Valuentum Exclusive Analysis for the Discerning Investor

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Mar 28, 2023

The Real Reason Why Moats Matter
Image Source: Ray in Manila.  Let's sit down with President of Investment Research Brian Nelson for his take on economic moats, and why he still likes the areas of large cap growth and big cap tech.

Mar 14, 2023

Berkshire Hathaway’s 2022 Shareholder Letter Addresses Buybacks
Image: Berkshire Hathaway has held up fairly well following the market rout in 2022. Image Source: TradingView. Buffett’s shareholder letters are always a refreshing read, a reminder of just how important it is to practice good business principles and to view stocks as pieces of businesses and not pieces of paper.

Mar 14, 2023

Norfolk Southern’s Environmental and Safety Troubles Plague Stock
Image: Norfolk Southern’s environmental troubles have sent its stock back to pre-pandemic levels. The company is yet another example of why companies cannot take for granted how their operations can negatively impact the environment. Image Source: TradingView. Neglecting the environment and employee and consumer/resident safety is a sure way for companies to end up in hot water. Norfolk Southern is under special investigation by the National Transportation Safety Board (NTSB) for a series of accidents during the past couple years, punctuated by the derailment and chemical spill occurring in East Palestine, Ohio, in early February. Though the firm’s costs associated with the high-profile train derailment may be capped at $75 million, its reputation may be irreparably harmed. Norfolk Southern is a prime example of why ESG investing has an important role in the marketplace, as the company simply dropped the ball when it came to ‘Environmental’ and ‘Social’ considerations within the ESG construct.

Nov 8, 2022

Berkshire Continues to Be a Staple in the Best Ideas Newsletter Portfolio
Image Source: Fortune Live Media. Warren Buffett has made some missteps over the years. For every Occidental Petroleum, there is a Kraft Heinz that hasn’t worked out. For every Apple, there is an IBM that has failed to live up to expectations. We hope our readers view our work in a holistic way, much like they view Buffett’s. In the Best Ideas Newsletter portfolio, for example, where Meta Platforms, PayPal, and Disney haven’t lived up to expectations, other Best Ideas Newsletter portfolio “holdings” such as Exxon Mobil, Chevron, and Vertex Pharma are up 79%, 56%, and 40% so far this year, respectively. We don’t think investors judge Warren Buffett solely on his missteps in Kraft Heinz and IBM (during a bull market no less!), no more than we hope readers won’t judge our work solely on Meta, PayPal, or Disney (during a punishing bear market!), particularly when other ideas are soaring--and the simulated Best Ideas Newsletter portfolio is outdistancing the SPY so far this year. Within any investment portfolio, there will be winners and there will be losers. It’s all part of investing. Buffett understands this. Valuentum understands this. We hope you understand this, too!

Oct 14, 2022

Banks Held Up in 3Q 2022 But Mortgage Market Dynamics and Consumer Health Are Big Economic Concerns
Image: Homebuyer mortgage payments on new homes have increased more than 50% since last year due to rising interest rates. We think this is a precursor to lower housing prices, which could have implications across the banking and financials sector. Image Source: Redfin. Third-quarter 2022 earnings reports from the money center banks weren’t bad, but we’re concerned about the impact of rising mortgage rates on originations coupled with weakness in asset values across the residential and commercial real estate markets. Consumer personal savings rates are already suffering as many seek to use revolving credit to deal with inflationary pressures. We like the Financials Select Sector SPDR (XLF) as the best way to play diversified exposure to the banking and financials industry, an ETF that we include in the Best Ideas Newsletter portfolio, but there's a lot to worry about, including global financial contagion risk from Europe.

Aug 10, 2022

Best Idea Berkshire Hathaway Continues to Impress
Image Shown: Berkshire Hathaway Inc is a stellar cash flow generator in almost any operating environment. Image Source: Berkshire Hathaway Inc – 10-Q SEC filing covering the Second Quarter of 2022. Berkshire Hathaway Inc reported second quarter 2022 earnings that saw its ‘operating earnings’ metric surge higher versus the year-ago level. This metric removes realized and unrealized gains/losses in its large equity portfolio from the picture to provide investors with a better understanding of the company’s underlying performance. Due to the downturn in equity markets seen during the first half of this year, Berkshire Hathaway’s GAAP net income swung to a large net loss last quarter. We include shares of Berkshire Hathaway Class B (ticker: BRK.B) in the Best Ideas Newsletter portfolio, and our fair value estimate sits at $320 per share with room for upside.

Mar 17, 2022

Berkshire Hathaway Is Firing on All Cylinders; Shares Surging
Image Shown: Shares of best idea Berkshire Hathaway Class B (ticker: BRK.B) have surged higher over the past year with room to run. Those of you that have been long-time members of Valuentum (thank you by the way!) know that we are huge fans of Warren Buffett. We include Berkshire Hathaway Inc (BRK.A) (BRK.B), specifically its Class B shares (ticker: BRK.B), as an idea in the Best Ideas Newsletter portfolio. Recently, Buffett (CEO and Chairman of Berkshire) released his latest annual letter to shareholders, which included plenty of important information regarding the conglomerate’s financial performance and investing practices at-large. One of the things that stuck out in Buffett’s latest annual letter to shareholders, a topic that he has brought up often in the past, is his belief in betting on America. In the letter, Buffett notes that “our country would have done splendidly in the years since 1965 without Berkshire. Absent our American home, however, Berkshire would never have come close to becoming what it is today.” For reference, Buffett took control of Berkshire back in 1965. We are also big believers that the number one place for investors to be invested is in U.S. equities. Specifically, large cap U.S. tech stocks with “moaty” business models, fortress-like balance sheets, incredible free cash flow generating abilities, and growth outlooks underpinned by secular tailwinds represent some of our favorite ideas alongside U.S. energy giants (a shorter term tactical play in the face of the ongoing inflationary environment) and high-quality U.S.-focused firms like Berkshire. We appreciate Buffett’s longstanding commitment to utilizing discounted free cash flow analysis to locate and invest in undervalued enterprises based in the U.S.

Feb 14, 2022

Credit Suisse Is a Case Study in Poor Governance and Why ESG Investing Matters
Image Shown: Shares of Credit Suisse Group AG have performed poorly in recent years as a revolving door of leaders combined with several major scandals have led to billions in losses and prompted Swiss regulators to launch investigations into the bank. The company has a plan in place to turn things around, though it will take years for these efforts to be fully reflected in its financial performance. Credit Suisse recently issued lackluster guidance for 2022 that weakened investor confidence in its turnaround story. We think Credit Suisse is a good case study in poor corporate governance.A revolving door of leadership does not speak favorably towards Credit Suisse’s outlook, though the company is working hard to put its past behind it. The Swiss bank has been unable to steady the ship so far after several serious scandals cost the firm billions and prompted Swiss regulators to take a closer look at Credit Suisse. When it comes to effective governance, Credit Suisse has been lacking and that has cost investors dearly. We hope Credit Suisse can right the ship under its new management team and is able to achieve its longer term goals (such as boosting its RoTE north of 10.0% by 2024 while improving its cost structure). However, we see no reason in taking the chance and view CS more as a study on why good corporate governance matters. Our two favorite banks are Bank of America Corporation and JPMorgan Chase & Co, both of which have solid leadership teams. Berkshire Hathaway Inc, specifically Class B shares (ticker: BRK.B) and the Financial Select Sector SPDR Fund ETF are both included as ideas in the Best Ideas Newsletter portfolio. As opposed to one individual bank, we like the diversified exposure to the U.S. banking and financial services space the XLF ETF provides. Additionally, we are huge fans of Berkshire Hathaway and recently increased the company’s fair value estimate.

Jan 23, 2022

RH’s Financials, Long-Term Potential Great But Housing Market and Deteriorating Wealth Effect Pose Risks
Image Shown: Shares of RH have exploded higher since the news broke that Berkshire Hathaway Inc had taken a stake in the firm’s equity back in 2019, though shares of RH have shifted lower in recent months. RH is an innovative home furnishing company that pairs its products with interior/exterior design services to offer a comprehensive package. The company primarily targets affluent households in the U.S., Canada, and the U.K. RH has tremendous pricing power and its margins have increased significantly in recent fiscal years, even during the COVID-19 pandemic, and its net revenues are trending higher as well. The firm is expanding into the high-end hospitality industry and has several projects that are set to come online in 2022 and beyond. RH is a stellar free cash flow generator with a manageable net debt load. Though the company has been executing nicely of late, as witnessed by its stellar financial performance and recent guidance increases, shares of RH have sold off in recent months. In our view, the recent selloff is a function of broad based market weakness, but it also may be due to investors growing more concerned about the impact higher interest rates and a deteriorating wealth effect may have on housing and home furnishing demand and on its push into the hospitality space, respectively. We continue to view RH’s long-term capital appreciation upside potential favorably, however.

Jan 13, 2022

Governance: The G in ESG Investing
Image: The Valuentum Environmental, Social and Governance (ESG) Scoring System shows how “Governance” considerations are analyzed. No discussion of ESG investing would be complete without addressing the role of corporate governance (“stewardship”) in equity investing. As with the other aspects of ESG investing, corporate governance covers a lot of ground. It can include pretty much anything related to how a company is run, including leadership, executive compensation, audits and accounting, and shareholder rights. These areas are just the tip of the iceberg, however. A company with good corporate governance is one that is run well with the proper incentives and with all stakeholders in mind, from employees to suppliers to customers to shareholders and beyond. Good corporate governance practices decrease the risk to investors as it cuts through conflicts of interest, misuse of resources, and a general lack of concern for all stakeholders. A company that fails at implementing good corporate governance is at increased risk of litigation or scandal, which could wreck the share price. With the turn of the century, the dot com bust probably exposed most prominently the need for good corporate governance practices. Fraud was rampant. Whether it was the former CEO of Tyco International receiving millions in unauthorized bonuses, the actions of those at the top of Enron that created one of the biggest frauds in corporate history, the scandal at accounting and auditing firm Arthur Andersen, the demise of MCI/Worldcom, or the questionable practices that led to the Global Analyst Research Settlement, Wall Street had lost its way. In fact, a big reason why our firm Valuentum was founded is based on ensuring that investors get a fair shake and that someone is keeping a watchful eye not only on companies, but also on the sell-side stock analyst research that may still be full of conflicts of interest. As a result of the Global Analyst Research Settlement, all the big investment banks from Goldman Sachs to J.P. Morgan to Morgan Stanley to UBS Group and beyond had to pay stiff fines for producing conflicted, if not fraudulent research. In this note, we talk about the considerations that go into the G in ESG investing.