Valuentum Exclusive Analysis for the Discerning Investor

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Oct 28, 2021

Alphabet Launches Higher
Image: Our fair value estimate of Alphabet has continued to lead the stock higher, and shares continued to deliver following the company’s third-quarter report, released October 28. Alphabet registered a 10 on the Valuentum Buying Index in January 2019 at just below $1,100 per share. Shares have launched to nearly $3,000 since then, and we continue to expect strong performance given the company’s tremendous free cash flow generation, huge net cash position, secular growth prospects in search advertising, and above-market fair value estimate that stands at ~$3,500. We like shares of this top-weighted position in the Best Ideas Newsletter portfolio.

Oct 26, 2021

Facebook’s Third-Quarter 2021 Results Better Than Feared
Image: Facebook continues to put up impressive levels of free cash flow generation. We remain huge fans of the stock. Image Source: Facebook. Facebook showed what it means to have a wide economic moat when it reported its third-quarter 2021 results. Robust revenue growth in the face of disruptive Apple iOS 14 privacy changes, impressive operating-income expansion in the face of considerable expense growth to build out the ‘metaverse,’ and cultural resilience in the face on a slew of media attacks on its business practices reveal that Facebook may be near-invincible. We’re huge fans of Facebook’s free cash flow generation capacity and its attractive net-cash-rich balance sheet, and we expect more good things to come from this top-weighted idea in the Best Ideas Newsletter portfolio. A huge new buyback authorization that we thought was in the cards in the wake of share-price weakness has arrived, and we love that Facebook is scooping up its undervalued stock. We’re maintaining our 10 rating on the VBI and $515 fair value estimate for shares.

Jun 1, 2021

ICYMI -- Video: Exclusive 2020 -- Furthering the Financial Discipline
In this 40+ minute video jam-packed with must-watch content, Valuentum's President Brian Nelson talks about the Theory of Universal Valuation and how his work is furthering the financial discipline. Learn the pitfalls of factor investing and modern portfolio theory and how the efficient markets hypothesis holds little substance in the wake of COVID-19. He'll talk about what companies Valuentum likes and why, and which areas he's avoiding. This and more in Valuentum's 2020 Exclusive conference call.

Jan 25, 2021

ALERT: Bull Raids, Short Squeezes and Highly Unusual Market Activity
Image: Shares of GameStop have been on an irrationally wild ride recently driven by what looks to have been an orchestrated and highly unethical (and perhaps illegal) short squeeze on the stock. According to some reports, during the pre-market session January 25, GameStop’s shares were up ~80%, and turned red during the trading session, with no fundamental news.In late 2018, Valuentum published Value Trap, a book that warned to all that would heed its warning that a collapse in the traditional quant value factor was coming and that excessive volatility in the markets caused by price-agnostic trading--or those that aren’t paying attention to fair value estimate calculations--would only build and build to eventually reach extreme and irrational levels. The book, while hugely successful winning award after award, was largely ignored by the media, despite our best efforts to get the word out. Now, the chickens are coming home to roost.

Dec 10, 2020

FTC Attacks Facebook, Win-Win Scenario for Investors
Image Shown: Facebook Inc has a large digital advertising business with global reach, but it does not have a monopoly on digital advertising or social media by any means. Image Source: Facebook Inc – Third Quarter of 2020 IR Earnings Presentation. Facebook is being sued by the FTC for allegedly engaging in monopolistic activities via its acquisition program. It's important to note that the government is not seizing Facebook's assets and that Facebook investors own the future free cash flow stream of the entire entity under any and every scenario--whether Facebook is retained in current form or whether it is broken into different parts through a potential IPO/spin-off of its Instagram and WhatsApp properties. Under a status quo scenario, we believe Facebook's shares are worth $413 each, an estimate that is backed by the company's vast net cash position and future expected free cash flow stream. In such a scenario, the company would remain one of our favorite ideas, retain its material competitive advantages (i.e. the network effect) and continue to build upon its very healthy financial profile. Further, in light of the FTC news, we believe the market will look to price Facebook more and more on a sum-of-the-parts basis, which could help to accelerate price-to-estimated fair value convergence relative to our intrinsic value estimate. In a highly improbable break-up scenario, Facebook investors could receive more than our status-quo intrinsic value estimate. The IPO market is very, very healthy at the moment, with investor interest in new issues at historic highs and many recent IPOs soaring on their first day of trading. If Facebook is forced to IPO Instagram or WhatsApp, the very, very healthy IPO market could generate proceeds for Facebook investors far in excess of what the implied value of Instagram and WhatsApp contribute to our current $413 per share fair value estimate of the combined company. Further, the cash proceeds of an IPO of Instagram or WhatsApp would stuff the coffers of Facebook's balance sheet with even more excess cash that could be used for material share buybacks or a vast one-time cash dividend--or for other value-generating opportunities. In an IPO or spin-off of Facebook's Instagram or WhatsApp properties, please note that investors are merely capturing the present value of these properties' future free cash flows sooner (not losing them)--and the market may price them at a substantial premium above our implied valuation within Facebook. The FTC news, which was largely expected, will generate headline risk for Facebook's shares, and it will undoubtedly be a source of continued share-price volatility and confusion for investors. In many respects, however, the FTC's attack on Facebook may turn out to be a win-win for Facebook investors. At the very least, if investors start to look at Facebook more and more on a sum-of-the-parts basis (pricing Facebook, Instagram and WhatsApp separately with consideration of current market conditions/relative prices, which are undoubtedly healthy for new issues), it may only accelerate status-quo-scenario price-to-fair value convergence. Facebook remains a top-weighted holding in the Best Ideas Newsletter portfolio, and we will continue to follow developments related to the FTC news.

Jun 16, 2020

Reiterating Our Bullish Long-Term View on Stocks
Image: The NASDAQ 100 Index remains resilient, bouncing off support, after breaking out to new highs recently. Some of our best ideas are included in the NASDAQ 100, and our favorite concentrations include exposure to big cap tech and large cap growth. We continue to be bullish on equities for the long run. In addition to unlimited quantitative easing and "whatever it takes, squared" Fed policy, today, June 16, the Trump administration announced that it is weighing a $1 trillion stimulus bill to help support the economy. While uncertainties remain regarding specifics of the bill (it might include state assistance, extension of unemployment benefits, etc.), the move is consistent with the outsize spending we expect to further bolster the bull case, "ICYMI -- Stay Optimistic. Stay Bullish. I Am." We continue to emphasize that, in light of unlimited QE and runaway fiscal stimulus, the longer-duration components of intrinsic values are expanding considerably, and as a result, fair values, themselves, are actually rising during this recession and pandemic [a good estimate of the value of the S&P 500 today may be between 3,530-3,920, as outlined in the following: "Scribbles and More Newsletter Portfolio Changes.]."

Jun 15, 2020

ICYMI: Survey Coming Later Today, More Market Volatility Expected
Image: The market's levels of volatility so far in 2020 have been among the greatest in history. Expectations for increased volatility in the marketplace as a result of the proliferation of price-agnostic trading (indexing and quantitative trading) is a key theme of Valuentum's text, Value Trap: Theory of Universal Valuation. We continue to emphasize the importance of due diligence, enterprise valuation, behavioral thinking, the information contained in prices, and stock selection across equity portfolios. Page 256. This week is setting up to be yet another volatile week of trading, but nothing too surprising. We've talked extensively about outsize levels of volatility in the book Value Trap, and many of our predictions regarding the magnitude of volatility have come to fruition, as described in this note here. But as we've also noted in Value Trap, we don't think increased volatility is a transient development. The Fed and Treasury have only further emboldened price-agnostic trading (indexing/quant) with recent bailout actions, and volatility and momentum funds, which exacerbate the swings, will only grow as a percentage of trading volumes. The magnitude of market volatility during the COVID-19 crisis has certainly been immense. During March for example, the Dow Jones Industrial Average had 8 consecutive days with a 4% move in either direction (this is the first time in history this happened--not even during the tumultuous times of the Crash of 1929 or Black Monday of 1987 or the Great Financial Crisis did this happen). Intra-day volatility has also been considerable, and it has become commonplace for equity futures to swing wildly before market open. Now, more than ever, investors need a steady hand at the wheel.

Jun 12, 2020

*ALERT* Scribbles and More Newsletter Portfolio Changes
Image: Why are stock prices increasing while the near-term economy and near-term earnings outlook isn't as bright as before...How unlimited quantitative easing, runaway government spending, increased inflation expectations impact equity values...Why this year's earnings expectations or next year's earnings expectations don't matter much...Why Valuentum thinks equity values are rising today, even as the near-term outlook remains unclear. Scribbles on page 76 of Value Trap. "I know it sounds crazy to say so during a global pandemic and during a recession, but the right multiple and the right earnings to use to value this market is an 18-20x multiple on $196 earnings, putting a fair value range on the S&P 500 today of 3,530-3,920. The S&P 500 is trading at about 3,000 today." -- Brian Nelson, CFA

Jun 11, 2020

Valuentum Research Update
"Hope you all are doing great! I must say I couldn't be more pleased with the research we've been putting out, and thank you very much for your continued interest. In this piece, I wanted to get some of our latest work to you. First, please note that we've done a great job holding the line on many of our fair value estimates (ranges) on our website. Many stocks have been bouncing back, and we're glad we didn't rush through any updates. Updating fair value estimates (ranges) too frequently doesn't make much sense to us. We're after the right answer, not any answer." -- Brian Nelson, CFA

Jun 8, 2020

ICYMI -- Stay Optimistic. Stay Bullish. I Am.
Image: My great-grandfather (second from left) and his buddies in the 88th Division of the United States Army during World War I, at the time of the Spanish Flu pandemic of 1918-1919. He would serve under Major General William Weigel, become proficient in the 37mm gun, and take part in the largest offensive in U.S. military history, the Meuse-Argonne Campaign. As a corporal, he would survive the Great War and the Spanish flu pandemic, returning to the U.S. in May 1919 from the port of Saint-Nazaire, France on his way to Omaha, Nebraska. First of all, I wanted to reiterate how bullish I am on equities for the long haul. There are no risk-less investments when it comes to the stock market, of course, but this "win-win" scenario we seem to find ourselves in today appears to be one-of-a-kind in history. Here's what it boils down to. If the U.S. economy re-opens and everything turns out to be "fine," or at least better-than-expected, it's hard not to be bullish on stocks. We can then possibly look to pre-COVID-19 earnings numbers for 2021 and 2022 with some adjustments here and there, and that means the bull market is on (and new heights may be in sight). On the other hand, if the U.S. economy re-opens and economic numbers don't live up to expectations, which could happen, there will likely be even more stimulus--but investors might be bullish in this scenario, too. For starters, there's been more money created during the past few weeks or so than during the entire year following Lehman Brothers' failure (there's even talk of more money creation with another round of stimulus). We cannot forget that, while stock values are calculated on the basis of future free cash flow expectations, they are priced nominally (not inflation-adjusted), and stock investing is one way to combat the risk of inflation as strong companies price goods ever higher to outpace rising costs to reap in ever-higher earnings. Even if this excess money in the economy is not translated into inflation in physical goods and services, however, it may translate into inflating equity prices specifically, as has arguably (or perhaps undeniably) been the case during the period of 2010-2019. But there's more to this line of thinking...