Valuentum Exclusive Analysis for the Discerning Investor

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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 7, 2020

Update on Wuhan 2019 Novel Coronavirus Outbreak: 31,000+ Infections, 630+ Deaths
Image Source: 2019-nCoV, Centers for Disease Control and Prevention. The number of infections and deaths related to the Wuhan 2019 Novel Coronavirus has surged since our last update, but we maintain our view that investors should keep a level head. We continue to wait to add protection to the newsletter portfolios as the market absorbs a massive liquidity injection from the PBOC.

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

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.

Dec 27, 2019

Nike Is Generously Valued
Image Shown: Shares of Nike Inc have been on an upward tear in 2019; however, we think the market has now gotten ahead of itself. While Nike runs a great business, the firm is unlikely to realize the kind of growth rates required to justify its lofty valuation as of this writing. Should the company underperform for even one quarter, that could lead to a sharp correction in the share price of NKE. Nike is performing well in multiple categories, and the news that the US and China reached a “Phase One” partial trade truce further improves the company’s outlook. That said, Nike’s current market price is based on growth assumptions that are very unlikely to be realized, in our view. Should the company stumble for even one quarter, that could see a sharp correction in the share price of NKE.

Nov 3, 2019

Our Reports on Stocks in the Internet Content and Catalog Retail Industry
Image Source: Robert Scoble. We've optimized our technology coverage.

Oct 25, 2019

Amazon Contends with Rising Operating Expenses and Shrinking Gross Margins
Image Shown: Shares of Amazon Inc have stumbled so far in 2019 as the headwinds from rising tariffs, largely a product of the US-China trade war, combined with a competitive cloud computing landscape put downward pressure on its profitability levels. Amazon reported third quarter 2019 earnings after the market close on Thursday October 24 that underwhelmed investor expectations and saw shares plummet after-hours. However, shares of AMZN recovered somewhat throughout the trading session on Friday October 25. We don’t include Amazon in our Best Ideas Newsletter portfolio due in part to its high levels of operating leverage. Small changes in one’s valuation assumptions generally cause large swings in the intrinsic value estimates of a company like Amazon. We like Amazon’s long-term free cash flow generating potential, and our fair value estimate stands at $2,000 per share, but we are still staying away from the company for now. Amazon would have to be heavily discounted relative to the low end of our fair value estimate range (which stands at $1,500 per share as of this writing) before we could get interested in the name as a potential newsletter portfolio addition.

Sep 30, 2019

Economic Commentary: US-Listed Chinese Names, 60-40 Stock-Bond Allocation and More
Image shown for informational/illustration purposes only.  There’s an interesting saying that I came across recently...that hits at the most important component of any fiduciary approach: capital preservation. The saying was “Friends don’t let friends buy and hold.” We’ve always employed the Valuentum strategy, which we believe is much more promising that a traditional buy and hold strategy. – Brian Nelson, CFA

Sep 27, 2019

Alert -- Chinese Stocks Hit the Skids
Image Source: Michael Vadon. We don’t think US and China are anywhere close to any sort of meaningful trade agreement, regardless of what you hear from the White House. The latest move in this high-stakes trade war by the US may be to de-list Chinese stocks. This actually happening seems surreal given the implications on U.S. investors, but given weakness in US-listed Chinese names, the market is factoring in some probability of this occurring.