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 20, 2020

Newmont Posts a Great Earnings Report
Image Shown: A look at Newmont Corporation’s asset base, which is heavily centered on the Americas and Australia, with some exposure to West Africa as well. Image Source: Newmont – Fourth Quarter and Full-Year 2019 IR Earnings Presentation. On February 20, gold miner Newmont Corp reported a fourth quarter and full-year earnings report for 2019 that pleasantly surprised, with shares of NEM up sharply after the report during the trading session that Thursday. Back on January 13, we added a modest weighting of NEM shares to our Dividend Growth Newsletter portfolio as part of our pivot to more defensive names given rising exogenous headwinds to the global economy. While Newmont’s top-line marginally missed consensus expectations, its bottom-line handedly beat consensus expectations which is partially why investors were excited about the report. The other big reason shares of NEM march higher is likely due to Newmont noting its outlook had improved materially since closing on its Goldcorp acquisition and selling off some of its assets, as part of the normal portfolio optimization process one would expect after a major acquisition.

Feb 18, 2020

Newmont Updates Investors Ahead of Earnings
Image Source: Newmont Corporation – January 2020 IR Presentation. Back on January 13, we added Newmont Corp to the Dividend Growth Newsletter portfolio with a modest weighting as part of our shift towards more defensive names in light of rising exogenous headwinds to global economic activity. Some important considerations include Newmont increasing its quarterly payout to $0.25 per share from $0.14 per share, which is expected to be declared at the level in April 2020 (the fourth quarter of 2019 dividend, as management puts it, will be paid out in March 2020 at $0.14 per share). As of this writing, Newmont would yield ~2.2% at the new annualized dividend rate. We like Newmont’s dividend coverage and its Dividend Cushion ratio sits at a solid 2.2x, keeping in mind that ratio is based on its expected future dividend obligations (we have modeled in the large announced payout increase and single-digit annual payout increases on a per share basis going forward).

Jan 31, 2020

Coronavirus May Trigger Long-Anticipated Global Recession
Image: Wuhan New Coronavirus. This was the catalyst that nobody was expecting, a novel coronavirus that nobody had in their economic models. We think global economic activity is slowing as we speak, and the spread of the virus may only accelerate in mainland China and elsewhere. Investors should keep a level head and perhaps think about adding protection to their portfolios before it becomes too expensive.

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 16, 2020

Alcoa’s Turnaround Still a Work in Progress
Image Shown: It has been rough for Alcoa Corporation over the past couple of years as the company faces a slowing global industrial economy while trying to optimize its asset base and overall operations in a bid to save on costs. After the market close on January 15, alumina, aluminum, and bauxite product leader Alcoa Corp reported earnings covering the fourth quarter of 2019. The company’s top- and bottom-line results missed consensus expectations. Alcoa is trading at the lower bound of our fair value estimate range and shares appear fairly valued. With global industrial activity slowing down considerably, we aren’t optimistic on Alcoa’s outlook. Material asset base and operational changes will help, but there’s only so much that can be done given the firm’s looming liabilities. Even with the US-China semi-trade truce now in effect, Alcoa still has plenty of work to do to turn this ship in the right direction. We continue to stay away from Alcoa, but appreciate management attempting to bring down the firm’s net debt/liability burden via divestments and free cash flow.

Jan 10, 2020

Newmont’s Outlook is Bright Due to More Than Just Gold Prices Rallying
Image Source: Newmont – Third Quarter 2019 Earnings IR Presentation. Newmont Corp announced a huge boost to its dividend on January 6, with its quarterly payout growing by 79% to $0.25 per share from $0.14 previously. As of this writing, that’s good for a forward-looking yield of ~2.4%. Additionally, the company reiterated its commitment to buying back its stock now that the merger between Newmont and Goldcorp is firmly in the rear view mirror (Newmont Corporation used to be known as Newmont Goldcorp Corporation, a name that was shortened this year). We continue to like the name as one of the top gold mining plays.

Dec 3, 2019

Cleveland-Cliffs Buying AK Steel Through All-Stock Transaction
Image Shown: A tale of two charts, with Cleveland-Cliffs Inc in blue and AK Steel Holding Corporation in orange, after the announcement was that that the former would acquire the latter in an all-stock deal.On December 3, Cleveland-Cliffs agreed to acquire AK Steel Holding Corporation through an all-stock deal, creating a vertically integrated producer of iron ore and steel products in the US. Cleveland-Cliffs operates three iron ore mines in Michigan and Minnesota, along with a hot briquetted iron production plant in Ohio that’s under-construction, and AK steel operates steel mills in North America along with related facilities in Western Europe.