Valuentum Exclusive Analysis for the Discerning Investor

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Apr 19, 2023

1Q 2023 Earnings Coming in Better Than Feared Thus Far
Image: We view valuation as a range of probable fair value outcomes. Our updated fair value estimate for Booking Holding stands north of $3,000, while shares are trading at less than $2,700. First-quarter 2023 earnings season has been coming in better than feared, in our view, and bank earnings have not spooked the market as many may have thought they would. But again, any banking crisis takes far more than just a month or two to work through the system, and in the event another shoe drops – whether in Europe or in U.S. commercial real estate or U.S. housing – things could get ugly for the banking sector. We continue to prefer equities over bonds, and as was shown once again during SVB Financial meltdown, the Fed was there once again to bail out the “market” and prevent contagion at any cost. With roughly 10% of the S&P 500 reporting first-quarter 2023 earnings so far, many companies have been beating consensus estimates.

Sep 8, 2022

LINK --> Massive Unrest In Europe, Energy Crisis Could Be the Catalyst to Topple the Global Markets
Europe is on the brink Over 70000 people came out in support of Russia in Prague and are forcing the Govt to resign for supporting Ukraine pic.twitter.com/lwMAjkBM2U — Mahesh 🇮🇳 (@Mahesh10816) September 3, 2022 The European energy crisis continues to unfold, and we’ve been keeping our members updated on this huge story. In the wake of the Russian invasion of Ukraine in February 2022, the European Union (‘EU’) along with key Western allies (such as the US, UK, Canada, Japan, South Korea, and Australia) imposed punishing economic sanctions on Russia to hinder its efforts in Ukraine and deter other nations from pursuing imperialistic land grabs. Russia retaliated by limiting the flow of various energy products to nations that imposed those sanctions. In particularly, energy flows from Russia to member nations within the EU were curtailed aggressively, with an eye towards France, Italy, and Germany along with Poland and the Baltic states (Latvia, Lithuania, and Estonia). Natural gas, crude oil, and petroleum product exports from Russia to EU member nations have tanked this year. The land war in Ukraine has not grown into a massive economic war in Europe, and this catalyst could be the one that topples the global markets.

Aug 14, 2020

Lloyds Banking Group Is Struggling Against the Tide
Image Shown: Lloyds’ first half results were pretty dismal indeed. Image Source: Lloyds 1H2020 Earnings Presentation. Lloyds Banking Group’s business model focused on being a “digitized, simple low risk, customer focused, U.K. financial services provider” sounds good on the surface, but uncertainty surrounding the U.K’s recovery makes this bank much more risky than some of its U.S. counterparts, in our view. Investors should take note the inherent leverage and riskiness of any banking business model, and Lloyds is no exception.

May 7, 2020

BNP Paribas’ Shares Could Have Upside Potential
Image Source: BNP Paribas 1Q2010 Earnings Presentation. BNP Paribas’ shares are trading at a fraction of tangible book. If the bank can contain its cost of risk through this cycle and produce double-digit returns on tangible equity on the other side of this crisis, shareholders would do quite well in such a scenario. That said, we point out that Europe is overtraded when it comes to banking, which pressures earnings power at even the stronger banks like BNP Paribas. We’re paying close attention to the key banking players in Europe to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19.

May 4, 2020

Lloyds Banking Group Navigates Competitive Markets
Image Source: Lloyds. The UK banking market is highly competitive with too many players, and we think this is the cause for the low returns on capital across the cycle. We’re paying close attention to the key banking players in Europe, including Lloyds Banking Group, to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19.

Mar 9, 2020

Oil Markets Get Decimated
Image Shown: Oil prices have been decimated year-to-date. The outlook for independent upstream names has become dire. In an industry that’s generated little to no free cash flow since 2010, and instead has relied heavily on capital markets to stay afloat; for all the hype surrounding surging US production of raw energy resources there hasn’t been much shareholder value creation to show for it. Consumers and certain US states have been big winners, sure, but equity holders and now potentially credit holders have largely taken it on the chin. We will continue following the space for our members going forward, and please note there’s a very good reason we removed the Energy Select Sector SPDR ETF from our newsletter portfolios back in August 2019 (link here), the outlook for the energy space (particularly oil & gas) was lackluster at the time and has since become dire.

Mar 9, 2020

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?
From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as downside probabilities such as a liquidity event are baked into the market price and at a higher probability. Because debtholders are higher up on the capital structure than equity holders, shareholders can sometimes get nothing in the event of a bankruptcy filing. Entities that are extremely capital-market dependent, or those that require ongoing access to new capital to fund operations, often face the greatest risk of the worst equity price declines during deteriorating credit market conditions.” Value Trap: Theory of Universal Valuation, published 2018

Mar 5, 2020

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?
Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that the decrease in spending is very real, and we’ve yet to see the brunt of the impact yet. We have written extensively about our valuation expectations and target on the S&P 500 in the past, so please don’t mistake this reference as the extent of our thinking. We do not think a sell-off on the S&P 500 to the range is 2350-2750 is too far-fetched, as it really only gets the broader markets back to late 2018 levels (a mere year ago or so), and reflects a reasonable 16x forward expected earnings, as of February 14, hair cut by 10% as a result of the impact of COVID-19. The Fed put may not matter much anymore in the wake of this “biological” crisis, and increased fiscal spending may not be enough to offset what could be sustained weakness across the global economy.

Mar 4, 2020

A ~0.1% Probability Since 1896
Image Source: Wikipedia Commons. "The market crash in the past two weeks has been truly historic: its probability of occurrence is ~0.1% since 1896; the velocity of the plunge and of the VIX surge is the fastest on record; and the 10-year [Treasury yield] is at all-time low. (Hao Hong, BOCOM International, a subsidiary of Bank of Communications, March 1)" -- Howard Marks' memo, Nobody Knows II

Mar 3, 2020

Covering Oil Markets Ahead of the Upcoming OPEC/OPEC+ Meetings
Image Source: Exxon Mobil Corporation – 2019 IR Presentation. On March 5, the Organization of Petroleum Exporting Countries (‘OPEC’) is holding an “extraordinary” meeting in Vienna, Austria, which will be followed up by a ministerial meeting between OPEC and non-OPEC members the next day. The group had already agreed to cut oil supplies by an additional 0.5 million barrels of per day (‘bpd’) back in December 2019 through an agreement that would last through March 2020 (that was on top of an existing deal to keep 1.2 million bpd off of the market which runs through the end of March 2020 as well). As part of that deal, Saudi Arabia offered to “voluntarily” reduce supplies by an additional 0.4 million bpd; however, that hasn’t been enough to prop up oil prices (even though ~1.7-2.1 million bpd of oil supplies are effectively removing removed from the market at 100% compliance). As of this writing, the internationally-oriented May 2020 Brent contracts are trading near $52 per barrel, down from the high $60s level seen at the end of 2019. The US-oriented WTI contracts haven’t fared any better, and April 2020 deliveries are trading near $47 per barrel as of this writing.