KO

Thinking Slow: 3 Research Blind Spots That Changed the Investment World

by

Dear members: — Daniel Kahneman in his text Thinking, Fast and Slow (1) divided the human psyche into two systems. The first system is instinctive and emotional, often set on autopilot, while the second system is slower and more logical, requiring a calculating conscious. Many of the maxims the investment world takes for granted today suffer from conclusions that are made rapidly, almost without thinking, driven by our first system, creating what I call research blind spots. — In World War II, Allied bombing raids were suffering from very high casualty rates. It was estimated that for those pilots that were flying at the beginning of the war, only about 10% survived, a terrible loss rate. Bombing was crucial to the Allied … Read more

3 Undervalued Stocks to Consider Buying Now

by

Dear readers:   With the markets retracing most of their recent drawdown, we’re taking a victory lap as we didn’t panic, nor should have you. We highlighted our wait-and-see approach amidst the worst of the pullback, and we expect the Magnificent 7 (large cap growth and big cap tech) to continue to propel the markets higher, as they have done.   We’ve been busy rolling valuation models as we finetune our assumptions for a great number of companies under coverage. While doing so, we came across three undervalued stocks that are also included in the simulated newsletter portfolios. We think they’re prime for highlight.   The three stocks are UnitedHealth Group (UNH), Nvidia (NVDA) and Alphabet (GOOG). We spend a lot of time on discounted cash-flow valuation, … Read more

Magnificent 7 Earnings Reports Not Bad Thus Far

by

By Brian Nelson, CFA   Shortly after Trump’s Liberation Day, where the President unveiled lofty tariffs on numerous countries, we released our wait-and-see outlook for the equity markets, which thus far has proven to be the right move, with the markets largely recovering from the depths reached in April. The S&P 500 (SPY), for example, is down just 3.3% year-to-date, excluding dividends.   A lot has happened since Liberation Day, including easing of tariffs to a 10% baseline for most, if not all, countries, with the key exception of China, where tariffs remain extremely elevated and prohibitive. Many countries are now reportedly negotiating trade agreements with the White House, and we expect China to be added to that list soon, even if … Read more

Trump Tariffs Higher than Expected; What We’re Doing

by

By Brian Nelson, CFA The Trump tariff increases came in larger than what we were expecting, and it remains to be seen how they will flow through the global economy, as we monitor potential retaliatory tariffs from other countries. As it relates to the equity markets, we’re taking a wait and see approach at the moment as we monitor new policy changes related to trade, immigration, fiscal (tax), and regulations. In short, we’re not overreacting to the sell off as we won’t have a great handle on the tariff impact to companies for a few quarters when they report results post-tariff increases. That said, we’re expecting continued market volatility, with meaningful risk to the downside, before trade uncertainty alleviates in … Read more

Berkshire Hathaway’s Operating Earnings, Free Cash Flow Fall in Third Quarter

by

Image: Berkshire Hathaway has reduced its stake in Apple and Bank of America. By Brian Nelson, CFA Berkshire Hathaway (BRK.A) (BRK.B) reported third quarter results November 2. Revenue edged down modestly on a year-over-year basis in the quarter, to $93 billion, while net earnings attributable to Berkshire Hathaway shareholders came in at $26.3 billion, up from a loss in the year-ago period as after-tax investment gains of $16.2 billion powered the improved performance. Image: Investment gains powered Berkshire’s third quarter results. After-tax operating earnings in the quarter, however, fell to $10.1 billion from $10.8 billion in the third quarter of 2023. Insurance underwriting experienced the biggest decline, with after-tax operating earnings dropping to $750 million from $2.4 billion in the … Read more

Coca-Cola’s Organic Growth Shines in Third Quarter

by

Image: Coca-Cola’s shares have done quite well the past couple years. By Brian Nelson, CFA Coca-Cola (KO) reported better than expected third quarter results October 23. Net revenue fell 1% in the quarter, but organic sales on a non-GAAP basis grew 9%. Comparable currency neutral operating income grew 14% in the quarter, as its comparable non-GAAP operating margin advanced 1 percentage point, to 30.7%. Reported earnings per share declined 7%, but comparable non-GAAP earnings per share increased 5%, to $0.77. On a consolidated basis, concentrate sales dropped 2%, while the company benefited from a 10% gain in price/mix in the third quarter. Organic revenue was particularly strong in Latin America (+24%) and North America (+12%) in the quarter, and the … Read more

An Important Measure of Leverage for Dividend-Growth and Income-Oriented Shareholders, One That Is Dividend-Adjusted

by

As more and more investors rely on company dividends for income, dividends, in our view, have become more debt-like commitments in nature, especially from the perspective of dividend-growth or income-oriented shareholders. Years ago, we rolled out a measure of financial leverage that considers both the company’s debt and the present value of its future expected cash dividend obligations, which, in the eyes of die-hard dividend-growth or income-oriented shareholders, may be implicitly assumed to be debt-like commitments in substance. We think this leverage ratio can be used in conjunction with the Dividend Cushion ratio to gain additional insight into the dividend-paying financial health of an entity. Note: There is often great confusion with respect to published measures of financial leverage, and … Read more

The Difference Between Speculation and Investment

by

Brian Nelson, President of Investment Research at Valuentum, discusses the difference between speculation and investment.  Brian Nelson, CFA: This is Brian Nelson from Valuentum Securities. I’d like to talk about the concept of speculation. I think it is best taught with a story perhaps, one of my personal experiences. I used to work on the buy side and one of the more interesting stocks that I pitched in my experience was a company called Synaptics (SYNA). This must have been in 2004-2005 — almost 20 years ago now. Synaptics made an interface for a number of electronic devices, and what it held was some of the technological building blocks for a click-wheel technology. About a year or two later following that … Read more

Paper: Value and Momentum Within Stocks, Too

by

Please select the image below to download, “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. To download the full report, please click here (pdf). ———- Actual results … Read more

Coca-Cola’s Organic Growth Surprises to the Upside

by

Image: Coca-Cola’s shares are trading near all-time highs. By Brian Nelson, CFA Coca-Cola (KO) reported solid second quarter results on July 23, with net revenues up 3% and organic non-GAAP revenues advancing an impressive and better-than-expected 15% thanks to a 9% increase in price/mix and 6% growth in concentrate sales. Reported operating income grew 10%, and comparable currency-neutral operating income jumped 18%. The company’s operating margin expanded to 21.3% versus 20.1% in the prior-year period. Its comparable operating margin (non-GAAP) was 32.8% versus 31.6% in the same period a year ago. Comparable non-GAAP earnings per share advanced 7%, to $0.84. During the quarter, organic growth was particularly strong in its Europe, Middle East, and Africa region as well as its … Read more