Valuentum Exclusive Analysis for the Discerning Investor

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Aug 9, 2024

Paper: Value and Momentum Within Stocks, Too
Abstract: This paper strives to advance the field of finance in four ways: 1) it extends the theory of the “The Arithmetic of Active Management” to the investor level; 2) it addresses certain data problems of factor-based methods, namely with respect to value and book-to-market ratios, while introducing price-to-fair-value ratios in a factor-based approach; 3) it may lay the foundation for academic literature regarding the Valuentum, the value-timing, and ultra-momentum factors; and 4) it walks through the potential relative outperformance that may be harvested at the intersection of relevant, unique and compensated factors within individual stocks.

Apr 7, 2024

Geopolitical Risks Driving Crude Oil Prices Higher
Image: Crude oil prices have staged a strong advance to start 2024. Geopolitical tensions continue to be elevated as concerns grow that the war in the Middle East could further escalate, and as the war in Ukraine continues to rage on. On April 1, Israel apparently staged an attack on an Iran embassy in Syria that killed several military officials, including three senior Iranian commanders. Iran has indicated that it would retaliate, and many are speculating that the possible attack may be on Israeli soil, which would further increase global tensions. Ukraine has also been actively targeting Russian energy infrastructure, cutting into Russia’s refining capacity.

Mar 20, 2024

Phillips 66 Hovering Near All-Time Highs, Shares Yield ~2.7%
Image: Phillips 66 continues to be very shareholder friendly returning cash in the form of share repurchases and dividends. Though crack spreads can be quite volatile at times, there’s a lot to like about Phillips 66. The company is targeting 2025 mid-cycle adjusted EBITDA of $14 billion, up from $10 billion in 2022. Cost savings should remain ongoing, with its target calling for a total of $1.4 billion in savings, implying the company has $200 million more in savings to go. We like its investment-grade (A3/BBB+) balance sheet and target for 2025 mid-cycle adjusted operating cash flow of $10+ billion, up from $7 billion in 2022, with expectations that it will return more than half of operating cash flow to shareholders. Phillips 66 is a quality income idea for investors seeking exposure to the energy space.

Oct 23, 2023

Kinder Morgan Now Covers Cash Dividends with Traditional Free Cash Flow
On October 18, Kinder Morgan reported third-quarter results that came in lower than expectations, but we’ve taken note of the company’s improved free cash flow generation that now runs in excess of its cash dividends paid, a huge change from a decade ago, where capital spending and cash dividends paid far outweighed its operating cash flow capacity. The company’s dividend stands at $1.13 per share on an annualized basis, and Kinder Morgan now has an forward estimated dividend yield of ~6.7%, which is quite attractive. Shares are trading meaningfully below our estimate of their intrinsic value, too, and we’re warming up to the company’s financials. Its net debt position likely precludes it from being added to any simulated newsletter portfolio at this time, however. Our $21 per-share fair value estimate remains unchanged.

Aug 17, 2023

3 High Dividend Yielders for Consideration
Image: Entities with large net cash positions and substantial free cash flow generation have outperformed not only the broader stock market, but also key high yield areas, including REITs, mortgage REITs and master limited partnerships during the past 10 years. Source: The respective ETF sponsors. The skills to successfully invest for long-term capital gains or long-term dividend growth are much different than those required for generating high yield dividend income. Income investing is a much different proposition. However, the skills do center on a similar equity evaluation process, but one that requires an acknowledgement and heightened awareness of considerably greater downside risks. Income investing, or high yield dividend income investing, should at times be considered among the riskiest forms of investing, as many high dividend-yielding securities tend to trade closer to the characteristics of junk-rated bonds than they do most net cash rich and free cash flow generating powerhouses that we like so much in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio.

Aug 9, 2023

Will Crude Oil Prices Hit $100 Again?
Image: US field production of crude oil is approaching record highs. Source: EIA. The next few weeks will likely see a rally in energy equities, but we note that U.S. field production of crude oil is approaching all-time highs and will likely eclipse all-time highs this year, given the pace of monthly year-over-year increases. With shale oil abundant and production still advancing nicely, the rise in crude oil prices this summer is largely of the speculative variety, in our view. We could see a run in black gold to the triple digits, but both supply and production remain healthy, and if crude oil prices reach the $100+ mark, we don’t see them staying there for long. We think investors are rotating out of this year’s big winners, a healthy consolidation, and we won’t be making any changes to the newsletter portfolios on account of what we believe is a temporary rotation into energy equities.

May 30, 2023

Phillips 66’s Stock May Be Volatile But Its Management Remains Very Shareholder Friendly
Image: Phillips 66’s shares have been quite volatile as refining margins ebb and flow, but shares are up nicely since the start of 2021 even as they’ve given up some ground so far in 2023. Phillips 66’s dividend yield stands at 4.4% at the time of its writing, and management remains committed to continuing to raise the payout, having done so as recently as its most recently reported quarter. Refining margins will continue to be volatile as feedstock costs fluctuate and prices at the pump vary, and while Phillips 66 retains a rather large total debt load, we think the risks are acceptable for this income generator. We continue to like shares as an idea in a well-diversified equity income portfolio.

May 17, 2023

Magellan Midstream Soars on Takeout Deal
Image: Magellan Midstream Partners soars on a takeout offer from ONEOK, Inc. We’re as happy as we can be to see a midstream energy master limited partnership (MLP) takeout. On Sunday, May 14, it was publicly announced that Magellan Midstream would be bought by ONEOK, Inc. in a cash and stock deal worth ~$18.8 billion including assumed debt. According to the deal terms, the transaction would give $25 per share in cash and 0.667 common share of ONEOK for each MMP common unit. Though many are questioning the rationale behind the deal, energy infrastructure rollups continue to reduce the number of energy MLPs trading on public markets, as we predicted years ago.

Apr 28, 2023

The Energy Sector Has Had a Great Run
Image: The energy sector was the top-performing sector during 2022. Exxon Mobil's and Chevron's first-quarter 2023 results were strong but as expected. The energy sector may have another good year or two in the next five-to-seven years, but our favorite areas for long-term investors remain large cap growth and big cap tech. Let’s say the only thing you ever read about investing was the book Value Trap, and after reading it, you decided to go long large cap growth and stay away from small cap value. You would be dancing right now.

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.