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Latest Valuentum Commentary
Feb 14, 2022
Credit Suisse Is a Case Study in Poor Governance and Why ESG Investing Matters
Image Shown: Shares of Credit Suisse Group AG have performed poorly in recent years as a revolving door of leaders combined with several major scandals have led to billions in losses and prompted Swiss regulators to launch investigations into the bank. The company has a plan in place to turn things around, though it will take years for these efforts to be fully reflected in its financial performance. Credit Suisse recently issued lackluster guidance for 2022 that weakened investor confidence in its turnaround story. We think Credit Suisse is a good case study in poor corporate governance.A revolving door of leadership does not speak favorably towards Credit Suisse’s outlook, though the company is working hard to put its past behind it. The Swiss bank has been unable to steady the ship so far after several serious scandals cost the firm billions and prompted Swiss regulators to take a closer look at Credit Suisse. When it comes to effective governance, Credit Suisse has been lacking and that has cost investors dearly. We hope Credit Suisse can right the ship under its new management team and is able to achieve its longer term goals (such as boosting its RoTE north of 10.0% by 2024 while improving its cost structure). However, we see no reason in taking the chance and view CS more as a study on why good corporate governance matters. Our two favorite banks are Bank of America Corporation and JPMorgan Chase & Co, both of which have solid leadership teams. Berkshire Hathaway Inc, specifically Class B shares (ticker: BRK.B) and the Financial Select Sector SPDR Fund ETF are both included as ideas in the Best Ideas Newsletter portfolio. As opposed to one individual bank, we like the diversified exposure to the U.S. banking and financial services space the XLF ETF provides. Additionally, we are huge fans of Berkshire Hathaway and recently increased the company’s fair value estimate.
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 14, 2022
The Success Equation Book Review: Is the Skill Paradox a Myth in Investing? We Think So
Image: The game of baseball has changed during the past 100 years. While many point to a declining standard deviation and coefficient of variation in batting averages for evidence of a paradox of skill in baseball, it's more likely the game has changed. Players are hitting more homeruns, sacrificing batting average as a result. Note the red part of the line is when the game of baseball expanded to the current number of 30 teams. Data from the COVID-19 shortened 2020 season omitted. Source: Baseball Almanac. There's a lot of informational value in reading The Success Equation (and everyone should pick up a copy), but please be careful to come to your own conclusion. From where we stand, there is not a paradox of skill in investing (or baseball, for that matter). The games have simply changed based on new incentives. Some wise person may have written this before: Be careful not in what you read, but rather in the conclusions you draw from your reading. We wish Mauboussin could re-write The Success Equation considering some of the thoughts in this article. Maybe he will!
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.
Dec 26, 2021
VIDEO/TRANSCRIPT: 2021 Valuentum Exclusive Call: Inflation Is Good
Valuentum's President Brian Michael Nelson, CFA, explains why investors should not fear inflation, why government agencies such as the Fed and Treasury are prioritizing something other than price discovery, why the 10-year Treasury rate is a must-watch metric, and why Valuentum prefers the moaty constituents in large cap growth due to their net cash rich balance sheets, tremendous free cash flow generating potential, and secular growth tailwinds.
Dec 20, 2021
Our Report on the Banks & Money Centers Industry
Image Source: Insomnia Cured Here. Our report on the Banks & Money Centers industry can be found in this article. We’ll talk about how banks make money, and the three most important costs of running a bank. The Great Financial Crisis revealed the tremendous risks of banking equities, and we’ll walk through these risks in depth. We will also cover how the COVID-19 pandemic impacted capital markets and the banking industry, and what to expect going forward. We’ll discuss how to conceptualize where we are in the banking cycle, and how that helps inform our valuation process for banks, which is different than traditional operating entities. The stress tests have helped many of the big banks from pursuing hazardous endeavors during the past decade, and we’ll go into how to think about the yield curve in the context of banks. Investors should expect ongoing the digitalization of banking operations and increased M&A as the competitive environment only intensifies. Our two favorite banks are Bank of America (BAC) and JPMorgan Chase (JPM). These stellar enterprises showcased the resilience of their business models during the worst of the COVID-19 pandemic.
Dec 10, 2021
What Really Is the ”S” in ESG Investing
Image: The Valuentum Environmental, Social and Governance (ESG) Scoring System shows how “Social” considerations are analyzed. Social considerations tend to ebb and flow and reflect the values of society. Renewed interest in diversity, inclusion, and equity, for example, have made these areas a greater focus for companies and investors. As we have evolved as a society over decades and generations, the types of social considerations that may have primacy will change over time, so it’s important to make sure social considerations are just one part of your research. In addition to looking at how a company scores on the Valuentum ESG rating system and how it aligns with your own values, be sure to also look at whether such an idea is in the simulated newsletter portfolios, how it rates on the Valuentum Buying Index (VBI), its Dividend Cushion ratio for dividend-paying stocks, and much more. It’s extremely important to reward those companies doing the social good, but equity prices and returns will always be driven in part by a company’s cash-based sources of intrinsic value: net cash on the balance sheet and future expected free cash flow.
Nov 17, 2021
Asset Allocators Fail, Advisors Should Pick Stocks, Save Investors $34 Billion Annually
Image: Most asset allocators can’t even keep pace with the underperforming 60/40 stock/bond portfolio. Highlight added by author. Image Source: Wealth Management. Let’s get this industry back on track. This isn’t about going all-in on cryptoassets or being reckless with one’s capital the past 10 years, but merely picking stocks as a risk/wealth management strategy that approximated the S&P 500 for the past 10 years, and how that has crushed not only the best that quant has had to offer in small cap value but also indexing and asset allocation. One hundred and seventy percentage points of difference relative to the 60/40 stock/bond portfolio, which itself beat many of the “best” asset allocators out there!!! This isn’t about taking on more risk, but rather that active stock selection should be viewed in the same vein as asset allocation. Why do we continue to publish the obviously-biased research in favor of indexing and asset allocation when stock selection could have delivered so much more for investors while saving them billions in annual fees from ETFs, etc. Today, the SEC has a lot on its plate regarding SPACs, cryptocurrency, new issues, ETF approvals and beyond, but in our view, the SEC shouldn’t necessarily be prioritizing 2 and 20 fees more than the index-fund fee chain, and it shouldn’t necessarily be trying to eliminate payment for order flow (PFOF) any more than it should seek to eliminate low-cost index funds. Let us not kid ourselves: It's clear why index funds and passive is winning -- the fees are tremendous! All things considered, if investors want to believe risk is volatility and suffer with indexing and asset allocators, that is their prerogative, but what worked in the past (deviations from equity selection as in the 60/40 stock/bond portfolio) bolstered by high interest rates in the 1980s is far from relevant today (and making up alternative assets isn't going to help). We don’t need more indexing and asset allocation books these days. We need more common sense. Stop selling index funds and start trying to help investors.
Nov 15, 2021
Hut 8 Mining Is an Interesting Play on Cryptocurrencies
Image Source: Hut 8 Mining Corporation – November 2021 IR Presentation. Executive Summary: We are intrigued by Hut 8 Mining’s business model. By growing its bitcoin balance over time and covering its operating expenses by lending out its bitcoin hoard, generating so-called fiat yield, Hut 8 Mining is effectively a bet that a combination of growth in the price of bitcoin and growth in its bitcoin hoard will provide a major boost to its net asset value (‘NAV’) over time. Should the price of bitcoin tank, however, that would weigh negatively on its business, though things would likely not be as bad as it first appears given that Hut 8 Mining is set up to make money in almost every bitcoin pricing environment. As long as there is investor demand out there to borrow its bitcoins, and that broad interest in cryptocurrencies holds up well going forward, Hut 8 Mining should be able to continue growing its revenue as it grows the amount of bitcoin it can lend out on average per quarter. Obviously, of course, the firm would do better if the price of bitcoin stays the same (currently at roughly USD$64,700 for one bitcoin as of this writing) or increases. From our perspective, Hut 8 Mining is better positioned to capitalize on the cryptocurrency craze, in our view, than many of the other firms out there that are mining and continuously selling off their bitcoin holdings or actively buying bitcoin on the open market seeking to flip those alternative digital assets for a profit down the road (the “greater fool theory” in action). We are keeping an eye on Hut 8 Mining, though in this particular case, we must caution that the intrinsic value of alternative digital currencies like bitcoin is zero. The value is entirely in the eyes of the beholder.
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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.