Valuentum Exclusive Analysis for the Discerning Investor

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Energy Earnings Roundup: CVX and XOM
Image Source: Exxon Mobil Corporation – 2020 IR Presentation. Several integrated oil and gas companies reported earnings for the final quarter of 2020, and as expected, these were brutal reports. The coronavirus (‘COVID-19’) pandemic weighed negatively on global demand for raw energy resources (crude oil, natural gas, natural gas liquids), refined petroleum products (gasoline, diesel, kerosene), and certain petrochemicals last year, which created massive headwinds for the oil and gas industry across the board. Subdued raw energy resource pricing and lackluster refined petroleum product demand were the two big obstacles for the industry as those dynamics severely weakened the economics of upstream (involved in the extraction of raw energy resources from the ground) and downstream (refineries and petrochemical plants) operations. However, things are starting to look up as raw energy resources pricing is now recovering.

Free Cash Flow Machine Visa Remains One of Our Best Ideas
Image Shown: Visa’s ability to generate sizable free cash flows continues to impress. We are big fans of the payment processing giant. Image Source: Visa Inc – First Quarter of Fiscal 2021 IR Earnings Presentation. We're huge fans of Visa's business model. The credit card network’s free cash flow generating abilities are impressive, aided by its low capital-expenditure requirements. We view Visa’s long-term outlook quite favorably and include the company in the Best Ideas Newsletter portfolio as a top-weighted idea. The top end of our fair value estimate sits at $263 per share of Visa, materially above where V is trading as of this writing.

Stock Market Outlook for 2021
2020 was one from the history books and a year that will live on in infamy. That said, we are excited for the future as global health authorities are steadily putting an end to the public health crisis created by COVID-19, aided by the quick discovery of safe and viable vaccines. Tech, fintech, and payment processing firms were all big winners in 2020, and we expect that to continue being the case in 2021. Digital advertising, cloud-computing, and e-commerce activities are set to continue dominating their respective fields. Cybersecurity demand is moving higher and the constant threats posed by both governments (usually nations that are hostile to Western interests) and non-state actors highlights how crucial these services are. Retailers with omni-channel selling capabilities are well-positioned to ride the global economic recovery upwards. Green energy firms will continue to grow at a brisk pace in 2021, though the oil & gas industry appears ready for a comeback. The adoption of 5G wireless technologies and smartphones will create immense growth opportunities for smartphone makers, semiconductor players and telecommunications giants. Video streaming services have become ubiquitous over the past decade with room to continue growing as households “cut the cord” and instead opt for several video streaming packages. We’re not too big of fans of old industrial names given their capital-intensive nature relative to capital-light technology or fintech, but there are select names that have appeal. Cryptocurrencies have taken the market by storm as we turn the calendar into 2021, but the traditional banking system remains healthy enough to withstand another shock should it be on the horizon. Our fair value estimate of the S&P 500 remains $3,530-$3,920, but we may still be on a roller coaster ride for the year. Here’s to a great 2021!

Earnings Roundup: Pinterest and Peloton
Image Source: Peloton Interactive Inc – Second Quarter of Fiscal 2021 Shareholder Letter. The outlook for the world economy, keeping near-term headwinds in mind, remains bright as global health authorities are actively working towards putting an end to the coronavirus (‘COVID-19’) pandemic largely through ongoing vaccine distribution efforts. As vaccine production scales up, widespread distribution efforts will become a much easier task. We’re continuing with our earnings commentary in this note by covering a social media contender (Pinterest) and an upstart exercise company (Peloton).

Earnings Roundup: Chipotle, PayPal, Qualcomm
Image Shown: PayPal Holdings Inc, a top-weighted idea in our Best Ideas Newsletter portfolio, continued to grow at a brisk pace during the final quarter of 2020. Image Source: PayPal Holdings Inc – Fourth Quarter of 2020 IR Earnings Presentation. Several of the newsletter portfolio ideas recently reported earnings, and we are quite pleased with the performance that our favorite ideas have put up so far this earnings season. Though the ongoing coronavirus (‘COVID-19’) pandemic created significant headwinds for the three companies we cover in this article (Chipotle, PayPal, and Qualcomm), each firm remained incredibly free cash flow positive, highlighting the resilience of their business models. Looking ahead, the outlook for these companies is bright and getting brighter.

General Electric Provides Upbeat Outlook for 2021
Image Shown: An overview of GE’s cash flow forecasts on a divisional basis for 2021. Image Source: General Electric – Fourth Quarter of 2020 IR Earnings Presentation. The ongoing coronavirus (‘COVID-19’) has weighed negatively on the industrial sector for most of 2020, before the space started to recover during the latter part of the year. On January 26, industrial conglomerate General Electric reported fourth quarter earnings for 2020 that beat consensus top-line estimates but missed consensus bottom-line estimates. The company’s business operating segments are broken down into its various GE Industrial divisions (‘Power,’ ‘Renewable Energy,’ ‘Aviation’ and ‘Healthcare’) and GE Capital. What really impressed us was that GE Industrial’s free cash flow came in at $4.4 billion in the final quarter of last year which pushed the segment’s full year free cash flow up to a positive $0.6 billion in 2020. Management cited outperformance at GE’s Healthcare division and the ongoing turnaround at its energy portfolio as being key here during GE’s latest earnings call, which offset significant weakness at its Aviation division.

Repub from March 5, 2018: The Tragedy of Quantitative Finance
-- Okay – it’s not 2038, but just imagine if this could happen…

Fourth Quarter Bank Earnings Roundup: MS, GS, BAC, C, WFC, JPM
Image Source: JP Morgan’s fourth-quarter earnings press release. Though we’re generally cautious on banking business models due to the arbitrary nature of cash-flow generation within the banking system and the difficulty in valuing such entities on the basis of a free-cash-flow-to-the firm framework, we like Morgan Stanley--and its return on tangible equity of 17.7% during the fourth quarter of 2020 speaks to solid economic-value creation. Goldman’s annualized return on total equity (ROTE) was an impressive 22.5% during its fourth quarter, helping drive the full-year measure to 11.1% for 2020. Bank of America had been an idea in the Best Ideas Newsletter portfolio in the past, but we removed the company June 11, 2020. We continue to view the banking system more as utility-like serving as an extension of the federal government, and as such, we generally don’t think they’ll be able to muster above-average returns in the longer-run. We still include diversified exposure to the financial sector in the Best Ideas Newsletter portfolio via the Financial Select Sector SPDR (XLF), but only for diversification purposes. Citigroup remains among our least favorite banking entities. Wells Fargo used to be a well-run bank, but consumer perception has certainly changed with its “fake account scandal” that cost it $3 billion to settle criminal and civil charges. JP Morgan's return metrics were solid like Morgan Stanley’s and Goldman’s, with return on equity (ROE) coming in at 19% and return on total common equity (ROTCE) coming in at 24% in the quarter. The banking system remains on stable ground.

Apple, Facebook, and Tesla Report Earnings
Image Shown: Facebook Inc continues to steadily grow its active user base, primarily by leveraging and expanding its international presence. Image Source: Facebook Inc – Fourth Quarter of 2020 Earnings IR Presentation.  We continue to witness unusual trading activity in the markets driven in large part by investors that are apparently communicating with each other over online forums such as Reddit. This trading activity is then being exacerbated by quantitative trend and momentum funds, generating levels of volatility in some names never before seen. On January 27, we sent out an alert to members noting that we shifted our newsletter portfolios to a 10%-20% cash weighting. Should numerous hedge funds start to fail due to short squeezes, that would put a tremendous amount of pressure on financial markets, at large, as investor confidence would start to erode. This, in turn, may beget more selling, creating an avalanche effect much like that of Long-Term Capital Management in the 1990s. Keeping this in mind, we continue to be big fans of top tier-tech giants, several of which have recently reported earnings that we will cover in this note. Companies with large (net) cash piles, resilient business models, promising long-term growth outlooks underpinned by secular tailwinds and strong cash flow profiles continue to be the best way to ride out the storm caused by the coronavirus (‘COVID-19’)--and more recently, very strange (if not downright manic) trading activity. Though the levels of volatility witnessed in dozens of companies may be unexpected by many, we had outlined the hazards of the volatility driven by price-agnostic trading (implicitly inclusive of Reddit and Robinhood trading) in the conclusion ("A Call to Action") of our book, Value Trap.

Recent Fair Value Estimate Changes
Let's cover a few recent fair value estimate changes in this note: APD, F, GM, EOG, LMT, CVS.