Mortgage REITs Still Dangerous Income Vehicles
April 29, 2019
Image: Since late May 2013, mortgage REITs, as measured by the iShares Trust Mortgage Real Estate ETF (REM), middle, have fallen more than 20%, while the master limited partnership space, as measured by the Alerian MLP ETF (AMLP), has fallen by nearly 45%, bottom. Meanwhile, the S&P 500 (SPY) has rallied more than 75%, all on a price-basis, top. By Brian Nelson, CFA There’s nothing “safe” about mortgage REITs (REM). The industry caught a lot of attention with the high-profile performance of some of the larger players, including AGNC Investment (AGNC) and Annaly Capital (NLY), in years past, but the hype has fizzled out. Not only has the mortgage REIT industry vastly underperformed a broad market benchmark such as the
Facebook Was Textbook, Intel Still About Fairly Valued After Weakness
April 26, 2019
Image: Best Ideas Newsletter portfolio holding Facebook’s (FB) stock has advanced 56% since it bottomed in December. This is yet another textbook execution of the Valuentum Buying Index, a strong breakout of the downtrend on a significantly undervalued stock. See also the example with Apple (AAPL) on page 241 in Value Trap: Theory of Universal Valuation. — In alphabetical order by ticker symbol: ABBV, AMZN, AAL, BMY, CHDN, CL, DHR, DLR, F, HON, INTC, SBUX — AbbVie (ABBV): The branded pharmaceutical business that was spun off from Abbott (ABT) continues to tread water, with shares in a steady downtrend since peaking at the beginning of 2018. We’re not interested in this company given the concentration risk of blockbuster drug Humira, and we generally
3M Plunges Toward Fair Value, More Earnings Reports
April 26, 2019
Several companies reported difficult earnings reports, including 3M, UPS, WWE, and Xilinx. No changes to the newsletter portfolios. — In alphabetic order by ticker symbol: MMM, CMG, FCX, HSY, TSLA, UPS, WM, WWE, XLNX — 3M (MMM): Our $175 fair value estimate remains unchanged following one of 3M’s worst quarterly reports in a long time. Not only did this industrial conglomerate miss both the top- and bottom-line in its first-quarter results April 25, but it also reduced its fiscal 2019 earnings guidance to the range of $9.25-$9.75 from $10.45-$10.90 previously, well below the consensus forecast. Clearly, the quarterly performance and outlook were poor, but 3M’s shares were also overpriced. The company finished the trading session down 13%. Enterprise valuation matters. The drop
Norfolk Southern Impresses But Sustained Dividend Growth is Doubtful
April 25, 2019
Image Source: Norfolk Southern Corporation – First quarter 2019 IR presentation While Norfolk Southern posted a solid first quarter earnings report and continued to showcase real operational improvement, an onerous net debt load combined with the long-term decline of coal in America puts its dividend growth trajectory in doubt. By Callum Turcan Norfolk Southern Corporation (NSC) is a major rail transportation provider with operations primarily located in the Midwest, the East Coast, and the Southeastern regions of the United States. As things stand today, the company yields 1.7% but its dividend coverage isn’t great with a Dividend Cushion ratio of just 0.6x. While we recognize that Norfolk Southern is a robust free cash flow generator, note that its dividend obligations
Facebook Surges! Microsoft, Visa, PayPal Quarterly Reports Solid
April 24, 2019
Facebook did not disappoint after the close April 24. Shares are surging after hours. We continue to value the company at nearly $230 per share. — Facebook Delivers in First Quarter, Sets $3 Billion Dollar Legal Expense — We’ve been pounding the table on Facebook (FB) since adding an additional 3 percentage points of “exposure” to the Best Ideas Newsletter portfolio in the low $160s in July 2017, and we further added to the company in the newsletter portfolio with shares under $140 each near the December 2018 bottom when we went to “fully invested.” As we have said this entire time, the sell off in Facebook last summer has been a gift to long-term investors! — Facebook’s total revenue advanced 26% on
Earnings Reports Flying In!
April 24, 2019
Earnings reports are flying in. We thought Air Products’, Hasbro’s, and Lockheed’s quarterly updates were standouts. By Brian Nelson, CFA It’s time to make some noise! Seriously, we just debunked a decades-old myth that the average active investor theoretically cannot outperform, net of fees. We also just showed theoretically how empirical asset pricing models in using realized data are off the mark. I think both of these are huge deals in the field of finance. Make some noise. I talk about these developments in subchapters of our new book, Value Trap! You can read about the contents of the book on Amazon. I hope that we hear more about these developments on a larger scale in the coming years. How wonderful that might be.
We Like Both Apple and Intel; Facebook’s Earnings Preview
April 23, 2019
Apple and Intel have been prominent holdings in the simulated newsletter portfolios for some time now, and we’re interested in what Facebook has to say regarding recent developments in its upcoming earnings release. By Brian Nelson, CFA Apple (AAPL) is now a $205+ stock. I can barely contain my excitement. Remember when shares were laboring under $160 when we went to “fully invested” in December 2018? We also explained why we liked Apple quite a bit, despite the share price decline, not only because of its solid net cash position on the balance sheet but also its strong future expected free cash flow generation. We value shares at $218. We don’t chase product cycles that are already implicitly embedded in our free cash
Morgan Stanley’s Lumpy Performance Calls Into Question Durability of Earnings Stream
April 23, 2019
Image Source: reynermedia If Morgan Stanley’s activities can collapse that quickly, as they did during the fourth-quarter of 2018 when the market swooned, it really calls into question the durability of the earnings stream for all of the global players. By Matthew Warren Morgan Stanley (MS) reported first-quarter 2019 results April 17 with net revenues down 7%, earnings down 9%, and diluted earnings per share down 4%. Return on equity was 13.1% versus 14.9% last year. The firm’s efficiency ratio was 71% versus 69% in last year’s first quarter. The bank is well-capitalized with a common equity Tier 1 ratio of 16.5%, which is necessary considering the riskier nature of Morgan Stanley’s balance sheet compared to a universal bank like
PepsiCo Fights off Forex Headwinds as it Gets Ready to Take on Amazon
April 22, 2019
Image Source: PepsiCo Inc – IR Presentation By Callum Turcan While foreign currency headwinds are proving quite troublesome, PepsiCo continues to post strong organic growth that helped drive its outperformance during the first quarter of 2019. That strong performance will be needed as Amazon gets ready to enter the energy beverage arena. PepsiCo Inc’s (PEP) shares shot up to record highs on April 17 after posting first quarter results that clearly impressed the market. With shares now trading around $127 as of this writing, the beverage and snack giant yields 2.9% with decent dividend coverage going forward. The company beat consensus top and bottom-line estimates while reaffirming 2019E guidance, which signals to the market that management is confident in PepsiCo’s
Taking a Fresh Look at Goldman Sachs
April 20, 2019
After taking a fresh look at our valuation assumptions in the context that Goldman hasn’t really proven that it can earn above the cost of capital through the economic cycle, we have lowered our fair value estimate to $200 per share. By Matthew Warren Goldman Sachs (GS) reported first-quarter 2019 results April 15 with revenue down 13%, to $8.8 billion, and diluted earnings per share down 18%, to $5.71. Return on equity was a middling 11.1% and return on tangible common equity was 11.7%. The bank’s standardized common equity Tier 1 ratio is 13.7%, well above large bank peers. This makes sense as Goldman holds substantial investment positions such as private equity holdings on its balance sheet, which have the
