Member Articles

China

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Image Source: Mike Behnken Our concerns about China are not new, and neither are your concerns. The potential Treasury Secretary-to-be, Carl Icahn, that is one in a world of a Donald Trump presidency, which has become all-the-more likely now that Ted Cruz and John Kasich have stepped aside, recently brought to light the differences between a capitalist society such as that of the US and a communist nation such as that of China (FXI). Unlike the US government which isn’t necessarily anti-business, even if it isn’t pro-business if existing corporate tax rates are any measure, the Chinese government can make things awfully hard on any company doing business within its borders, if it wants to. What Icahn has been referring … Read more

There’s No Such Thing as a Perfect Process

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Image Source: Kryzysztof “If mangement teams want to give bogus forward earnings guidance as in the case of Jakks Pacific or balk in light of ominous industry conditions as in the case of Marriott or National Oilwell Varco, or simply abandon the dividend altogether with no warning despite a flawless balance sheet and strong free cash flow generation as in the case of Quality Systems, the objective and financially-based Dividend Cushion ratio may come up short in predicting such irrational human behavior. The board can do what it wants with the dividend, and every board is different.” — Brian Nelson, CFA By Kris Rosemann The Dividend Cushion ratio does not have a perfect record in catching dividend cuts, though it … Read more

A Letter from the President

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“We’re Valuentum, not value – and that’s all the difference in the world.” – Brian Nelson, CFA Dear member: We received a few questions on this topic and I wanted to help clarify the Valuentum process. We are the only investment research publishing company that systematically embeds a technical and momentum assessment into a robust valuation methodology, comprised of a discounted cash-flow process and relative valuation overlay. As you can imagine, the output of the combination can be quite confusing for anyone, for the pure technician as well as the pure value investor and everyone in between. First, we should note that our fair value estimates and fair value ranges are not price targets that you may see in brokerage … Read more

Altria and “Socially Confused” Investing

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You may have heard of socially-responsible investing. This investment framework tends to avoid businesses that are involved in tobacco, alcohol, sugary sodas, gambling, fossil fuel production, or even defense. There’s nothing wrong with having views about these topics – in fact, that’s what being an individual is all about. However, things get kind of silly when such views dictate how one makes money in the secondary market, or how asset managers invest in portfolios. You see – when you buy or sell stock, the company that you are investing in doesn’t get that money. You are merely trading with someone else. The company only receives your money when you invest in the primary market (IPO) or through new shares, a … Read more

Gilead: What’s Your Long Term Thesis?

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Shown: Pricing pressure continues to hurt Gilead’s gross margin; source: Gilead’s first-quarter 2016 presentation. We’re still sleeping better at night knowing that we avoided the first-quarter blowup at Gilead (GILD), “Gilead Disappoints, Harvoni Sales Drop 16% (April 2016).” Sales of Harvoni in the US dropped like a rock from the year-ago period, and as Gilead throws away its cash at buybacks to bolster accounting earnings per share, no longer does it hold the balance sheet it once did. Sure, something can be said about having ~$21 billion in cash, but it kind of loses its luster matched up with a similar amount of liabilities, as is the case with Gilead. Remember – it’s net cash that matters. To a large … Read more

April Deals May Flower Future Growth

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Image Source: Iqbal Osman By Kris Rosemann Thursday, April 28, was marked by a surge of M&A activity, as major corporations continue to search for growth as global economic concerns remain and the US economy shows signs of slowing. The world’s largest economy, which is accustomed to slow starts to the year, saw seasonally-adjusted GDP grow at a 0.5% rate in the first quarter of 2016, the slowest rate for the first quarter since 2014. Though a rebound in GDP growth in the second quarter has followed in nearly every year since the Great Recession, a variety of global pressures has caused US GDP growth to slow on a quarter-over-quarter basis since the second quarter of 2015 when it nearly … Read more

Gilead Disappoints, Harvoni Sales Drop 16%

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Image Source: Gilead By Brian Nelson, CFA “They” say nobody saw this coming, but then again not everybody follows Valuentum’s research and analysis. That’s a good thing. We were starting to doubt our de-risking maneuver in the Best Ideas Newsletter portfolio that we made in January, “Alerts: High-grading! GILD–>JNJ; EBAY–>FB (January 2016),” in light of Gilead’s shares recovering nicely along with the market advance. However, the hep-C giant’s first-quarter report, released April 28, looks like it will be the catalyst to bring shares back down to earth, fair or not. Given some of the comments/questions we’ve received in recent months, we think it is worth noting that since the January 29 transaction alert, shares of Johnson & Johnson (JNJ) have … Read more

PayPal’s Growth Engines Still Firing

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Image: PayPal continues to add millions of active customer accounts each quarter. Source: PayPal’s Q1 2016 Investor Update. By Brian Nelson, CFA Revenue up 23%, excluding foreign exchange rate fluctuations. GAAP operating margin up 90 basis points. GAAP earnings per share up 43%, to $0.30. Operating cash flow of $738 million. Free cash flow of $605 million, up 70% year-over-year. 1.4 billion transactions processed. Ended the quarter with 184 million active customer accounts, up 4.5 million. These were just a few headlines in PayPal’s (PYPL) first-quarter report, released April 27. PayPal is mainstream – it’s no longer just a way to send money between friends, if it truly ever was just this. The secular trend toward a cashless society is … Read more

Facebook: It’s All about The Vanity of the User

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Image Source: Sean MacEntee By Brian Nelson, CFA Our thesis on Facebook (FB) is one grounded on the firm foundation that the company holds one of the strongest competitive advantages of any business model, the network effect. What a network effect creates is quite simple to define, but extremely difficult to replicate. Said differently, as more users become engaged with Facebook, more businesses want to interact with Facebook, and as more businesses interact with Facebook, more users may want to engage within Facebook, and so on. It is a virtuous cycle of proliferating advertising revenue growth and optionality, much like we’ve witnessed with eBay’s (EBAY) auction business in the early days of the Internet and with the likes of MasterCard’s … Read more

Coach: Still On Path to Recovery?

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By Brian Nelson, CFA Why would we include Coach (COH) in the portfolio of the Dividend Growth Newsletter portfolio? This was a question we were asked quite frequently when shares had dipped into the mid-$20s, but we don’t hear it too much now with the company’s shares breaking north of $40 each. The company was added to the Dividend Growth Newsletter portfolio at $37.55 per share in September 2014, but the handbag maker has been paying a rather hefty yield since then, adding up to a respectable total return for the unique exposure within the context of a dividend growth strategy. The position in Coach had given us heartburn in the past, “Coach…Ouch! (April 2015),” and we weren’t exactly pleased … Read more