By Brian Nelson, CFA
Hi everyone,
Hope you are doing great.
There a few things I wanted to put on your radar this evening. We’re going to talk the importance of having CFA charterholder research at your advisory practice. We’ll discuss Facebook (FB) and National Beverage (FIZZ) in the context of our methodology, and we’re going to touch on a couple things at Chipotle (CMG), Apple (AAPL) and Boeing (BA). Did you hear about the 737 MAX 8? Not good. I also wanted to remind you of the new 40/40 Goal (click here), of which we are already making progress (the book reviews keep coming in). Thank you!
First, just a quick reminder on the 40/40 Goal. We now have 15 reviews of Value Trap: Theory of Universal Valuation on our way to 40, and I can’t be more excited. Don’t forget to leave your review of Value Trap on Amazon! The other part of the 40 is the 40% response rate to a survey we intend to send out in the coming months. Response rates to surveys are meager, but I hope that you make this one fantastic. Also, the CFA Institute has a new website, showcasing the benefits of having a CFA charterholder at your practice. Please view the new website the Institute put up; the video is fantastic, too: The Right Question. Don’t just rely on any research. Demand a CFA charterholder.
Let’s get started with Facebook. It has become clear that the market overreacted during the summer of 2018 when it sent shares tumbling. You knew my opinion about this all along. In April and June 2018, shares of Facebook registered a 10 on the Valuentum Buying Index at $174 and $193, respectively, and the equity promptly rallied to ~$220 in short order. Then came the swoon and shares again registered a 10 on the Valuentum Buying Index in January 2019 at $143, before now promptly rallying to $170+. This is what the VBI should do.
The Valuentum Buying Index is a timing overlay to the enterprise valuation process. We don’t use the VBI or enterprise valuation, by itself. If we think shares of a company are undervalued, but their technicals and momentum indicators are terrible, we won’t come close to it (think GE in the high $20s). If we think shares are overvalued, but its technical and momentum indicators are still running, we won’t ditch it (think Chipotle at the moment). The Valuentum process has come in mighty handy through this 10-year bull market as prices would stretch for some time, only for valuations to eventually follow higher.
In what many believe may be our worst call (given the timing of a few of our emails last summer), our “cost basis” in the Best Ideas Newsletter for Facebook is in the mid-$130s, so the company’s rally has put this one in the winner’s column in a meaningful way…again. What we are effectively after as Valuentum investors is stocks that the in-depth value and income-oriented investor already might own anyway, but ones that have added conviction as measured by technical/momentum indicators. We simply like stocks that are undervalued on an enterprise valuation basis (and on a behavioral valuation basis, as in the forward-looking PE or PEG ratio) and are exhibiting strong technical and momentum indicators.
Our process is that easy, but there’s so much behind it, as you’ll read in Value Trap: Theory of Universal Valuation. Now what about the other side of our methodology in the case of National Beverage? For starters, this is a company that we never would have considered being involved in. The company’s equity exhibited continued strength through much of 2016 and 2017 (and we watched it), and that was fine by us. We stuck to our guns, and shares registered a 1 in November 2017 at nearly $100. For those that were holding the equity at that time, the Valuentum Buying Index acted as a sign to reconsider. Shares swooned recently and are now trading under $60.
It’s important that you understand this call. We did miss the substantial run-up in National Beverage’s price, but we also missed the huge decline, all the while we reaped the strength of other ideas in the newsletter portfolios, not the least of which is Chipotle and Apple, among others. Chipotle’s shares are now nearly $620 each, and we added them in April 2018, when shares were ~$420 (that’s a huge move in less than a year). Our thesis on Chipotle remains the same: the worst is behind the company when it comes to food scares, and new CEO Brian Niccol is the person for the job.
I also wanted to mention Apple. The company has been in the doldrums through much of the last quarter of 2018, but it has come roaring back in 2019. There are few companies out there with Apple’s free cash flow generation and net balance sheet strength coupled with a powerful consumer brand name, ecosystem of repeat business, and services opportunity. Shares of Apple are on the up and up and closed just under $180 per share March 11. We continue to value Apple’s shares north of $200 each.
Many of you have been following the Boeing developments with respect to the crashes of the 737 MAX 8 at Lion Air in October of last year and Ethiopia Airlines over the weekend. Any loss of life is simply a tragedy, and we think Boeing will fix the problems of its workhorse narrowbody line-up. The aerospace giant has encountered production problems in the past with the 787 and it persevered, and the company faced tragedy during 9/11, but customers stuck with Boeing and cancellations were minimal. Boeing’s backlog of unfulfilled deliveries stands at about 7.3 years of its annualized delivery run-rate of ~800. We expect the impact on Boeing’s intrinsic value and order book as a result of these disasters to be minimal, though we note shares are still pricey.
I’m still working through all the emails from those that were interested in the Exclusive publication. If you haven’t heard back from me yet, you will shortly. Thank you. Aren’t the success rates incredible? I remember sending out the emails letting our members know about this publication so often. It depends on your portfolio size, of course, but it’s never smart to be “penny wise, pound foolish,” as the old saying goes. Free ideas can sometimes be very expensive. What you find on our website is only part of what we do, and yes, we still have availability to the Exclusive publication! Be sure to register at the following link: /20160505
That’s all for now! I’m available for any questions.
Kind regards,
Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
brian@valuentum.com
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Aerospace & Defense – Prime: BA, FLIR, GD, LLL, LMT, NOC, RTN
Aerospace Suppliers: AIR, AL, ATRO, HEI, HXL, SPR, TDY, TXT
Conglomerates: DHR, GE, HON, MMM, UTX
Tickerized for holdings in the US Global Jets ETF (JETS)
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.