October 31, 2021
The Valuentum Weekly is a brand-new weekly market commentary from Valuentum Securities, released each weekend in digital form. The Valuentum Weekly offers members a weekly synopsis of the markets and major events. It will be straight and to-the-point. Our goal is to deliver to you the latest information and insights. We welcome your feedback on how we can make the Valuentum Weekly as useful and as relevant for you as ever!

Markets
 
  • We set expectations low for last week's set of earnings reports, and sure enough there were a few disappointments. However, what we think readers should focus on is the resilience of the markets in the face of quarterly earnings disappointments at Apple (AAPL) and Amazon (AMZN), particularly in that the NASDAQ powered to new highs, with the Invesco QQQ Trust (QQQ) breaking out. The S&P 500 (SPY) also followed through nicely on a breakout, and we must say we continue to be pleased with equity share-price performance and the underlying valuation considerations of some of the strongest companies in the S&P 500. Though capital spending builds at Intel (INTC) and Facebook (FB) were a bit higher than the market's expectations, that these companies continue to spend is a net positive across the respective tech supply chains and helps to support the case for our continued bullish stance on technology equities. The increased spending coupled with fantastic quarterly reports from behemoths Alphabet (GOOG) and Microsoft (MSFT) might be why the market's underlying current remains positive, and why the NASDAQ has again surged to new highs. We remain bullish!
Image: The S&P 500 (SPY) made yet another new high, and while we still retain "protection" in the simulated newsletter portfolios, we can't be too disappointed with ongoing wealth creation from some of the strongest global multi-nationals. We remain bullish on stocks for the long haul.
Top News
 
  • Apple is not immune to the headwinds facing global supply chains, though its fortress-like balance sheet and stellar free cash flow generating abilities should enable the firm to ride out near-term hurdles with its bright growth trajectory intact. We are huge fans of the tech behemoth and continue to like shares of AAPL as an idea in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. To read our take on its recently-released earnings report >>
  • Microsoft has long been a favorite of ours. The technology giant continued its dominance into the first quarter of its fiscal 2022 (ends September) and guided the current calendar quarter revenue above consensus forecasts. Its free cash flow generation remains top notch, and its balance sheet is flush with net cash. Microsoft remains an idea in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. Shares have a dividend yield of ~0.8% at the time of this writing. The high end of our fair value estimate range of Microsoft stands at $360 per share. To read our take on its recently-released earnings report >>
  • Alphabet registered a 10 on the Valuentum Buying Index in January 2019 at just below $1,100 per share. Shares have launched to nearly $3,000 since then, and we continue to expect strong performance given the company’s tremendous free cash flow generation, huge net cash position, secular growth prospects in search advertising, and above-market fair value estimate that stands at ~$3,500. We like shares of this top-weighted position in the Best Ideas Newsletter portfolio. To read our take on its recently-released earnings report >>
  • Lockheed Martin (LMT) reported a terrible third-quarter 2021 report and offered a gloomy outlook, but there are still reasons to be optimistic. The company retains strong coverage of the dividend with traditional free cash flow and has a burgeoning backlog of $134.8 billion (2.04x expected 2022 revenue). Its acquisition of Aerojet Rocketdyne may breathe new life into an executive team that may need to sharpen its focus on delivering for investors, and it's hard to argue with the strength of its competitive position. We’ll be lowering our fair value estimate upon the next update, but investors are getting paid a ~3.4% dividend yield to wait for management to right the ship. The company retains its position in the simulated Dividend Growth Newsletter portfolio. To read our take on its recently-released earnings report >>
  • Facebook has changed its name and ticker symbol to Meta (MVRS), effective December 1. In this video, CEO Mark Zuckerberg explains his vision for the metaverse. Watch the video >> Facebook showed what it means to have a wide economic moat when it reported its third-quarter 2021 results. Robust revenue growth in the face of disruptive Apple iOS 14 privacy changes, impressive operating-income expansion in the face of considerable expense growth to build out the ‘metaverse,’ and cultural resilience in the face on a slew of media attacks on its business practices reveal that Facebook may be near-invincible. We’re huge fans of Facebook’s free cash flow generation capacity and its attractive net-cash-rich balance sheet, and we expect more good things to come from this top-weighted idea in the Best Ideas Newsletter portfolio. A huge new buyback authorization that we thought was in the cards in the wake of share-price weakness has arrived, and we love that Facebook is scooping up its undervalued stock. We’re maintaining our 10 rating on the VBI and $515 fair value estimate for shares. Read our take on Facebook's latest quarter >>
  • On October 26, Digital Realty Trust (DLR) posted third quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The data center real estate investment trust (‘REIT’) saw its GAAP operating revenues come in at $1.1 billion (up 11% year-over-year) and its non-GAAP core funds from operations (‘FFO’) per share come in at $1.65 per share (up 7% year-over-year) last quarter. Digital Realty also increased its guidance in conjunction with its latest earnings report, which we appreciate, as that signals the REIT is growing confident that it will exit 2021 on a high note. When taking into consideration Digital Realty’s ability to tap capital markets at attractive rates, we give the REIT a “GOOD” Dividend Safety rating as its adjusted Dividend Cushion ratio is near parity at 0.7, which factors in expected dividend growth over the coming years. Additionally, we give Digital Realty a “GOOD” Dividend Safety rating, underpinned by its bright cash flow growth outlook. The top end of our fair value estimate range sits at $186 per share of DLR, well above where Digital Realty is trading at as of this writing. To read our take on its recently-released earnings report >>
  • ExxonMobil Corporation (XOM) reported third quarter 2021 earnings on October 29 that beat both consensus top- and bottom-line estimates, aided by the uplift rising raw energy resources pricing had on its upstream (oil & gas production) operations, major improvements at its downstream (refining) operations, stable performance at its petrochemical operations, and ongoing cost control measures. The company announced a $10.0 billion share repurchase program slated to last for 12-24 months in conjunction with its latest earnings update, and additionally, ExxonMobil recently raised its quarterly dividend by a penny, bringing its payout up to $0.88 per share (or $3.52 per share on an annualized basis). ExxonMobil's stock page >>
  • Chevron Corporation (CVX) reported third quarter 2021 earnings on October 29 that beat both consensus top- and bottom-line estimates due to strength at its upstream (oil & gas production) and downstream (refining and petrochemical) operations. The company spent $0.6 billion buying back its stock on a net basis during the third quarter of 2021, according to its earnings press release. Chevron's stock page >>
  • Strong demand for "experiences" as COVID-19 lockdown measures ease in the US enabled The Walt Disney Company (DIS) to raise prices for its Disneyland resort operations in California. The Los Angeles Times reports that the daily ticket price increases range from 3%-8% alongside 20% increases in daily parking prices.
  • In case you missed it, you can find our latest thoughts on Schlumberger (SLB) here, Honeywell (HON) here, Intel (INTC) here, and Chipotle (CMG) here.
  • PayPal (PYPL) walked away from the rumored deal with Pinterest (PINS). We like that the deal fell through, but we remain somewhat cautious on why PayPal might have been looking in this area and (possibly) be willing to shell out tens of billions of dollars to make the transaction happen. We’re still bullish on PayPal, but we hope to learn more about strategic initiatives. PayPal’s stock page >>
  • Tesla (TSLA) topped $1 trillion in market cap on news that it would raise prices on its electric vehicle (EV) line-up. A $4.2 billion deal with Hertz (HTZZ) for 100,000 EVs also has investors buzzing over the company’s future prospects and what the deal means for potential accelerated consumer adoption of the brand. We think Tesla has pricing power given its unique niche and consumer perception, but shares look mighty pricey at current levels. Tesla’s stock page >>
  • One of our favorite new issues Portillo’s (PTLO) has taken off like a rocket ship, with shares jumping to a high of $46 per share after opening in the mid-$20s range. The stock closed at $38 per share Friday.
  • The Valuentum Exclusive publication continues its fantastic track record, closing two short-idea considerations last week after their stocks collapsed. Learn more about the Exclusive >>
  • Garbage hauler and Dividend Growth Newsletter portfolio idea Republic Services (RSG) reported excellent third-quarter numbers. We'll have more to say about the quarter early next week, and we continue to be huge fans of the name. Republic Services' stock page >>
  • Starbucks (SBUX) posted a rather disappointing fiscal fourth-quarter report on October 28 as the company failed to match the market's lofty expectations for comparable store sales. We like Starbucks, and we're keeping a close eye on the stock for potential addition to the simulated newsletter portfolios. Starbucks' stock page >>
  • McDonald's (MCD) continues to power ahead and posted an excellent third-quarter report on October 27. The fast-food giant noted that it is experiencing cost pressures, but we think menu price increases will be readily absorbed by hungry consumers. We like McDonald's, but the company's shares are a bit pricey. McDonald's stock page >>
  • Newmont Corp. (NEM) reported a difficult third-quarter report on October 28, missing the consensus forecast on both the top and bottom lines. Shares have faced pressure this year after peaking in May, but still yield an attractive ~4% at the time of this writing. Newmont's stock page >>
 
Economy
 
  • The initial estimate for third-quarter real gross domestic product (GDP) came in at 2% versus expectations of 2.7%. We're not concerned about the miss. The Bureau of Economic Analysis noted the following: "The increase in real GDP in the third quarter reflected increases in private inventory investment, personal consumption expenditures (PCE), state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment, federal government spending, and exports. Imports, which are a subtraction in the calculation of GDP, increased." The report >>
  • The Chicago PMI picked up after two months of declines. "Among the main five indicators, four were higher, led by Order backlogs and Employment. Only Production fell across the month." The report >>
  • Crude oil prices took a breather this week, but they put up a nice gain in October. The price of black gold now stands in the mid-$80s, helping much of the energy complex. The energy sector remains a small percentage of the S&P 500, however.
  • Industry leaders have been chatting about the idea of potential hyperinflation with Twitter’s CEO Jack Dorsey believing that “it’s happening,” and Tesla’s CEO Elon Musk noting that Tesla is experiencing “inflation pressures.” ARKK Invest’s Cathie Wood, while a Bitcoin bull, believes that instead deflation is a possibility, especially in areas heavily impacted by disruptive technologies. U.S. Treasury Secretary Janet Yellen, however, believes that the U.S. is not “about to lose control of inflation.” We welcome manageable inflation, and we've yet to see signs of hyperinflation.
  • "Holiday spending has the potential to shatter previous records." -- National Retail Federation
 
Valuations
 
  • We continue to be bullish on equity markets, with many of our fears during the most recent 5% pullback assuaged. The 10-year Treasury stands at a benign 1.56% at the time of this writing, suggesting a very healthy economy, modest inflation expectations, and low borrowing costs.
  • We've had a lot of report refreshes recently, and we'll be taking a deep dive in our technology universe in the coming weeks. Reports on companies in the Industrial Leaders Industry were among the most recent industry refreshes.
  • We continue to like large cap growth as the stylistic area where some of the strongest and most underpriced companies can be found. The Best Ideas Newsletter portfolio is heavily exposed to this particular area.
 
Fed and Treasury
 
  • The Federal Open Market Committee ('FOMC') is set to hold its next meeting this upcoming week on November 2-3. Various monetary officials have commented in the recent past that the Fed will begin tapering its quantitative easing ('QE') program in November 2021 in an attempt to tame rising inflationary pressures.
 
ETF News
 
  • Most of the ETF community continues to be fixated on developments with respect to Bitcoin ETFs, with the first couple Bitcoin futures ETFs beginning to trade in recent weeks. According to the WSJ, the "SEC won't approve (a) leveraged Bitcoin fund." We think an unleveraged futures ETF may be all the ground Bitcoin may gain for a while.
  • Since the publishing of the book 'Value Trap: Theory of Universal Valuation' in December 2018, a large cap growth index (SCHG) has outperformed a small cap value index (IWN) by over 80 percentage points, as of October 28 -- a huge win for readers.
 
On Deck
 
  • Next up are the November editions of the Dividend Growth Newsletter and High Yield Dividend Newsletter, to be released Monday, November 1.
  • We'll also be hosting an educational webinar series in the coming weeks. We'll have dates and times available soon. Let us know if you may be interested. Learn more here >>
We disclose the holdings of the portfolio of the Best Ideas Newsletter in this article. This portfolio can always be found in each edition of the monthly Best Ideas Newsletter.
Image Source: Valuentum
We disclose the holdings of the portfolio of the Dividend Growth Newsletter in this article. This portfolio can always be found in each edition of the monthly Dividend Growth Newsletter.
Image Source: Valuentum
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www.valuentum.com
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