Valuentum Exclusive Analysis for the Discerning Investor

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Feb 27, 2020

Has the Stock Market Crash Begun?
Image: CDC. Transmission electron microscopic image of an isolate from the first U.S. case of COVID-19, formerly known as 2019-nCoV. The spherical viral particles, colorized blue, contain cross-section through the viral genome, seen as black dots.According to the latest Situation Report from the CDC, dated February 25, there are now more new cases reported from countries outside of China than from China. Globally, there are currently 80,000+ confirmed cases in nearly 40 countries, with China, South Korea, Italy and Iran the major hotspots. Up until now, investors have been anxiously waiting for the other shoe to drop (i.e. community spread in the United States), with the CDC even saying, “It's not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country (United States) will have severe illness.” Well, that “when” is now. The CDC just confirmed February 26, 2020, a possible instance of community spread of COVID-19 in the US.

Feb 24, 2020

ALERT: Adding Market Crash 'Protection,' Removing MSFT, BKNG
Image source: Centers for Disease Control and Prevention.  We're adding out-of-the-money put options to both the Dividend Growth Newsletter portfolio and Best Ideas Newsletter portfolio. We're removing Microsoft from the Dividend Growth Newsletter portfolio, and we're removing Booking Holdings from the Best Ideas Newsletter portfolio. We reiterate that, had the Dow Jones Industrial Average already swooned a couple thousand points on news of the COVID-19 outbreak, we might have considered some undervalued stocks with strong momentum potential "buying opportunities." However, to this point in time, the markets have largely ignored COVID-19, with major US indices still sitting near all-time highs. We could be in for a wild ride in the coming weeks and months, and an outright market crash is not out of question. For those looking for short-idea considerations, please consider the Exclusive publication here. We remain fully-invested in the High Yield Dividend Newsletter portfolio given its yield and income focus.

Feb 22, 2020

Is a Stock Market Crash Coming? -- Coronavirus Update and P/E Ratios
Image Source: World Health Organization, Coronavirus disease 2019 (COVID-19), Situation Report -- 32. We don’t think this is the environment to put new capital to work, and we remain highly cautious of what COVID-19 means for global economic growth not just in the first quarter of 2020 but for the rest of this year (maybe longer). Right now, the US markets are not really factoring in anything related to COVID-19, and perhaps may be adjusting to China’s stimulus in artificially propping up the markets as if the outbreak is somehow a “positive thing.” With the S&P 500 trading at 19.0 forward earnings estimates--estimates that are likely too high given the evidence we are seeing with respect to a slowdown due to COVID-19--and corporate debt levels more elevated than ever before (note, a high net debt level should depress the P/E in enterprise valuation--US corporate debt has advanced 50% over the past decade, to $10 trillion), it is our contention that the current market reflects a “situation-equivalent” forward P/E (i.e. rightsizing for new net debt relative to the dot-com peak and adjusting for lower forward earnings expectations compared with current forecasts) perhaps greater than 24.4, which was recorded at the peak of the dot-com bubble. Though interest rates are lower than they were at the time of the dot-com crash, suggesting a modest reasonable bump to normalized forward P/E ratios of ~15 times to reflect “fair valuations,” we could seriously be in for fundamental-driven crash soon, as both the earnings multiple and earnings estimates contract aggressively. Hypothetically, a contraction to a 16x forward multiple on earnings estimates just 10% lower than currently forecast implies an S&P 500 of 2,566, or a swoon of about 20%-30% from current levels--and that would just get us down to 16x still-respectable forward numbers. How quantitative-driven price-agnostic trading may impact this scenario is not known either, and all of this could be setting up for a wild ride in the coming weeks and months. Fasten your seatbelts. We’ll have a few newsletter portfolio alerts coming Monday.

Feb 10, 2020

Disney Reports Earnings and Provides an Update on the Novel Coronavirus Epidemic
Image Shown: Walt Disney Company recently reported earnings and provided an update as to what investors should expect going forward given the ongoing novel coronavirus epidemic in China. On February 4, Walt Disney reported earnings for the first quarter of its fiscal 2020 (period ended December 28, 2019). While Disney beat both consensus top- and bottom-line estimates, shares sold off modestly the next trading day over fears concerning the ongoing novel coronavirus epidemic (abbreviated as ‘2019-nCoV’) in China, and how that would impact its financial performance going forward. On January 13, 2020, we added shares of DIS to our Best Ideas Newsletter portfolio with a modest weighting given that shares were trading close to our fair value estimate at the time. However, we view Disney’s free cash flow growth outlook as very promising, which could see shares of DIS approach the high end of our fair value estimate range which sits at $168 per share. Additionally, we like its dividend coverage as its Dividend Cushion ratio sits at 3.1x, which supports a nice dividend growth trajectory as well. Shares of DIS yield ~1.2% as of this writing.

Jan 30, 2020

AT&T Continues to Follow Through With Its Mission
Image Source: AT&T Inc – Fourth Quarter and Full-Year Earnings Presentation. One of our holdings in the High Yield Dividend Newsletter portfolio, AT&T, reported full-year and fourth quarter results for 2019 on January 29. Shares of T sold off modestly on the mixed report (adjusted non-GAAP EPS beat consensus estimates but revenues fell short of expectations), and now shares of T yield ~5.6% as of this writing. We continue to like what we see in AT&T as management is delivering on major value creating initiatives: deleveraging, margin expansion, and ultimately free cash flow growth. More information on the High Yield Dividend Newsletter >>

Jan 23, 2020

Resetting Your Mental Model
Image Source: affen ajlfe. Having the right mental model and using the right information can be the reason why you win or lose in investing.

Jan 14, 2020

Disney Joins the Best Ideas Newsletter Portfolio
Image Shown: Shares of The Walt Disney Company have performed well over the past year, and we see room for additional upside. Media and entertainment giant The Walt Disney Company was just added to our Best Ideas Newsletter portfolio. Though the firm does not register the typically high Valuentum Buying Index rating that we would prefer with new additions (sometimes we have to relax criteria to achieve newsletter portfolio goals), we like Disney’s business model and its future free cash flows are underpinned by: a top quality intellectual property (‘IP’) portfolio that’s practically impossible to replace, the immense profitability of its theme parks (which benefit from its strong and ever-growing IP portfolio i.e. adding Star Wars-themed rides), its strength in streaming (Disney owns ~67% of Hulu and Disney+ has reportedly been a big hit initially), its position in live sports (one of the few reasons why households keep cable, or choose higher priced streaming packages) is top notch (ESPN, which Disney owns ~80% of, now has ESPN+ to offer incremental upside), and the company should be able to wring out synergies after buying 21st Century Fox (the deal closed in March 2019) through a ~$71 billion cash-and-stock deal.

Dec 27, 2019

Streaming Wars Roundup
Image Shown: Shares of Netflix Inc came under pressure around the same time that competition in the streaming video space really started to heat up. Those competitive headwinds are only going to build going forward. This is often referred to the start of the “streaming wars” which is what we’ll cover in this article.With so many competitors now entering the streaming space, it will likely become hard for companies to push through price increases unless they are truly producing top tier content. That will make covering enormous content creation liabilities a difficult but not impossible task. Our favorite companies in this space remain Apple and AT&T. Differentiation is possible in this industry but having a strong free cash flow profile (both Apple and AT&T’s free cash flows are simply enormous) is essential to having a chance.

Nov 5, 2019

Our Reports on Stocks in the Media Entertainment Industry
The media (entertainment) industry spans firms with diversified worldwide entertainment operations to those that specialize primarily in motion picture production and technologies. Firms with media network businesses compete for viewers with other networks, while companies with studio entertainment businesses compete with all forms of entertainment. A significant number of companies produce theatrical/television films, and success depends on unpredictable public preferences. The strongest participants will consistently create filmed entertainment and/or cable programming that consumers want. We’re neutral on the group.

Oct 23, 2019

Netflix Continues to Grow Paying Subscriber Count, Free Cash Flows Elusive for Now
Image Shown: Netflix Inc continues to grow its global net subscriber count as it pushes deeper into overseas markets and fends off rising competitive threats. Image Source: Netflix Inc – Third quarter 2019 IR presentation. While we doubt Netflix will generate meaningful free cash flows in the short-term given its large content investments and marketing spend, we think the company’s longer term trajectory is quite promising. Competitive pressures are building, however, and while growth ensues at the firm, we aren’t interested in shares of NFLX given its wide fair value estimate range (small changes in Netflix’s trajectory can have an outsized influence on its intrinsic value). That said, we see the company being able to stay a leader in the streaming race.