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Staying Focused on the Long Term
publication date: Apr 30, 2020
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author/source: Brian Nelson, CFA
 Image Source: The final lesson to learn from financial crises. Value Trap: Theory of Universal Valuation.
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By Brian Nelson, CFA
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Dear members,
---Hope you and yours are well, and staying safe during this crisis. I know it's difficult to be optimistic during these challenging times, but sometimes it's okay to take a step back and relax. Things are going to be alright. Many of you have read my book Value Trap: Theory of Universal Valuation. In it, I talk a lot about the lessons from the Great Financial Crisis. Above any other, however, what I've found is that the most difficult lesson to accept is that moral hazard will (once again) be rewarded.
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As I outlined in our prior note, "Going to 'Fully Invested' -- The Fed and Treasury Have Your Back," the Fed and Treasury may really have no choice but to continue to bail out "everyone," flood the markets with never-ending liquidity injections (if needed), and otherwise continue to prop up these markets at any and all costs. Granted, it was much easier to call the top in February and to identify dollar-cost-averaging opportunities near the bottom of this swoon here and here than it is to call a near-term direction today, but over the longer run, I don't think I've ever had more conviction that the markets will, once again, make new highs thanks to Fed and Treasury actions and the resulting equity-focused inflationary repercussions.
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With that said, we've never been more excited about the performance of some of the top-weighted ideas in the newsletter portfolios, and we continue to focus on alpha-generating ideas. As we wrote in our preview note for Facebook's (FB) first-quarter results here, we're huge fans of one of our top-weighted ideas in the Best Ideas Newsletter portfolio. Facebook is up 4%+ at the time of this writing, trading north of $200. We've been pounding the table on the company for a couple years now, and we still like it. Our fair value sits at $234 per share, and we think there could be even more valuation upside potential than the high end of our range ($293 per share).
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Alphabet (GOOG, GOOGL) is another top-weighted idea in the Best Ideas Newsletter portfolio, and we're huge fans of that one, too. Shares soared yesterday. We wrote up its recent quarter at the following link, "Alphabet Surges Higher," and as with Facebook, it fits the bill of a "moaty" equity, with a strong net cash position, and substantial free cash flow generating capacity. Net cash on the books and strong expected future free cash flows are two major sources of intrinsic value, and it probably should be no surprise why big cap tech stocks are holding up so well during this pandemic. Intrinsic value matters.
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Throughout this crisis, I hope that we showed how hard we work, and how much we care about our members. We don't get everything right, of course, but we're never going to stop trying to do so. On behalf of our team, I wanted to say how much we appreciate your support. Thank you so much. As we conclude today's note, I wanted to leave you with some of the most recent work we've published on the website. We're monitoring the European banks closely for global financial contagion risk, and you can read our write-ups on Deutsche Bank (DB) and Santander (SAN) here and here, respectively.
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In case you missed it, General Motors (GM), a company we removed from the newsletter portfolios some time ago, suspended its payout. Read more about Detroit automakers at the following link, "Detroit Automakers on the Ropes, Tesla Continues to Dominate." We also updated our thoughts on High Yield Dividend Newsletter portfolio holding Philip Morris (PM) at the following link, "Philip Morris International is Ready to Ride Out the Storm," and we dug deep into Intel's (INTC) and Coca-Cola's (KO) recent quarters here and here, respectively.
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We expect market volatility to continue (and headlines to be scary in the coming months), but our emphasis remains on the long term--and what unlimited quantitative easing, runaway government spending, the willingness of the Fed and Treasury to bailout "everybody," and the flooding of the markets with liquidity means for the markets. Even if we cry foul and say bailing out Vanguard is not fair (read this note), that doesn't mean that moral hazard, as in buying anything at any price (indexing), won't be rewarded once again in the form of new stock market highs.
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Stay safe out there. Thank you and God bless.
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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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