Member Articles

Buffett Planning to Scoop Up a Valuentum Favorite

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We’re hearing that Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) is nearing a deal to buy one of our favorite commercial aerospace suppliers and former Best Ideas Newsletter holding Precision Castparts (PCP). We’ve always been fans of Precision Castparts and believe its management team is one of the best in all of the industrial sector. This was likely something that convinced the Oracle that Precision Castparts was right for the Berkshire portfolio. As we’ve yet to hear specific deal terms, we believe Berkshire can pay up to $34 billion in equity value, or ~$240 per share and still make this deal work from an economic-value standpoint. Precision Castparts’ shares closed at ~$194 each Friday. We expect aerospace suppliers to catch a … Read more

Earnings Brings Out Volatility of Speculative Entities

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Tesla Falls on Lowered Delivery Guidance Tesla’s (TSLA) shares fell following the release of its second-quarter results August 5, despite beating consensus estimates on revenue and earnings per share. The firm reported non-GAAP revenue growing 40% from the year-ago period to $1.2 billion, and a non-GAAP loss of $61 million or $0.48 per share. The company was significantly cash flow negative through the first half of 2015 due in large part to capital expenditures for capacity expansion and tooling associated with the new Model X and the construction of the Tesla Energy Gigafactory. Management claims its capital spending is more efficient than ever in terms of capital spend per unit of incremental capacity, which will be necessary to get the firm … Read more

Disney’s Disappointment

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On August 4, media giant and consumer spending bellwether Walt Disney (DIS) put up decent fiscal third-quarter results, but concerns about the future of pay-TV left investors a bit cautious on its outlook. We don’t expect a material change to our $94 per share fair value estimate of the company (we have been far below the market price of $120+), and we point to most of the sell off as profit-taking following a very strong multi-year share-price run. During the fiscal third-quarter (ended June 27, 2015), revenue leapt to $13.1 billion from $12.5 billion in the year-ago period (a 5% increase), while diluted earnings per share advanced at a nice 13% clip, to $1.45 per share. On display yet again … Read more

The Great Pipeline Cash Flow Deficiency

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A myopic view on the energy sector may lead one to ask the question whether the distributions of energy master limited partnership are safe. A broadminded view would answer that question in two words: absolutely not. Through the first six months of 2015, almost every energy-related MLP has spent more in total capital expenditures and distributions than they generated in cash flow from operations. Business models with financials such as these cannot be sustainable over the long haul without infinite access to capital via the debt or equity markets. We learned that housing prices don’t always go up (and that they can fall on a national scale) during the Financial Crisis, and we’ll eventually learn that debt-infused business models that … Read more

Analyzing Healthcare REITs

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The market seems to be unforgiving these days. The threat of rising interest rates continues to weigh on everything REIT-related. The healthcare REITs are tied to the most favorable long-term trend within our coverage universe (the aging population), but that may not be enough to completely offset worries. With many REITs priced on “cap” rates, or the discounting mechanism for future adjusted funds from operations, a looming increase in this measure means that REITs are worth less, all else equal. For some, higher net operating income and funds from operations will help mitigate inevitably higher cap rates, while others may feel ongoing pressure. Let’s walk through the second-quarter performance of three of the best healthcare REITs on the market today.  … Read more

Assessing the Fallout from the Collapse in China’s Stock Market…Thus Far

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No longer do we live in an isolated world. If you weren’t convinced of this before the Global Financial Crisis, the credit crunch of late last decade should have changed that. Just as the interconnectedness of global financial markets is undeniable, we think the significance of the health of the Chinese economy is as critically important to the trajectory of equity prices across the globe. That’s why we’re not taking the recent collapse in the Chinese stock market lightly. Here’s what we’re hearing. China’s major restaurant bellwether, Yum! Brands (YUM), owner of KFC, addressed whether a decline in the country’s equity market has impacted sales. Though the company noted that “a very small percentage of customers have been impacted,” we’re … Read more

The Priceline Group Soars!!!

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It’s difficult to be patient with new ideas, and we understand. But the efficacy of the Valuentum Buying Index in picking winners continues to be a big head-turner. The methodology’s batting average—or the number of ideas that “work out”—is among the best of any systematic process that we’ve seen (if not the best), and we point to the logic behind its conceptual underpinnings as to the reasons why. The Valuentum Buying Index, which combines valuation and technical/momentum indicators, hits at the heart of what makes a good equity investment idea. Companies that we think are undervalued and ones in which the market also believes are undervalued—i.e. stocks whose shares are moving higher—should, by definition, be top performers. After all, the … Read more

FAQ: ETP and MLPs

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Answer: Thank you for your question. It is a good one. The Valuentum process considers both value and momentum in considering ideas. Just because a firm is undervalued does not guarantee that it will be added or remain in the newsletter portfolios. We use the Valuentum Buying Index rating system as a guide for idea consideration (addition and removal), which considers both the attractiveness of the entity from a valuation standpoint and market conviction via its share-price activity. As of late, our fundamental view on MLPs has deteriorated, and we have grown more cautious on the space, a view that has been reinforced through the broad-based sell-off and weakness in shares. We think this has warranted a removal in ETP shares from … Read more

Social Media Posts Mixed Trends

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Image: Twitter has tumbled significantly following the release of the past two of its quarterly earnings reports. The difference between a social media network success story and failure is simple: product iteration and innovation coupled with disciplined execution. This has been the difference between social media giant Facebook (FB) and Twitter (TWTR). While Twitter has spent time fighting through management shifts and attempting to discover its true calling as a social media platform, Facebook has been busy growing its global scale. LinkedIn (LNKD) continues to navigate its wide range of fair value outcomes, and we maintain our view that the company’s business model has yet to be tested. Twitter’s Valuation Distribution: A Lotto Ticket Twitter is still in the midst … Read more

FAQ: What Is the Difference Between the Raw Unadjusted Dividend Cushion Ratio and the Adjusted Dividend Cushion Ratio?

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FAQ: What Is the Difference Between the Raw Unadjusted Dividend Cushion Ratio and the Adjusted Dividend Cushion Ratio?  A number of quarters ago, we rolled out additional transparency with respect to the Dividend Cushion ratio methodology for master limited partnership (MLP) and real estate investment trusts (REIT) we cover in order to help readers understand how much of the adjusted Dividend Cushion ratio is supported by external capital-market assistance.  Both the adjusted and unadjusted ratios are worth keeping a close eye on. For example, should an MLP and/or a REIT have ongoing access to the capital markets, its highly probable that its dividend/distribution will be supported, as revealed by an adjusted Dividend Cushion ratio that would be comfortably north of … Read more