near-term expected economic returns, or returns that are more likely to be realized as opposed to those that may be built on “castles in the air” over 20-30 time horizons. By evaluating companies on the basis of the spread between their forecasted future return on invested capital (‘ROIC’) excluding goodwill less their estimated weighted-average cost of capital (‘WACC’), we measure a company’s ability to generate an “economic profit” over the foreseeable future, which we define as the next five fiscal years. Companies that generate a forecasted spread of 50 percentage points or more are given a “Very Attractive” Economic Castle rating and firms that are forecasted to generate a spread of 150 percentage points or higher are considered “Highest-Rated”. Firms that carry an Unattractive Economic Castle rating are those that are forecasted to generate a forward ROIC (ex-goodwill) less estimated WACC spread that’s meaningfully below zero (firms near economic parity can receive a Neutral Economic Castle rating, assigned by the Valuentum team).
Nov 25, 2020
Thinking Slow: 3 Research Blind Spots That Changed the Investment World
Image Source: EpicTop10.com. We have to be on high alert about how our minds work. PBS is premiering a four-part series examining about how easily our minds are being hacked, and why it is so important to "think slow." Tune in (5). When it comes to the active versus passive debate, does the analysis suffer from parameter risk? With respect to empirical, evidence-based analysis, does the analysis have the entire construct wrong? When it comes to short-cut multiples, are we falling into the behavioral trap of thinking on autopilot?
Nov 24, 2020
Brain Teaser - Reflexive versus Reflective
Image: Amy Leonard. Valuation multiples tend to trigger the reflexive side of our brain, and we process the multiples through anchoring, in most cases. On the other hand, enterprise valuation, or the process required to answer the second set of questions in this article correctly, shows that our reflexive process can be quite incorrect at times. In fact, cognitive biases such as anchoring can completely trip us up into missing out on truly undervalued companies while baiting us into value traps.
Nov 24, 2020
Your Role as a Choice Architect
Image: Impact Hub Global Network. Richard Thaler in his groundbreaking book Nudge, co-written with Cass Sunstein, talked about the role of the choice architect. A choice architect is basically someone or some organization that has the responsibility for organizing the context and content in which people make decisions. At Valuentum, we can never provide personalized buy/sell advice, but in providing publishing services, we've opted for the healthy option for members, and that sometimes means you won't find a large selection of dessert options. This isn't a shortcoming of our service (i.e. we know desserts are tempting), but rather a key positive attribute. As we've shown time and time again, you don't need to look far to beat the market return (or, by comparison, to have a healthy diet). If something is not on the menu at Valuentum, it means the chef has something better cooking in the kitchen. Here's to your long-term financial health!
Nov 5, 2020
Another Great Day for Best Ideas Newsletter Portfolio Holdings!
Image: The holdings in the Best Ideas Newsletter during the trading session November 5. We continue to pound the table on our best ideas. We don't traditionally update members on daily performance of the Best Ideas Newsletter portfolio, but we want to continue to emphasize our best ideas (what they are and where to find them). We have written extensively in the past that we put the Valuentum Buying Index and the Dividend Cushion ratio into practice as we manage the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, respectively. For example, it may not make much sense to be searching for other ideas without at least considering our best ideas first. As the architect behind our process, we believe we have the unique insights to put our methodologies into practice the best. That's why we always say our best ideas are included in the newsletter portfolios.
Nov 4, 2020
Best Ideas Newsletter Portfolio Holdings Are Surging!
Image: The holdings in the Best Ideas Newsletter during the trading session November 4. We continue to pound the table on our best ideas. If you were like me, you stayed up as long as you could last night watching the U.S. election coverage before it became too difficult to keep your eyes open. When I went to sleep, it seemed as though Donald Trump would be re-elected. The only state that appeared to flip to the Democrats from the 2016 election was Arizona, meaning Trump would still retain greater than the 270 electoral votes required to gain re-election. Well, that was last night, and this is today. As more and more votes came in last night and into the morning, it became evident that the races in Wisconsin and Michigan were much tighter than the news coverage last night led to believe. In fact, with just a small percentage of the votes left outstanding to count in those states, Joe Biden appears to be running ahead of Donald Trump in those states, if only ever so slightly (~20,000-30,000 votes). Donald Trump’s huge gap in Pennsylvania--about 8.7 percentage points at the time of this writing--may also narrow when it is all said and done. The bottom line is that this election is just too early to call!
Oct 30, 2020
Our $140 Fair Value Estimate of Apple Remains Unchanged
Image Shown: Apple Inc maintained its enormous net cash position at the end of fiscal 2020. In the graphic up above, Apple’s cash-like items are underlined in red and its debt-like items are underlined in blue. Image Source: Apple Inc – 8-K SEC filing covering the fourth quarter of fiscal 2020 with additions from the author. On October 29, Apple reported fourth quarter and full-year earnings for fiscal 2020 (period ended September 26, 2020). Its fiscal 2020 GAAP revenues and GAAP operating income were up 6% and 4% year-over-year, respectively. Growth was driven by its Mac, iPad, ‘Wearables, Home and Accessories,’ and ‘Services’ offerings while its iPhone revenues dropped somewhat. Longer term, we are optimistic that Apple’s high-margin Services businesses will eventually become a significantly larger part of its overall financial performance (its Services segment represented ~20% of Apple’s sales and ~34% of its gross profit in fiscal 2020). We continue to be huge fans of Apple and include shares of AAPL as a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios.
Oct 22, 2020
News Brief: Stay at Home Stocks, REITs, Housing, Oracle, and AT&T
Image: Number of COVID-19 cases reported weekly by WHO Region, and global deaths, 30 December 2019 through 18 October 2020. Source: WHO. The COVID-19 pandemic continues to rage on, though the healthcare community has become more adept at reducing the incidence of death given the many treatments now available to battle the disease. We continue to stay the course with the newsletter portfolios. Many of our favorites include Apple, Microsoft, Facebook, Alphabet, and PayPal, among other moaty, net-cash-rich, free-cash-flow generating powerhouses tied to secular growth trends. Our focus remains on the long haul. The business models of many stay-at-home stocks are solid as they continue to reap the rewards of the accelerated trends of home office use and e-commerce proliferation. Housing-related names are also benefiting as consumers adjust their lifestyles to accommodate a post-COVID-19 world. Many pockets of the economy still remain ill, and the slow fading of the attractiveness of commercial / office / apartment space may rear its ugly head as this new decade continues. As was the case with the department stores, they may hang around for years (decades) with myriad fits and starts, but it will be an uphill battle for REITs operating in these areas. We see little reason to bottom fish in airlines, cruise lines, or fickle mall-based retail, for example, but there may be select opportunities in the restaurant arena with Chipotle and Domino’s. The financials and energy sectors are two areas we continue to avoid, more generally, and they have continued to underperform.
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The High Yield Dividend Newsletter, Best Ideas Newsletter, Dividend Growth Newsletter, Nelson Exclusive publication, and any reports, articles and content found on this website are for information purposes only and should not be considered a solicitation to buy or sell any security. The sources of the data used on this website are believed by Valuentum to be reliable, but the data’s accuracy, completeness or interpretation cannot be guaranteed. Valuentum is not responsible for any errors or omissions or for results obtained from the use of its newsletters, reports, commentary, or publications and accepts no liability for how readers may choose to utilize the content. Valuentum is not a money manager, is not a registered investment advisor and does not offer brokerage or investment banking services. Valuentum, its employees, and affiliates may have long, short or derivative positions in the stock or stocks mentioned on this site.