November 14, 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
 
  • It’s easy to forget how much we’ve been through the past two years. Often, we forget how helpful the warning that markets were going to crash was the weekend before they did on February 22, 2020, “Is a Stock Market Crash Coming? – Coronavirus Update and P/E Ratios,” how we thought dollar-cost-averaging made sense at the bottom in March 2020, and how we went “all-in” in April 29, 2020, “ALERT: Going to “Fully Invested” – The Fed and Treasury Have Your Back,” when we saw the writing was on the wall for this blow off top. If nothing else, these three moves alone during the past couple years have paid for a lifetime of subscriptions. Read: Hard Work and the Trust That Binds >>
  • The week of Veterans Day was a bit more volatile than usual given recent readings of inflation. We maintain our view that inflation looks to be manageable and is far from threatening given that the rate on the 10-year Treasury, a key benchmark rate for equity valuation models and bond prices, remains benign (1.57%). In some cases, 1) strong inflationary tendencies that translate into nominal economic earnings expansion and 2) little changes in interest (discount) rates within the valuation construct may make for a fantastic scenario for equity prices, help to drive them to new highs. We think investors should keep an eye on the 10-year Treasury rate as the key indicator for inflation expectations and not extrapolate recent CPI data.
  • We continue to like the stylistic area of large cap growth. We believe Alphabet (GOOG), a top "weighting" in the Best Ideas Newsletter portfolio that has soared almost 70% so far this year, remains one of the most attractive ideas. Online ad spending continues at a torrid pace, and we think Alphabet and Facebook, now Meta Platforms (FB), will continue to dominate the landscape. Alphabet and Meta Platforms are quintessential large cap growth names, with strong net cash positions and solid expectations for future free cash flow expansion. Large Cap Growth Has More Room to Run >>
Image: Since the inaugural publishing of the book Value Trap, an ETF that tracked large cap growth (top) has outperformed an ETF that tracked small cap value (bottom) by nearly 80 percentage points.
Top News

  • We knew something wasn’t quite lining up at digital-payments provider PayPal (PYPL) when the rumor mill started to turn with reports it was interested in scooping up Pinterest for a pretty penny. PayPal has since put to rest rumors about buying Pinterest, but it left investors with a sour outlook when it issued third-quarter results November 8. Though the market wasn’t happy with the forecast for the fourth quarter of 2021 and into 2022, the company continues to grow revenue at a robust pace, and we expect several key initiatives to drive sustainable top-line expansion for many years to come. We expect to make some tweaks to our fair value estimate in light of PayPal’s new outlook, but we’re sticking with our $300+ per share fair value estimate for now. The PayPal Wave Recedes, We Still Like Shares >>
  • On November 10, Disney (DIS) announced its fourth quarter earnings for fiscal 2021 (period ended October 2, 2021) that came in lighter than consensus expectations on the top- and bottom-lines. Subscriber growth at Disney's various video streaming services is slowing down versus the breakneck performance put up earlier on during the COVID-19 pandemic, though its 'Disney Parks, Experiences and Products' business segment is recovering at a robust pace as services spending continues to rebound and pandemic-related quarantine measures ease up. Disney's stock page >>
  • On November 12, Johnson & Johnson (JNJ) announced it was separating its consumer-facing operations (includes its band aid, skin care, oral care, and other offerings) from its medical devices and pharmaceuticals operations within the next 18-24 months to create two publicly traded standalone entities with greater operational focus. In the press release announcing the move, Johnson & Johnson stated that "it is expected that the overall shareholder dividend will remain at least at the same level following the completion of the transaction" and that the "new Johnson & Johnson would remain committed to maintaining a strong balance sheet and to its stated capital allocation priorities of R&D investment, competitive dividends and value-creating acquisitions." Johnson & Johnson's stock page >>
  • On November 6, the industrial and insurance conglomerate Berkshire Hathaway Inc (BRK.A) (BRK.B) reported third-quarter 2021 earnings. We liked what we saw in its latest earnings update as most of its business segments reported strong results, save for some of its insurance businesses which took a hit from major weather events and headwinds resulting from more drivers being on the road. Shares of Berkshire Hathaway Class B are included as an idea in the Best Ideas Newsletter portfolio. Best Idea Berkshire Hathaway Moving Higher! >>
  • ASML Holding (ASML) is a tremendous way to play the ongoing boom in semiconductor demand. The firm’s medium-term growth targets are fantastic and supported by surging net bookings for its photolithography systems. With a pristine balance sheet, shareholder friendly management team, stellar free cash flow generating abilities, and promising growth outlook, ASML Holding has a lot going for it. The company is a good fit for the ESG Newsletter portfolio, in our view, as ASML Holding scores well on our 1-100 (100 being the best) ESG rating system (94 out of 100). ASML Holding’s Bright Growth Outlook >>
  • Beyond Meat (BYND) has tumbled through our fair value estimate after reaching highs north of $200 per share earlier this year. We’re not making changes to our fair value estimate, which stands at $100 per share, but the company has seen better days. On November 11, the plant-based meat producer reported third-quarter earnings that came in below consensus estimates and issued forward guidance that was scoffed at by the market. We think the company serves an interesting niche as a food producer, but we don’t see it as a great fit in any of the simulated newsletter portfolios. Beyond Meat's stock page >>
  • New issue Rivian Automotive (RIVN) took the market by storm last week, surging to north of $130 per share at its highs. Its ~$110 billion market capitalization has a lot of investors worried that we are entering the “silly” phase of the stock market cycle. The company barely generates any revenue and has yet to hammer down a business model, but the market is nonetheless going electric-vehicle (EV) crazy if Tesla’s (TSLA) recent market action is any indication. CEO Elon Musk has been selling Tesla shares into strength, too, but mostly because he has a large tax bill.
  • Singles Day, November 11, or the largest physical retail and online shopping day across the globe, went off without a hitch. JD.com (JD) reported record revenue during the day, while both Weibo (WB) and Alibaba (BABA) put up solid numbers. We think the data point is highly encouraging as it relates to the health of the global consumer heading into the important holiday season. Alibaba, JD smash Singles Day record with $139 billion of sales and focus on ‘social responsibility’ >>
  • On November 9, General Electric (GE) announced it was separating into three different publicly traded standalone companies, effectively ending its industrial conglomerate business structure after steadily winding down GE Capital over the decade following the Great Financial Crisis ('GFC'). The new entities include GE Healthcare, a consolidated entity that includes GE's various energy and power operations (GE Renewable Energy, GE Power, and GE Digital), and a standalone GE focused on the aerospace industry. While GE Healthcare will operate as a standalone entity, GE will retain a 19.9% stake in one of its best run operations that historically has had a stellar free cash flow conversion ratio, according to a recent IR presentation. GE's stock page >>
  • On November 12, Toshiba (TOSBF) announced it was separating into three different standalone companies in conjunction with its latest earnings update. Toshiba intends to separate its infrastructure services business and its electronic devices businesses into new publicly traded entities, with the remaining Toshiba focused on Toshiba Tec (an office equipment manufacturer) and winding down its stake in computer memory manufacturer Kioxia (which may soon go public via an IPO according to Reuters).
  • While Zillow (ZG) is bowing out of the home flipping business, Opendoor Technologies (OPEN) is thriving (Opendoor operates a home flipping business driven by digital technology, algorithms, and solid operational execution). On November 10, Opendoor reported third quarter 2021 earnings that smashed past consensus top- and bottom-line estimates and the firm offered up favorable near term guidance for the current quarter.
  • Roblox Corp. (RBLX) soared last week thanks to a strong third-quarter report and talk about the "metaverse." From our IPO note about the company in March: "Roblox Corp. went public through a direct listing on March 10, 2021. The video game platform company has an extensive growth runway with multiple avenues to further expand its business. We are impressed with its free cash flow generating abilities, pristine balance sheet, and strong growth rates of late. Roblox’s outlook for 2021 indicates its growth story is expected to continue this year in earnest. Capital appreciation seeking investors should take a deeper look at Roblox, though we caution that its co-founder, CEO, and chairman controls most of the company’s voting power." To continue reading our IPO note >>
 
Economy
 
  • Recent readings of inflation reveal it is running a little hotter than many others were expecting, but we’re not worried and believe that inflation is positive for nominal earnings and equity prices, provided the 10-year benchmark Treasury rate remains benign. Here are a few highlights from the BLS release November 10: “The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in October on a seasonally adjusted basis after rising 0.4 percent in September…Over the last 12 months, the all items index increased 6.2 percent before seasonal adjustment. The monthly all items seasonally adjusted increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent. The index for all items less food and energy rose 0.6 percent in October after increasing 0.2 percent in September. Most component indexes increased over the month. Along with shelter, used cars and trucks, and new vehicles, the indexes for medical care, for household furnishing and operations, and for recreation all increased in October. The indexes for airline fares and for alcoholic beverages were among the few to decline over the month. The all items index rose 6.2 percent for the 12 months ending October, the largest 12-month increase since the period ending November 1990. The index for all items less food and energy rose 4.6 percent over the last 12 months, the largest 12-month increase since the period ending August 1991. The energy index rose 30.0 percent over the last 12 months, and the food index increased 5.3 percent.” To read the entire report >>
  • After spiking earlier this year, U.S. natural gas futures have faced some pressure, closing at a near two-month low. Russia seems to be pumping enough gas to Europe, while mild weather so far into the fall season has kept prices at bay. We’re monitoring developments across the energy resource pricing arena.
  • Gold (GLD) is making somewhat of a comeback, but prices of the yellow metal haven’t done much in a decade, while broader equity markets have soared. In any case, gold prices reached their highest levels in months this week. It remains to be seen whether crypto will replace gold as a inflation play. Here’s what Valuentum’s Callum Turcan had to say: “As it concerns cryptocurrencies, that would only impact gold in the sense that capital that would normally go towards gold and possibility silver in previous decades will now instead go towards the "virtual money" that is crypto. That might weigh on gold prices modestly, though I doubt it is the main culprit behind the headwinds that have pressured the price of gold (and the stock price of global gold miners). In my view, it is the political risks that investors are factoring in that is impacting many gold mining plays.”
  • The unemployment insurance weekly claims data hit the wire November 10: “In the week ending November 6, the advance figure for seasonally adjusted initial claims was 267,000, a decrease of 4,000 from the previous week's revised level. This is the lowest level for initial claims since March 14, 2020 when it was 256,000. The previous week's level was revised up by 2,000 from 269,000 to 271,000. The 4-week moving average was 278,000, a decrease of 7,250 from the previous week's revised average. This is the lowest level for this average since March 14, 2020 when it was 225,500. The previous week's average was revised up by 500 from 284,750 to 285,250.” To read the report >>
 
Valuations
 
  • Refreshed reports on the technology industry are on the docket this evening and tomorrow (Monday) morning. We’ve also made some changes to our intrinsic values for the following companies: LMT, INTC, NEM, SNAP, EL, CVS, F, NVDA. Let us know if you have any questions.
 
Fed and Treasury
 
  • Chair Jerome Powell recently offered opening remarks at the Conference on Diversity and Inclusion in Economics, Finance, and Central Banking. Read his remarks >>
  • Though the Fed will begin tapering this month, a pull back in some Treasury and mortgage-backed security purchases really won't impact the economy or stock market much at all. We believe the economy remains on solid ground and that the stock market may benefit from continued strong nominal earnings expansion and all-time low interest rates.
 
ETF News
 
  • As we've reiterated throughout this weekly write-up, we don’t think equity investors should worry too much about inflation at the moment, as stock investing tends to be a great way to offset inflationary pressures as nominal earnings advance. However, there are a few “U.S. Treasury Inflation-Protected Securities” ETFs that may be worth considering, if investors want exposure to this area. The largest is the iShares TIPS Bond ETF (TIP), which according to ETFdb, has amassed some $37.3 billion in assets under management. The Schwab U.S. TIPS ETF (SCHP) may be worth a look, too, but again, we believe equity investing remains the best way to hedge against rising inflation.
  • As expected, the SEC put the kibosh on VanEck’s plans to bring to market a spot Bitcoin ETF. We don’t think a spot cryptocurrency ETF will come to market anytime soon, if ever.
 
On Deck
 
  • The November editions of the Best Ideas Newsletter and ESG Newsletter will be released tomorrow, Monday, November 15.
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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Valuentum Securities, Inc.
www.valuentum.com
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