Valuentum Exclusive Analysis for the Discerning Investor

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Dec 26, 2021

VIDEO/TRANSCRIPT: 2021 Valuentum Exclusive Call: Inflation Is Good
Valuentum's President Brian Michael Nelson, CFA, explains why investors should not fear inflation, why government agencies such as the Fed and Treasury are prioritizing something other than price discovery, why the 10-year Treasury rate is a must-watch metric, and why Valuentum prefers the moaty constituents in large cap growth due to their net cash rich balance sheets, tremendous free cash flow generating potential, and secular growth tailwinds.

Nov 3, 2021

Large Cap Growth Has More Room To Run
“The stylistic area of large cap growth has been one of our favorite areas because of the strong net cash rich, free cash flow generating, secular growth powerhouses that make up much of the space. The image is a rundown of the key Valuentum statistics for the top 15 holdings of the Schwab U.S. Large Cap Growth ETF (SCHG). We believe where large cap growth goes, so does the broader market, considering the hefty weightings of some of these stocks in other broad-based indices. Based on the high end of our fair value estimate range for this group of bellwethers, the broader U.S. markets still have room to run, to the tune of 7%+, despite the many highs already reached during 2021. Though traditional valuation multiples may seem stretched by most measures, many market bellwethers have huge net cash positions and tremendous free cash flow growth potential. We expect the equity markets to continue to be led by large cap growth.” – Brian Nelson, CFA

Oct 20, 2021

Quants and High-Frequency Trading the Real Cause of the GameStop Frenzy?
Image: The cause of the GameStop trading frenzy remains largely unclassified as it appears to us that quant and high-frequency trading played a much bigger role in the market disruption than what is being reported. We think the SEC staff put out a fantastic “GameStop Report” with some excellent information. However, the report did not get to the crux of the matter, failing to disclose what actually caused the extreme market volatility in meme stocks, while glossing over the substantial increase in institutional accounts, likely belonging to quant/trend/momentum funds, that contributed to the trading frenzy this year. We think investors and market participants deserve to know more about what caused this threat to market integrity and structure as the continued proliferation of which may only grow larger and larger in the coming decades. If it was quant trading, then we encourage the SEC to take steps to ensure that such trading is curbed effectively as it is clear that such price-agnostic activity is not contributing to market efficiency.

May 7, 2021

Dividend Increases/Decreases for the Week May 7
Let's take a look at companies that raised/lowered their dividend this week.

Feb 8, 2021

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!

Dec 1, 2020

Walking Through the Calculation of the Dividend Cushion Ratio
Image shown: An image found on page 2 of Valuentum's Dividend Report on Kimberly-Clark. The 'Dividend Cushion Ratio Deconstruction,' shown in the image, reveals the numerator and denominator of the Dividend Cushion ratio. At the core, the larger the numerator (or the healthier a company's balance sheet and future free cash flow generation) relative to the denominator (or a company's future expected cash dividend obligations), the more durable the dividend. In the context of the Dividend Cushion ratio, KimberlyClark's numerator is larger than its denominator suggesting strong dividend coverage in the future. The 'Dividend Cushion Ratio Deconstruction' image puts sources of free cash flow in the context of financial obligations next to expected cash dividend payments over the next 5 years on a side-by-side comparison. Because the Dividend Cushion ratio and many of its components are forward-looking, our dividend evaluation may change upon subsequent updates as future forecasts are altered to reflect new information.We believe the Dividend Cushion ratio is one of the most helpful tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based, considers balance sheet health, and is forward looking. Since its development in 2012, we estimate its efficacy at ~90% in helping to forewarn readers of impending dividend cuts. For companies where Valuentum reports are available, the Dividend Cushion ratio can be found in a stock's Dividend Report or in the table on the company's stock landing page. We use Kimberly-Clark as an example of how we calculate the Dividend Cushion ratio and how useful it is for investors of all types.

Nov 2, 2020

ICYMI -- Dividend Growth Strategies Struggle
Image: A large cap growth ETF (orange) has significantly outperformed an ETF tied to a dividend growth strategy, the SPDR S&P Dividend ETF (SDY), which mirrors the total return performance of the S&P High Yield Dividend Aristocrats Index. To no surprise to many members, several dividend growth strategies have faced tremendous pressure during 2020. The Journal recently wrote a piece on the topic, but from our perspective, the problem with many dividend growth strategies is that they tend to be balance-sheet agnostic and pay little attention to traditional free cash flow expectations, focusing only on the yield itself, sometimes dismissing future fundamentals in favor of historical growth trends and the inferior EPS-based dividend payout ratio. In many dividend-targeted ETFs, for example, it may not matter to the index creator whether a firm has $10 billion in net debt or $10 billion in net cash; as long as management has a track record of raising the dividend in the past, it is included. To us, however, there is a world of difference between a company that has a huge net cash position and a huge net debt position. The more excess cash on the balance sheet a dividend payer has, for example, the more secure its payout. In some cases, entities held in high-yielding ETFs don't even cover their dividends or distributions with traditional free cash flow generation, despite having ominous net debt loads. A look at the high-yielding ALPS Alerian MLP ETF, for example, shows a number of entities that are buried under a mountain of debt and are generating meager free cash flow relative to expected distributions. The lofty yield on that ETF should therefore be viewed with a very cautious eye. If the yield weren't at risk for a big cut, the market would bid up the stock, and down the yield would go. In no way should you believe that you can sleep well at night holding stocks yielding north of 10% when the current 10-year Treasury is well below 1%. The market is just not that inefficient. A dividend growth strategy can never be a passive one either. Only through constant attention to the balance sheet (net cash) and future free cash flow expectations can investors truly sleep well at night. At Valuentum, we do the balance sheet and cash flow work and summarize it succinctly in a key ratio called the Dividend Cushion ratio.

Jul 2, 2020

Macy’s Builds Liquidity and Cuts Costs to Stay Afloat
Image Shown: Our fair value estimate range for shares of Macy’s Inc is quite wide at $1-$9 per share, relatively speaking, as the retailer’s outlook remains troubled due to its large net debt load and the ongoing pandemic. In the event Macy’s can reopen its physical stores in the near-term while maintaining recent gains seen at its digital operations, its revenues might rebound convincingly. Should Macy’s be forced to close its physical stores again for a prolonged period of time to contain the ongoing pandemic, that would likely drain its recently enhanced liquidity position and put a tremendous amount of stress of its financials going forward. Thus Macy’s has a relatively wide range of fair value outcomes, and represents the type of firm we generally prefer to stay away from. On July 1, Macy’s reported first quarter fiscal 2020 earnings (period ended May 2, 2020) that missed consensus top-line estimates but beat consensus bottom-line estimates. The retailer’s GAAP net sales plummeted by 45% year-over-year last fiscal quarter due to various US state and local government mandates that forced non-essential businesses to close. Quarantine efforts to contain the coronavirus (‘COVID-19’) pandemic in the US, rising unemployment rates, and a large net debt load represent three big hurdles Macy’s will need to find a way to deal with. Please note that most of the retailer’s physical stores are in the US and that Macy’s suspended its common dividend payouts earlier this calendar year. A large impairment charge combined with sharply lower revenues saw Macy’s post a large GAAP net loss of $3.6 billion in the fiscal first quarter.

Jun 21, 2020

Gap Buys Itself Some Time
Image Shown: An overview of Gap Inc’s net sales by brand. Image Source: Gap Inc – First Quarter Fiscal 2020 IR Earnings Presentation. On June 4, Gap reported first quarter fiscal 2020 earnings (period ended May 2, 2020) that missed both consensus top- and bottom-line estimates. Shares of GPS have gotten crushed due to the ongoing coronavirus (‘COVID-19’) pandemic as consumers (particularly those in the US) have spent far less on discretionary goods (like apparel) over the past several months. Combined with the negative impact of physical store closures and the lack of a meaningful online presence, Gap shares sank as its outlook turned dire. Though Gap operates stores in over 40 countries, please note about ~80-82% of its GAAP net sales came from the US from fiscal 2017 to fiscal 2019, highlighting its dependence on the US consumer.

Jun 9, 2020

Macy’s Secures Additional Financing
Image Shown: Shares of Macy’s Inc have started to recover some of their lost ground after the company secured additional financing to ride out the storm created by the ongoing coronavirus (‘COVID-19’) pandemic. Store closures have decimated the company’s bottom-line, but the reopening of the US economy and many of the retailer’s stores has improved Macy’s outlook. Back on April 21, 2020, we published a note on Valuentum (link here) highlighting why it would be hard for Macy’s to unlock the (fair) value of its real estate assets. We are following up on that piece given recent events that we will cover in this article, and we strongly encourage our members to check out that first article.