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.

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 20, 2019

Our Reports on Stocks in the Specialty Retailers Industry
Image Source: Mike Mozart. The specialty retail segment is fragmented, highly competitive, and economically-sensitive. The group covers a broad array of businesses and is dominated by retailers with large brick-and-mortar store footprints. Though some constituents may be insulated from e-commerce competition, others risk obsolescence as product distribution moves to digital means, and online retailers offer lower prices for identical goods and services. We're fairly neutral on the structure of the industry, though some constituents will inevitably face secular and permanent declines.

Dec 11, 2019

GameStop’s Problems Continue
Image Source: GameStop Corporation – Fourth Quarter Fiscal 2018 Earnings IR Presentation. On December 10, video game retailer GameStop Corp reported third quarter earnings for its fiscal 2019 (13-week period ended November 2, 2019) that were simply terrible. Shares of GME were down big after-hours on December 10. GAAP net sales were down 26% year-over-year last quarter, hitting $1.4 billion, while the company’s GAAP operating loss came in at ~$0.05 billion, an improvement versus an operating loss of $0.5 billion (due to a large goodwill impairment charge) in the same period last fiscal year. GameStop halted its common dividend program in the middle of 2019, which freed up substantial cash flow for share buybacks and deleveraging efforts. Investors looking to avoid disruptions to their dividend income streams should consider utilizing Valuentum’s Dividend Cushion ratio to avoid value traps (read more about the importance of our Dividend Cushion ratio here).

Dec 5, 2019

Best Buy’s Rebound Continues
Image Shown: Best Buy Co Inc has staged an impressive rebound over the past few years. This rebound was aided by significant investments in its digital presence, recognizing the core markets Best Buy wanted to target, and ultimately comparable store sales growth. On November 26, Best Buy reported third quarter earnings for its fiscal 2020 (three month period ended November 2, 2019) that beat both top- and bottom-line consensus estimates. Even better, Best Buy raised its guidance for fiscal 2020, largely on the back of stronger than expected same-store sales growth. Best Buy’s update helped send shares of BBY over our fair value estimate of $76 per share, and if this outperformance is sustained, the retailer may march towards the upper end of our fair value range estimate (which currently sits at $95 per share). Shares of BBY yield 2.5% as of this writing, and we like the firm’s dividend growth prospects. However, we caution that Best Buy remains very exposed to the US-China trade war, and we don’t include shares of BBY in our newsletter portfolios in large part due to the downside risks exogenous forces impose.

Nov 19, 2019

Berkshire Hathaway Invests in RH, a Quality Company in Our View
Image Shown: RH now counts Berkshire Hathaway Inc as a shareholder, which saw shares of RH initially spike up on the news. Having reviewed RH’s business model, capital allocation priorities, and financial position, it’s clear why Berkshire Hathaway would like the business. Strong free cash flows, rising margins, and a management team that’s very capable of adapting to shifting macro forces makes RH a quality company. We continue to like Class B shares of Berkshire Hathaway as a top holding in our Best Ideas Newsletter portfolio, and while its investment in RH is modest compared to a company as big as Berkshire Hathaway, this investment is a sound one in our view. Members interested in reading more about Berkshire Hathaway should check out our third quarter earnings review here---->>>>

Sep 5, 2019

Valuentum’s Economic Roundtable: Trade War, Factors and Beyond
The markets rallied hard September 5 on relief that the US and China will go back to the negotiations table next month. This back-and-forth news cycle is enough to give any investor whiplash. Let’s catch up with the Valuentum Team on the latest developments, not only with the trade war but also with respect to factor investing, possible bubbles and beyond.

Jun 25, 2019

Visa, Concentration Bets and Facebook's Gift
Image: In late December, we increased the position in Facebook (FB) while shares were in the mid-$130s. The stock is up huge since then.

Jun 24, 2019

Value Trap Is Winning And So Are You!
Image: Value Trap received acclaim at the prestigious Next Generation Indie Awards at the Mayflower Hotel in Washington DC. Shown: Value Trap at the American Library Association conference Headline Books booth June 22. 

Apr 4, 2019

Tesla and GameStop Face Selling Pressure After Notable Disappointments
Image Source: Kamil Murat Yılmaz.  Tesla reported a significant shortfall in its first quarter 2019 deliveries amid global distribution growing pains, which called in to question its ability to deliver on its reiterated guidance for 2019. Meanwhile, video game retailer GameStop continues to face challenges presented by headwinds beyond its control and expects its revenue contraction to accelerate in fiscal 2019. We’re not interested in shares of either company.