August Best Ideas Newsletter!
publication date: Aug 17, 2020
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author/source: Brian Nelson, CFA
Image: The Best Ideas Newsletter portfolio. We migrated to weighting ranges at the beginning of 2018. The image above is as of the close April 15.
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Hi everyone:
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Trust you are well.
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Portfolio concentration among strong-performing equities has been the key to outperformance. Since the last update, we've witnessed some big moves from our top-weighted entities: Berkshire Hathaway (+10.7%), Facebook (+8.7%), and PayPal (+11.2%). These three entities comprise roughly 34% of the Best Ideas Newsletter portfolio at the high end of the weighting ranges, more than offsetting the weaker performance from lower-weighted Cisco and Intel during the month. We continue to focus on over-weighting our "best of the best" ideas within a portfolio setting, and we're hoping to get both Apple and Microsoft back near the top when the opportunity presents itself. Apple has advanced +17.6% since the last month's edition.
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There are a few things I wanted to make you aware of. First, with the put option expiration, we've reallocated the 1% to Apple and Microsoft. We continue to like both of these net cash rich and free-cash-flow generating secular growers, both of which coincidentally may turn out to be among the best dividend growth entities for the next decade or so. It's just hard not to like them given where interest rates are today and how resilient their business models are under pretty much any economic conditions. In any case, that's why you see the "(increase)" in red in the table above--due to the reallocation after the put option expiration.
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Second, you may have heard by now but if you haven't, Warren Buffett's Berkshire Hathaway has been lightening up on the banks, as revealed in the company's latest 13-F. He took a "machete" to the positions in Wells Fargo and J.P. Morgan (and sold completely out of Goldman Sachs), and we think this is a good time to reiterate our views on the banks and financials industry. We don't like them--perhaps as much as we don't like the airline business--which Buffett backed out of a few months ago. The bank/financials ETF (XLF) is down over 18% year-to-date, despite the market coming back in a big way. We're glad to see that Uncle Warren seems to be getting back on track, and we'd really like to see him take a big stake in Facebook.
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Facebook could be a great fit for the Berkshire portfolio. From our perspective, the company is among the "moatiest" businesses around given its network effect. It has a huge net cash position and strong free cash flow generation, and Facebook has the potential to become the "new Internet" with its Shops feature. At the high end of our fair value estimate range, we value shares of Facebook at $355, and we could envision a scenario where there is even more upside than that, if some of the company's long-term ambitions pan out the way we envision them. Top-weighted Facebook in the Best Ideas Newsletter portfolio is up +27% year-to-date against a modest advance in the S&P 500 (SPY). Top-weighted GOOG is up +12.8% year-to-date, while heavily-weighted PayPal is up +77% so far this year.
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A synopsis of our latest work can be accessed at this email, and please don't forget to order a copy of the second edition of Value Trap. The book hits home the importance of enterprise valuation (the discounted cash flow method) and seeks to encourage quantitative practitioners to redefine the field in a forward-looking manner. Without any further delay, please find the August edition of the Best Ideas Newsletter here -- login required. Don't forget to subscribe here if you're unable to gain access to the newsletter. If you've forgotten your password, please contact us. Thank you for your continued interest in our services.
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Kind regards,
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Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
brian@valuentum.com
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It's Here!
The Second Edition of Value Trap! Order today!
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Brian Nelson owns shares in SPY and SCHG. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.