Valuentum Exclusive Analysis for the Discerning Investor

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Mar 3, 2020

Fed Cuts 50 Basis Points, Expect More Market Volatility Ahead
Image Source: FOMC. The emergency 50-basis point Fed rate cut announced March 3 was largely expected by the marketplace in light of growing economic concerns due to COVID-19, but it does nothing to immunize against COVID-19 and little to stabilize the situation. We continue to monitor the situation closely, and we expect ongoing volatility in the coming days and months as the situation with COVID-19 remains fluid. Having moved to defensive positions in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in January and having capitalized on the “crash protection” put, we are preparing for our next move. For now, we’re watching and waiting, and we encourage readers that have not yet picked up their copy of Value Trap to do so.

Mar 1, 2020

COVID-19 Crisis Intensifies
Image Source: CDC. Coronavirus Disease 2019 (COVID-19). The world is being challenged today by what some including Bill Gates believe might be a "once-in-a-century pathogen." We do not know the eventual outcome, whether the impact of this illness ends up being as profound as the Spanish Influenza of 1918-1919 (which inflicted a death toll in the tens of millions), but we maintain our view the markets have yet to come to grips with the impact of COVID-19 on economic activity and potential ramifications on the global economy and the banking system. What is currently a "biological" crisis may turn into an all-out global financial crisis, one that could end up worse than the 2008/2009 mortgage meltdown. Instead of toxic mortgages putting a halt to lending activity across the globe as they did over a decade ago, today's crisis stems from an illness that very few of the top health officials in the world know much about--not only in the duration of COVID-19's incubation period, but also in how easily it seems to be spreading, and how deadly it may eventually become, particularly if health systems around the world become overwhelmed.

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 17, 2020

Amazon Contests Microsoft Winning JEDI Contract
Microsoft Corp is a longtime holding in the Dividend Growth Newsletter portfolio and on top of posting great dividend growth historically--from the start of 2010 to the start of 2020, Microsoft’s quarterly dividend rose from $0.13 per share to $0.51 per share, and we see that trajectory continuing going forward--shares of MSFT have been on an upward tear and are up ~73% over the past year as of this writing. Microsoft now trades well above the top end of our fair value estimate range. However, we let our winners run until the technicals start turning against them in a meaningful way. As of this writing, shares of MSFT yield ~1.1% on a forward-looking basis.

Feb 5, 2020

Alphabet Reports Earnings and Its Fundamentals Remain Stellar
Image Shown: Shares of Alphabet Inc Class C, a top weighted holding in our Best Ideas Newsletter portfolio, continued their upward climb in 2019 and maintained their stellar trajectory. On February 3, Alphabet reported fourth quarter and full year earnings for 2019. The firm’s bottom-line beat consensus estimates, but Alphabet’s top-line miss sent shares modestly lower the next day on Tuesday, February 4. We continue to like Alphabet’s Class C shares as a top weighted holding in our Best Ideas Newsletter portfolio with our fair value estimate sitting at $1,440 per share of GOOG (under our base case scenario) and the top end of our fair value estimate range sitting at $1,800 per share of GOOG (under our optimistic case scenario that’s still deemed reasonable, in our view).

Feb 5, 2020

Amazon Posts Blowout Earnings, Shares Back Near 2018 Highs
Image Shown: After reporting fourth quarter earnings for 2019, shares of Amazon Inc have returned to their 2018 highs as of this writing. On January 30, Amazon reported fourth-quarter earnings for 2019 that handily beat consensus expectations. Shares of AMZN are now trading back near their highs first reached in 2018. We like Amazon’s growth trajectory but don’t include Amazon in the newsletter portfolios due to the enormous uncertainty in the company’s key valuation drivers, which has a magnified impact on changes in its fair value estimate. That’s a product of its high operating leverage. Even a ~50 basis point difference in its expected gross margins versus its realized gross margins, for example, could have a profound impact on its intrinsic value and ultimately share price performance. Our fair value estimate sits at $1,972 per share of Amazon, and our fair value estimate range sits at $1,479-$2,465 per share.

Jan 31, 2020

Microsoft Continues to Outperform After a Great Earnings Report
Image Source: Microsoft Corporation – Second Quarter Fiscal 2020 IR PowerPoint Presentation. We continue to be impressed with Microsoft’s fundamental performance, and that’s clearly being reflected in its technical performance as the market prices in an ever-optimistic outlook. It won’t be until Microsoft’s technicals turn against the company that we would consider removing shares of MSFT from the Dividend Growth Newsletter portfolio. We like to let our winners run, within reason.

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.