August 5, 2023

Dear members:

How is everyone doing?

I'm so happy for this year. Some of our favorite stocks have been on a tear year-to-date, including Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT) and more. Apple is up more than 45% so far in 2023, Alphabet is up over 43%, while Microsoft is up more than 36%. Over the past 5 years, Apple is up nearly 250%, Alphabet has more than doubled, while Microsoft has more than tripled. We've also recently put together an awesome streak of success in the Exclusive publication, too.

After the big bull run so far in 2023, however, we expect some profit-taking across the broader markets in the coming weeks to months, especially in light of bellwether Apple's fiscal third-quarter report, released last week, that served as a catalyst for selling in its shares and its technical breakdown. August could end up being a difficult month. But as with the end of 2021--heading into what eventually turned into a difficult 2022 for the markets--we're focused on generating alpha.

Last year, we carved out about 4-5 percentage points of outperformance relative to the S&P 500 (SPY) in the Best Ideas Newsletter portfolio. Had we not had the Meta Platforms' (META) debacle, the outperformance may have been close to 10 percentage points. The Dividend Growth Newsletter portfolio and High Yield Dividend Newsletter portfolio outperformed the market last year, too.

With the first few trading sessions of August being difficult and Apple's stock breaking down technically, I want to get ahead of what could be a challenging few weeks to months, telling you upfront that the risks of a market pullback have increased. We stuck with big cap tech and large cap growth during much of 2022 because we anticipated a huge run in these names this year, which has happened. The market may face pressure in the near term, but we're sticking with this exposure in anticipation of a great 2024.

Now, there may be some investors that might be looking to move to 'all cash,' but that's just not the call we're going to make. Without the benefit of hindsight, had we had to do things over again for 2021 and 2022, we're not sure that we'd do many things different. Who wouldn't be happy with 4-5 percentage points of outperformance in 2022 after a great 2021? A mitigated drawdown in 2022 combined with the run so far in 2023 is flat-out awesome. But it took patience, and a year can seem like an eternity sometimes!

We plan to provide a performance update soon as it relates to the newsletter portfolios for this year, but our top "weightings" have flat-out dominated, and for investors with a relatively longer time horizon, I think they are going to be pleased once we tally up where the Best Ideas Newsletter portfolio stands on a two-year lookback basis--inclusive of the drawdown in 2022. I don't want to jump the gun on the analysis, as our team has yet to put it together, but I have to think it's going to be pretty darn good.

That said, the probability of a pullback in the markets over the near term has increased meaningfully following Apple's fiscal third-quarter 2023 report last week, but again (just like at the beginning of 2022), we're not panicking. Had we "sold" everything at the end of 2021 (prior to the fall in 2022), we're not sure the performance would have ended up being better through today. Many that sold in 2021 and 2022 may still be looking to get back into the market.

We understand that many of our members are looking for more sophisticated ideas, and for that we have a variety of add-on publications. Through July 8 (we've yet to update the tables since then), the Exclusive publication had put up 17 straight monthly capital appreciation ideas that have worked out in a row. In addition to 2023, that covers almost all of 2022 when the markets faced considerable pressure. Be sure to add that publication to your membership here, if you haven't already. For those that have done so already, thank you.

As for areas we don't necessarily like over the next few years, we think utilities (XLU) will continue to face pressure due to competition from yields on fixed income assets, and we think it's worth noting why we don't like their dividends here. We'd be very cautious on most REITs (VNQ), and we think the area could face a substantial fallout as both consumer spending preferences online and work-from-home trends proliferate. We're still steering clear of most MLPs (AMLP) and banking institutions (XLF), the latter likely to experience pressure on ROEs in coming years.

What do we still like? Big cap tech and the stylistic area of large cap growth, of course. Their cash-based sources of intrinsic value remain phenomenal: net cash on the balance sheet and future expected free cash flow. But that said, in light of the massive run higher so far in 2023 in these two areas, a market pullback should be expected in the coming weeks to months, but we're staying the course--just like we've always done. Thank you so much for being here. Let's keep crushing it!

Kind regards,

Brian Nelson, CFA

President, Investment Research

Valuentum Securities, Inc.

[email protected]

Questions for Valuentum’s Brian Nelson >>

ICYMI: Best Idea Booking Holdings Soars!

Booking Holdings fits the mold of the type of companies that we’re looking for in this market environment. The company has an asset-light business model that is tied to secular growth trends, all the while it boasts a net cash position and significant free cash flow generation. The company’s outlook also speaks to continued strength as it relates to leisure demand, a key data point suggesting that the broad economic environment remains resilient despite rate increases and the erosion of excess consumer cash savings built up during the COVID-19 pandemic. The quarterly report was welcome news.

To continue reading >>

Image Source: Booking Holdings

ICYMI: Not Expecting Much From Consumer Staples Stocks

Though consumer staples equities have shown tremendous resilience in the face of adversity and their dividend yields can make sense in certain portfolios, the group is overflowing with net debt positions, meager long-term growth prospects, and free cash flow generation that is largely absorbed by growing per-share dividend liabilities. On the other hand, big cap tech and large cap growth have tremendous net cash positions and substantial future expected free cash flow generation, paving the way for what could be considerable long-term return potential. As with the last decade, we expect cash-based sources of intrinsic value to prevail, and for that, we continue to point to big cap tech and large cap growth as areas for consideration.

To continue reading >>

Image: Kellogg is representative of many consumer staples stocks that have considerable net debt positions. Image Source: Kellogg’s second-quarter press release.

ICYMI: Let’s Play Devil’s Advocate: What’s the Bear Case for Realty Income?

It’s helpful to challenge one’s thesis on a favorite idea every now and then, and we’ve done just that with Realty Income in this article. We see three areas of weakness at Realty Income that could challenge our bullish take on the name: 1) its retail exposure, 2) its financial leverage and arguably unwarranted investment-grade credit rating, and 3) the current rising interest rate environment. Perhaps the most compelling component of the bear case on Realty Income is its massive net debt position and present value of future dividend liabilities that dwarf its annual operating cash flow. The REIT business model isn’t as attractive as many make it out to be.

To continue reading >>

Image Source: Realty Income

U.S. Credit Rating Downgrade Won't Derail This Bull Market >>

ICYMI: We Removed Disney from the Best Ideas Newsletter Portfolio in November 2022

By Valuentum Analysts

The great second-quarter report from garbage hauler Republic Services (RSG) recently reminded us that it was probably a good move to swap Republic Services into the Best Ideas Newsletter portfolio in the place of Disney in November 2022.

Disney's shares are flat so far in 2023 while some of our favorite net-cash-rich, free-cash-flow generating powerhouses in big cap tech and large cap growth are up ~40%, ~50% this year! Republic Services, itself, is up more than 17% so far in 2023. What a great year 2023 is shaping up to be!

2022, last year, was a busy year for the newsletter portfolios as most sectors, save for the energy sector, struggled. Had one not had exposure to energy in 2022, one likely underperformed the market. Last year, the newsletter portfolios were heavy with Exxon Mobil and Chevron, even while Meta Platforms, PayPal, Digital Realty and Disney and others weighed on performance.

Any newsletter portfolio is going to have its share of losers at times (especially when the overall market is down), but it's a fantastic feeling to have put up relative outperformance in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in a very difficult market last year (relative to both the market-cap weighted S&P 500 and 60/40 stock/bond portfolio), while positioning the newsletter portfolios well for this huge rally in big cap tech and large cap growth this year!

In case you missed it, here is the note when we replaced Disney with Republic Services, from November 9, 2022:

We Replaced Disney with Republic Services in BIN Portfolio (Nov 9, 2022) >>

Summary (November 9, 2022): With content costs on the rise and the potential for the streaming business to become irrational as rivals fight for the incremental customer, Disney has a tough road ahead of it, in our view. Its ‘Parks, Experiences and Products’ segment is recovering nicely from the COVID-19 lockdowns, but losses in its ‘Media and Entertainment Distribution’ business remain very concerning in a difficult advertising environment. Disney has already cut its dividend payout, and while the firm remains free cash flow positive, we’re not fans of its massive net debt position. Our updated fair value estimate of Disney now stands at $93 per share, and it no longer fits the bill of a best idea. We’re replacing it with Republic Services in the simulated Best Ideas Newsletter portfolio. The change will be reflected in the next edition of the Best Ideas Newsletter.

Here are more of our thoughts on Disney during 2023 in case you missed them. We continue to follow the story closely, even though the firm is no longer included in any of our newsletter portfolios and while we no longer like shares.

Disney’s 5-Year Returns Have Been Pitiful (May 14, 2023) >>

Summary (May 14, 2023): Since the beginning of 2018, Disney’s shares have fallen, while the S&P 500 has surged. Though we liked the company more recently, as of November 2022, we no longer include shares in the Best Ideas Newsletter portfolio. Disney has its hands full with its feud with Florida Governor DeSantis, a weakening linear television market, and intense rivalries in the streaming market. All of this won’t be solved overnight and might even worsen. From where we stand, investors simply don’t need the complexity of the Disney story at this time, and the company’s 5-year returns tell the story of a troubled company. With shares of Disney largely fairly valued, we won’t be adding the company back to the Best Ideas Newsletter portfolio anytime soon.

Disney: Iger’s Back, Peltz Concedes, Thousands of Jobs Gone, Dividend Coming Back Soon (February 11, 2023) >>

Summary (February 11, 2023): Disney has a lot of work to do. The company’s Parks, Experiences and Products segment has recovered nicely from the worst of the COVID-19 pandemic, but pricing increases may put the experience out of reach for many. Disney+ subscribers may have peaked given that the company will begin to cut costs to the bone in an effort to stop the billions in cash burn. Disney ended the year with $8.47 billion in cash and equivalents and a massive $48.4 billion debt load. Investors are happy that Bob Iger is back and with the company’s plans to re-instate a modest dividend later this year, but we think former CEO Bob Chapek may have gotten a bad shake. Chapek took over the week of the huge COVID-driven market crash in February 2020 and led the firm through a once-in-a-century pandemic, only to be shown the door before his investments could ever be given a chance of bearing fruit. There’s more to this story than we’ll ever know, and we doubt that Disney or Iger will have much to say about it.

Image Source: Valuentum

Image: The first page of our 16-page report on Disney.

ICYMI: 17 Capital Appreciation Ideas in a Row! >>

Image: The area of large cap growth (SCHG), top, continues to trounce the market (SPY), as well as the areas of small cap value (IWN) and dividend growth investing (SDY). Performance in 2023 shown.

Microsoft is nothing short of net-cash-rich, free-cash-flow generating, secular-growth powerhouse!

Image: Microsoft's free cash flow has been phenomenal!

For the three months ended in June, cash flow from operations at Microsoft (MSFT) surged to $28.8 billion, while capital spending came in at $8.9 billion, good for free cash flow generation in the quarter of $19.8 billion (see image above). At the end of June, Microsoft held $111.3 billion in total cash and cash equivalents, exclusive of $9.9 billion in equity investments, and short- and long-term debt of $47.2 billion--good for a very nice net cash position. Net cash is an add-back to the present value of future enterprise free cash flows within the discounted cash-flow construct to arrive at equity value, so we continue to be big fans of companies with net cash on the balance sheet. Microsoft is nothing short of net-cash-rich, free-cash-flow generating, secular-growth powerhouse!

ICYMI: Johnson & Johnson Belongs in the “Too Hard” Bucket

Johnson & Johnson recently entered the “too hard” bucket for us. We dropped J&J from the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio on March 13 of the year, as we lost interest in the company given the uncertainties surrounding talc liabilities and the Kenvue split-off. We prefer simplicity across our newsletter portfolios, and J&J’s results have often been messy, to say the least. Though J&J's second-quarter 2023 performance, released July 20, was a bit better, we no longer have much interest in the name, given its net debt position and contingent talc liabilities. We’re also not interested in shares of its split-off Kenvue, having completely removed J&J from the newsletter portfolios prior to the split. We continue to prefer the areas of big cap tech and large cap growth.

To continue reading >>

What is a "Too Hard" Bucket? >>

Image Source: Johnson & Johnson

Image: REITs have performed terribly for the better part of a decade, and more difficult times may be ahead.

ICYMI: The Role of Luck in Investing and How To Think About It

For every Amazon that made it, there are hundreds, maybe thousands, from the dot-com era that didn't. Very few remember or, both of which went belly up during the dot-com meltdown. For every Tesla, there is a DeLorean Motor Co. We might have completely forgotten about DeLorean were it not for the blockbuster movie, Back To The Future, that immortalized its futuristic sports car. For every streaming enterprise like Netflix, there is a Napster that failed. Most of us probably don't even remember the original Napster, which encountered legal troubles before closing shop shortly after the dot-com bust. For every Alphabet, there's an AltaVista or Netscape. For every Apple, there is a Palm or Blackberry. Who remembers how popular the Palm Pilot and Blackberry were? How about the Motorola Razr? For every Facebook and Instagram, there is a Myspace or Friendster. As investors, we underestimate the role of luck in a company's long-term success. In February 2000, a month before the dot-com market crash, a fledgling Amazon raised $672 million in convertible notes to European investors. If the company hadn't done so, there'd likely be no Amazon today, and one of the wealthiest men in the world, Jeff Bezos, might have just been a mere footnote in stock market history. Amazon would have been insolvent in 2001-2002 just like many of its other dot-com peers.

To continue reading >>


ICYMI: McDonald’s, Chipotle, Domino’s Second-Quarter 2023 Results Solid

McDonald’s and Chipotle aren’t going away anytime soon, and we’re not at all discouraged by their respective second-quarter 2023 same-store-sales performance; CMG’s performance gave the market pause, but the sell-off in the burrito maker’s shares was mostly profit-taking (after a huge run up so far in 2023). McDonald’s is a perfect stock for the current inflationary environment, in our view, while Chipotle remains one of the best unit growth stories in the restaurant arena. Another one of our favorites, Domino’s has recently broken through its downtrend. We don’t expect to make any major changes to our fair value estimates of MCD, CMG, or DPZ, and we continue to like shares of all three in the Best Ideas Newsletter portfolio.

To continue reading >>

Image: Shares of McDonald’s, Chipotle and Domino’s have done well since the beginning of 2020, with Chipotle leading the pack.

ICYMI: "Bought” Low and “Sold” Low with Meta

Did you leave the classroom early?

There’s an old story about Albert Einstein--nobody has ever confirmed it to be a real story, but the moral of the story is a good one, so it’s worth sharing. It is said that Einstein once wrote the following, or something like it, on the chalk board in front of a class of students:

10 x 10 = 100

9 x 9 = 81

8 x 8 = 64

7 x 7 = 49

6 x 6 = 36

5 x 5 = 25


To continue reading >>

Image: Shares of Meta Platforms have been on a wild ride the past few years. We didn’t do well with the stock, unfortunately.

ICYMI: 17 Capital Appreciation Ideas in a Row! >>

4 REITs For Consideration >>

ICYMI: Questions for Valuentum’s Brian Nelson

Valuentum’s President Brian Nelson, CFA, answers your questions...

To read the Q&A >>

Image: President of Investment Research Brian Nelson, CFA

"What if I told you that almost everything you know about finance is wrong? The book Value Trap is the finance and valuation course you didn't get in school," President of Investment Research at Valuentum Brian Nelson says.

"The field needs to be almost entirely redefined in a forward-looking manner. Historical data is useless when it comes to asset pricing. It is future expectations that matter. In the age of Big Data, there may be no better book to guide investors than Value Trap."
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Valuentum Securities, Inc.
This email, its contents, and the reports or articles (links) or comments referenced or attached in this email are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of the reports, articles, Best Ideas Newsletter, Dividend Growth Newsletter, ESG Newsletter, Valuentum Exclusive publication, or any other communication and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the reports or articles and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at [email protected]. The Best Ideas Newsletter portfolio, High Yield Dividend Newsletter portfolio, ESG Newsletter portfolio, and Dividend Growth Newsletter portfolio are not real money portfolios. Any performance, including that in the Valuentum Exclusive publication, is hypothetical and does not represent actual trading. Past simulated performance, back-tested or walk-forward or other, is not a guarantee of future results. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. Valuentum is an investment research publishing company. No warranty or guarantee may be created or extended by sales or promotional materials, whether by email or in any other format. Further, this e-mail and attachments relating thereto, is intended for the abovementioned recipient. If you have received this e-mail in error, kindly notify the sender and delete it immediately as it contains information relating to the official business of Valuentum Securities Inc, which is confidential, legally privileged and proprietary to Valuentum Securities Inc.