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

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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

AT&T Expects Strong Free Cash Flow in Coming Years

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Image Source: TradingView By Brian Nelson, CFA On October 22, AT&T (T) reported mixed third quarter results with revenue missing the consensus forecast, but GAAP earnings per share coming in line with expectations. Revenue in the third quarter totaled $30.7 billion, up from $30.2 billion in the year-ago quarter, up 1.6%. AT&T benefited from higher Mobility, Consumer Wireline and Mexico revenues, strength that was partially offset by a decline in Business Wireline. Adjusted operating income in the quarter was $6.6 billion versus $6.5 billion in last year’s quarter. Adjusted EBITDA was $11.9 billion in the quarter versus $11.6 billion in the year-ago period. Cash flow from operating activities was $10.2 billion, consistent with the year-ago quarter, while capital spending dropped … Read more

AT&T Is Targeting Free Cash Flow in the Low-to-Mid $16 Billion Range for 2025

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Image Source: TradingView By Brian Nelson, CFA AT&T (T) recently reported second quarter results that came in better than expectations. Revenue came in at $30.8 billion versus $29.8 billion in last year’s quarter thanks to strength in mobility and consumer wireline revenue, while adjusted diluted earnings per share were $0.54 versus $0.51 in the year-ago period. Consensus was at $0.53 per share. Adjusted operating income came in at $6.5 billion versus $6.3 billion in same period last year, while net income was $4.9 billion versus $3.9 billion in the year-ago period and adjusted EBITDA was $11.7 billion versus $11.3 billion in the year-ago quarter. Cash flow from operating activities was $9.8 billion in the quarter, while free cash flow, excluding … Read more

AT&T Is Targeting $16+ Billion in Free Cash Flow in 2025

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Image: AT&T’s shares have performed well of late. By Brian Nelson, CFA AT&T (T) recently reported mixed first quarter results with revenue exceeding the consensus forecast, but non-GAAP earnings per share coming in slightly short of expectations. Revenue came in at $30.6 billion versus $30.0 billion in the year-ago period, while adjusted diluted earnings per share advanced to $0.51 from $0.48 in the year-ago period. Adjusted operating income was $6.4 billion versus $6.0 billion in the year-ago quarter, while operating cash flow totaled $9.0 billion, up from $7.5 billion a year ago. Free cash flow was $3.1 billion versus $2.8 billion a year ago. Management had the following to say about the quarter: Our business fundamentals remain strong, and we … Read more

3 Undervalued Stocks to Consider Buying Now

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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

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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

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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

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

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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

Paper: Value and Momentum Within Stocks, Too

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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

AT&T’s Dividend Coverage with Free Cash Flow Is Solid

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Image Source: AT&T By Brian Nelson, CFA On July 24, AT&T (T) reported mixed second quarter results with revenue coming up short of consensus, but non-GAAP earnings per share coming in line with what the Street was looking for. Revenue for the second quarter declined 0.4% on a year-over-year basis “due to lower Business Wireline service revenues and declines in Mobility equipment revenues driven by lower sales volumes.” Adjusted operating income came in at $6.3 billion versus $6.4 billion in the year-ago quarter. Net income attributable to common stock was $3.5 billion versus $4.4 billion in the same period last year. Adjusted earnings per diluted share was $0.57 versus $0.63 in the same period a year ago. Adjusted EBITDA improved … Read more