Valuentum Exclusive Analysis for the Discerning Investor

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Oct 22, 2020

Our Thoughts on Netflix’s Latest Earnings
Image Shown: An overview of Netflix Inc’s historical financial and operational performance and a snapshot of its outlook for the fourth quarter of 2020. Image Source: Netflix Inc – Letter to shareholders covering the third quarter of 2020. On October 20, the video streaming giant Netflix reported third-quarter 2020 earnings after the market close that underwhelmed lofty investor expectations and saw shares of NFLX move lower the next day. We recently updated our cash flow models for the Discretionary Spending industry, and our current fair value estimate for NFLX sits at $488 per share, near where Netflix is trading as of this writing. The recent selloff in Netflix’s stock price is largely about investors scaling back their expectations for Netflix’s net paid subscriber growth figures, in our view, and is not a sign of underlying weakness in the company’s business model.

Oct 22, 2020

Overweighting Outperformers
Image: The performance of ideas in the Best Ideas Newsletter portfolio during the trading session October 21. Many of the higher-weighted ideas in the newsletter portfolio are propelling the portfolio to relative outperformance. The Best Ideas Newsletter portfolio comprises a portfolio constructed of Valuentum's best ideas. These are companies that have scored favorably on the Valuentum Buying Index (VBI) and have been included in the newsletter portfolio with consideration of sector diversification and market/economic risk. The Best Ideas Newsletter portfolio is found in the Best Ideas Newsletter, which is released on the 15th of each month. Source: Seeking Alpha.

Oct 20, 2020

ConocoPhillips Is Buying Concho Resources
Image Shown: An overview of the pro forma asset base of ConocoPhillips and Concho Resources Inc. Please note that Concho Resources’ main operations are in the Permian Basin in West Texas and Southeastern New Mexico, a region that ConocoPhillips seeks to grow its exposure to. ConocoPhillips has an expansive upstream portfolio with operations worldwide, though its North American position is set to become a much larger part of its company-wide profile. Image Source: ConocoPhillips – ConocoPhillips & Concho Resources Transaction Announcement IR Presentation. On October 19, ConocoPhillips announced it was acquiring Concho Resources through an all-stock deal. If the deal goes through as planned, each share of CXO will be exchanged for 1.46 shares of COP, and as the press release notes, this represents “a 15 percent premium to closing share prices on October 13.” However, please keep in mind shares of CXO have fallen by roughly two thirds since October 2018 as of this writing, indicating ConocoPhillips is really not paying much of a premium for Concho Resources.

Oct 19, 2020

PepsiCo Earnings Update
Image Shown: PepsiCo Inc’s expansive snacks and beverage portfolio is home to 23 brands that generated $1+ billion in annual retail sales in 2019. We are big fans of PepsiCo’s business model but caution that the firm’s net debt load needs to be closely monitored going forward, especially given management’s generous approach to dividends and share repurchases. Image Source: PepsiCo Inc – CAGNY 2020 IR Presentation. PepsiCo reported third-quarter fiscal 2020 earnings (period ended September 5, 2020) that beat both top- and bottom-line consensus estimates. PepsiCo’s organic revenue growth, a non-GAAP metric, stood out. During the fiscal third quarter and the first three quarters of fiscal 2020, PepsiCo’s organic revenue growth clocked in at 4.2% and 3.6%, respectively, on a year-over-year basis. For the full fiscal year, management is guiding for ~4% annual organic sales growth at PepsiCo. In May 2020, PepsiCo increased its quarterly dividend, and the firm was happy to announce that this marked its 48th consecutive year of annual dividend increases. PepsiCo has paid out quarterly dividends since 1965 and remains very committed to rewarding its shareholders. Organic sales growth will provide a tremendous amount of support to PepsiCo’s cash flows going forward.

Oct 15, 2020

Our Thoughts on the Potential Acquisition of Concho Resources by ConocoPhillips
Image Source: ConocoPhillips – November 2019 Annual & Investor Meeting Presentation. According to Bloomberg, the super-independent ConocoPhillips is currently talking with Concho Resources about acquiring the company. We do not expect that such a deal will come with a significant premium, and furthermore, and we expect that such a deal will likely be funded with equity. Our reasoning is underpinned by recent M&A activity in the oil patch, such as the all-stock acquisition of Noble Energy by Chevron Corporation through a ~$5 billion deal that was completed in early-October. That deal involved Chevron paying a ~12% premium (based on ten-day average closing stock prices) at the time of the announcement, though please note shares of Noble Energy had cratered beforehand indicating that Chevron did not have to pay up for the company. Noble Energy, like Concho Resources, also had a significant position in the Permian Basin (though its Mediterranean assets were Chevron’s main target, in our view). We covered that deal in great detail. As it concerns our view that ConocoPhillips would likely use equity instead of cash to acquire Concho Resources (should such a deal materialize), that is largely due to ConocoPhillips’ sizable net debt load at the end of June 2020 and its inability to generate meaningful free cash flows in the current pricing environment for raw energy resources. Additionally, Concho Resources had a net debt load at the end of June 2020 and is also unable to generate meaningful free cash flows in the current environment. The oil patch is contending with serious financial constraints and all-stock acquisitions/mergers with minimal premiums are likely going to continue being the norm for some time.

Oct 13, 2020

JPMorgan, Citigroup Third Quarters Not Terrible, But Still No Reason to Own Financials
Image: Banks and financials were among the most aggressively beaten down groups during the COVID-19 crash, and the sector failed to participate meaningfully in the bounce back. The leveraged and arbitrary nature of banking business models makes them much less attractive than entities with strong net cash positions on the balance sheet and solid expected future free cash flows. Source: Kastner, David, Charles Schwab. “Schwab Sector Views: Changes Are Coming.” 18 June 2020. https://www.schwab.com/resource-center/insights/content/sector-views. Better-than-feared third-quarter reports are not going to change our minds on the banking and financials sector. The group has been among the worst performing sectors amid the COVID-19 market crash and failed to bounce back meaningfully since the March bottom. Banks are being used as extensions of government fiscal intervention via myriad stimulus programs, while oversight puts a limit on just how much capital they can return to shareholders. Returns on equity remain subpar for many, and systemic risk remains present with most books opaque and intertwined within the global financial system. Cash flows for the group are largely arbitrary, and most remain leveraged by the very nature of their business models. We see no reason to own most banks and financials and point to fintech via PayPal and credit card processor Visa as our favorite ideas for indirect exposure to the global financial system.

Oct 13, 2020

Great Day in the Markets!
Image: The Invesco QQQ Trust, an exchange-traded fund based on the NASDAQ 100 index, had a great day during the trading session October 12, as it leads all major indexes on the year. The trading session October 12 was a sight to see. The Dow Jones Industrial Average advanced 0.88%, the S&P 500 jumped 1.64%, while the NASDAQ powered ahead an incredible 2.56%. As many of our members know, the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are very heavily weighted in large cap growth, big cap tech, and the NASDAQ.

Oct 12, 2020

Dollar General’s Promising Growth Outlook
Image Source: Dollar General Corporation – Fiscal 2019 Annual Report. We are big fans of Dollar General Corp and continue to like shares of DG as a holding in our Best Ideas Newsletter portfolio. After updating our discounted cash flow model, we increased the fair value estimate and the top end of our fair value estimate range for Dollar General. Under our “bull” case scenario, Dollar General now has a fair value estimate of $223 per share. Even if Dollar General surpasses the top end of our fair value estimate range, we prefer to let our winners run until their technicals turn against them. The latest 16-Page Stock Report covering Dollar General can be accessed here.

Oct 8, 2020

Nelson: I'm Not Worried About This Market
Image Source: The White House. President Donald J. Trump listens as U.S. Surgeon General Jerome Adams delivers remarks and urges citizens to wear masks in public at a coronavirus (COVID-19) update briefing. All things considered, not much has changed since our last update. I think the newsletter portfolios--Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio--are well-positioned for this market environment, our new options idea generation has been great, the Exclusive ideas have had tremendous success rates (we just closed another two winners recently), and we continue to add tremendous value in providing our work in full transparency for readers. Thanks for tuning in.

Oct 2, 2020

Our Thoughts on the Oil & Gas Industry
Image Shown: Crude oil prices, measured by the WTI benchmark, plummeted during the initial phases of the COVID-19 pandemic and have yet to fully recover. Declines in global crude oil prices have depressed prices for natural gas, natural gas liquids, and liquified natural gas as well. We expect that it will take some time for the oil and gas industry to truly recover, and hefty net debt loads combined with onerous dividend obligations are making that a very tough task. Juicy dividend yields are a sign of the headwinds facing the oil and gas industry and are not a sign of strong underlying strength in those firms that are paying out generous dividends. Most of the juicy dividend yields within the energy space are a sign of the stress facing those companies and the industry at-large, and we caution that the chance other oil majors follow Shell and BP in cutting their payout remains very likely. For instance, Exxon Mobil’s payout is simply not well-covered in the current raw energy resources pricing environment and the firm is taking on a lot of debt to cover those obligations. Chevron Corporation’s payout is also on shaky ground as it generated negative free cash flows during the first half of 2020 while carrying a large net debt load at the end of June, though like Exxon Mobil, Chevron’s management team has stuck with its current dividend policy so far. Like Shell, Chevron also grew its natural gas and LNG business meaningfully over the past few years, but that strategy did not pan out as intended.