Valuentum Exclusive Analysis for the Discerning Investor

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Jan 22, 2022

Don’t Throw the Baby Out with the Bathwater
Image: Erica Nicol. Junk tech should continue to collapse, but the stylistic area of large cap growth and big cap tech should remain resilient. Moderately elevated levels of inflation coupled with interest rates hovering at all-time lows isn’t a terrible combination. In fact, it’s not bad at all. The markets are digesting the huge gains of the past few years so far in 2022, and the excesses in ARKK funds, crypto, SPACs, and meme stocks are being rid from the system. Our best ideas are “outperforming” the very benchmarks that are outperforming everyone else. The BIN portfolio is down 6.4% and the DGN portfolio is down 3.2% year to date. The SPY is down 7.8%, while the average investor may be doing much worse. Our timing to exit some very speculative ideas in the Exclusive publication has been impeccable. Beware of “best-fitted” backtest data regarding sequence of return risks. Research is to help you navigate the future, not the past. We remain bullish on stocks for the long haul and grow more and more excited as our simulated newsletter portfolios continue to hold up very well. Don’t throw the baby out with the bath water. Stick with the largest, strongest growth names. We still like large cap growth and big cap tech, though we are tactical overweight in the largest energy stocks (e.g. XOM, CVX, XLE). The latest short idea in the Exclusive publication has collapsed aggressively since highlight January 9, and we remain encouraged by the resilience of ideas in the High Yield Dividend Newsletter portfolio and ESG Newsletter portfolio. Our options idea generation remains ongoing.

Jan 21, 2022

Valuentum's Brian Nelson in CFA Institute's 'Enterprising Investor'
"The DCF model is not only relevant to today’s market, it remains an absolute necessity." -- Enterprising Investor

Jan 20, 2022

Dividend Growth Idea UnitedHealth’s Growth Story Expected to Continue
Image Shown: Shares of dividend growth idea UnitedHealth Group Inc have surged higher over the past year. The company put up solid performance in 2021 and its guidance for 2022 indicates that its growth trajectory is expected to continue. On January 19, UnitedHealth Group reported fourth-quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The company’s health insurance business is covered by its ‘UnitedHealthcare’ segment, and its health care provider business is covered by its ‘Optum’ segment. Virtually all of the firm’s revenues come from the U.S. It also reaffirmed its guidance for 2022 in its fourth-quarter earnings report. We continue to be impressed with UnitedHealth and include shares of UNH as an idea in the Dividend Growth Newsletter portfolio. Shares of UNH yield ~1.3% as of this writing.

Jan 19, 2022

Microsoft Is Buying Activision On Way to Becoming Video Game Giant
Image Shown: Microsoft Corporation is buying Activision Blizzard Inc, the largest buyout for a US tech firm ever. Image Source: Microsoft Corporation – January 2022 IR Presentation covering its acquisition of Activision Blizzard Inc. On January 18, Microsoft Corp made history by making an all-cash offer to purchase Activision Blizzard Inc for $95 per share. The boards of both companies have already approved the deal. Inclusive of Activision’s net cash position, the deal is worth $68.7 billion which makes it the largest buyout ever for a US tech firm according to CNBC. This deal is expected to close in fiscal 2023 (Microsoft’s fiscal year ends in June). Once it closes, assuming the deal pasts antitrust muster, Microsoft views the acquisition as being accretive to its non-GAAP earnings per share. Our fair value estimate of Activision will be updated to reflect a modest discount to the buyout price to incorporate the small probability the deal won't be completed due to antitrust concerns.

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.

Jan 11, 2022

Raising Our Fair Value Estimate on Berkshire Hathaway, Our Thoughts on the Insurance Industry
Image Source: AIG. Shares of the SPDR S&P Insurance ETF (KIE) have trailed the performance of the S&P 500 (SPY) during the past 15 years. Our favorite insurer remains Berkshire Hathaway (BRK.B), and we recently raised our fair value estimate of its B shares to $320, as of the latest update (effective January 12, 2022). The high end of our fair value estimate range for Berkshire Hathaway is $384 per share. Berkshire Hathaway is included in the simulated Best Ideas Newsletter portfolio as of this writing. American International Group (AIG) serves as an important cautionary tale of what could happen to an insurer that doesn't manage its risks effectively, and we wouldn't expect to add any pure-play insurer to the simulated Best Ideas Newsletter portfolio.

Jan 10, 2022

Public Storage Is Simply A Monster REIT Idea!
Image Shown: We examine the traditional operating metrics of the REITs with a focus on traditional free cash flow, dividends paid, and traditional balance sheet analysis where we assess net debt positions. Most REITs fail to cover their dividends with traditional free cash flow and boast huge net debt positions. Public Storage remains one of our very favorite REITs, however. Its free cash flow coverage of the payout and manageable financial leverage are exactly what we’re looking for. There are a number of industry-specific metrics that REITs use including funds from operations (FFO) and adjusted funds from operations (AFFO), but we think more traditional analysis helps to offer incremental insights while adding considerable informational value when used in conjunction with industry-specific REIT analysis. The REIT with the best combination of dividend yield, free cash flow generation in excess of cash dividends paid, and leverage (as measured by net debt divided by annualized traditional free cash flow) is Public Storage. The company’s self-storage peers are runners up with respect to our favorites, followed by the tower stocks American Tower and SBA Communications, and then timber REIT Weyerhaeuser.

Jan 10, 2022

High Yielding Philips 66 Has a Solid Plan in Place to Reward Its Shareholders
Image Shown: An overview of Phillip 66’s expansive asset base. Image Source: Phillips 66 – November 2021 IR Presentation. Demand for diesel and gasoline has largely recovered from the worst of the coronavirus (‘COVID-19’) pandemic, though kerosene demand (jet fuel) has a way to go given depressed levels of international travel. The refining giant Phillips 66 took advantage of the rebound seen over the past year to pare down its debt levels on a consolidated basis. At the end of December 2020, Phillips 66 had $13.4 billion in net debt (inclusive of short-term debt) on a consolidated basis, which fell down to $12.0 billion in net debt (inclusive of short-term debt) at the end of September 2021. Going forward, Phillips 66 now wants to focus on returning cash to shareholders as communicated during a January 2022 investor conference. Shares of PSX yield a nice ~4.6% as of this writing.

Jan 7, 2022

The Metaverse: Qualcomm Expands Partnership with Microsoft
Image Source: Qualcomm Inc – November 2021 Investor Day Presentation. A lot of attention has been directed towards the idea of a metaverse, which in short is an expansive digital universe where users can interact with one another via digital avatars of themselves (or whatever avatar the user prefers). This universe could, in theory, combine the functionality of computers and smartphones with almost every digital platform and application in existence. Users could perform both productivity-related activities (collaborating on work projects, holding team meetings, working with clients) and leisure-related activities (playing games with friends and family, meeting up with distant relatives, watching concerts, other live events, TV shows, and movies) in a seamless fashion. The user would not need to jump from digital platform to platform to access different applications. What the metaverse actually ends up looking like, assuming this concept materializes into something more tangible, remains to be seen. However, what is abundantly clear today is that tech companies are investing heavily to make this vision a reality. Meta Platforms, Qualcomm and Microsoft remain key players.

Jan 6, 2022

Best Idea Domino’s Has a Massive Growth Runway
Image Source: Domino’s Pizza Inc – Third Quarter of Fiscal 2021 IR Earnings Presentation. Domino’s Pizza runs a great business. Most of its store locations are franchised (~98% as of September 2021), meaning inflation cost headwinds fall more squarely on its franchisees. The company has put up great same store sales performance on both a domestic and international basis in recent fiscal years, and it continues to have an immense growth runway. Domino’s is a stellar generator of free cash flow, too, thanks to its asset light revenue model. We include shares of Domino’s as an idea in the Best Ideas Newsletter portfolio.