November 7, 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!

  • The equity markets continue to power ahead thanks to resilient calendar third-quarter earnings reports and a Fed that remains accommodative. The Dow Jones Industrial Average, S&P 500 and NASDAQ continue to hover around all-time highs. The stylistic area of large cap growth has been one of our favorite areas because of the strong net cash rich, free cash flow generating, secular growth powerhouses that make up much of the space. The image below is a rundown of the key Valuentum statistics for the top 15 holdings of the Schwab U.S. Large Cap Growth ETF (SCHG). We believe where large cap growth goes, so does the broader market, considering the hefty weightings of some of these stocks in other broad-based indices. Based on the high end of our fair value estimate range for this group of bellwethers, the broader U.S. markets still have room to run, to the tune of 7%+, despite the many highs already reached during 2021. Though traditional valuation multiples may seem stretched by most measures, many market bellwethers have huge net cash positions and tremendous free cash flow growth potential. We expect the equity markets to continue to be led by large cap growth.
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  • Meme stock trading is picking up again with abnormal activity coming from the likes of GameStop (GME), AMC Entertainment (AMC) and Bed, Bath and Beyond (BBBY). The meme stock frenzy has done a lot to reinforce the arbitrary nature of investing labels such as “value” and “growth.” Some “value” ETFs such as the Vanguard Russell 2000 Value ETF, the iShares Russell 2000 Value ETF, and the iShares Morningstar Small-Cap Value ETF include overpriced AMC Entertainment as a top weighting, for example. Though we point to large cap growth as our favorite investment area for consideration, our reasoning is based on the net cash rich, free cash flow generating profiles of such constituents. On the other hand, areas such as small cap value are highlighted by quantitative investors ("quants") as attractive based solely on the historical performance of the arbitrary subset of stocks derived by valuation multiple analysis, which falls short of a holistic approach to valuation. Quants and High-Frequency Trading the Real Cause of the GameStop Frenzy >>

Top News

  • We liked what we saw in the latest earnings reports from Chevron (CVX) and ExxonMobil (XOM). Both are focused on fiscal discipline and returning cash to shareholders in the form of dividend payments and share repurchases. Looking ahead, the outlook for the global energy complex is quite bright, and we continue to be huge fans of both Chevron and ExxonMobil. Please note we also include Energy Select Sector SPDR Fund ETF (XLE) as an idea in the Best Ideas Newsletter portfolio to gain diversified exposure to the recovering global energy complex. Our Favorite Energy Giants Chevron and ExxonMobil are Focused on Returning Cash to Shareholders >>
  • Cryptocurrency trading is all the rage these days, but when it comes down to it, the average consumer isn’t using crypto to pay for everyday goods and services. We believe fintech is a great way to play the firm foundations of asset-light, free-cash-flow generating entities that are exposed to crypto adoption but not pure plays to crypto’s success, which is far from guaranteed. Cloudy outlooks from Visa (V) and Mastercard (MA) regarding cross-border travel activity have many fintech investors somewhat cautious heading into 2022, but we couldn’t be bigger fans of the group. Visa and PayPal (PYPL) remain two of our favorite fintech ideas. FinTech Stocks Still Attractive, Market Overreacting to Visa’s Cross-Border Travel Outlook >>
  • Qualcomm (QCOM) remains a free-cash-flow generating juggernaut that has a very healthy dividend. Management surprised the market to the upside with its fiscal fourth-quarter report and guidance and indicated that supply chain issues are “playing out exactly as (they) planned,” as the firm expects supply and demand to be aligned by the second half of 2022. We were pleased by the news and are reiterating our $170 per share fair value estimate and the company as an idea for long-term dividend growth investors. Qualcomm Explodes Higher Towards Our Fair Value Estimate; Semiconductor Supply Chain Update >>
  • We’re huge fans of the waste-hauling industry, and we nailed one of the best-performing ideas in Republic Services (RSG) for the Dividend Growth Newsletter portfolio. Shares of Republic Services have advanced nearly 40% so far this year, and fundamental momentum has continued in its business, with the executive team raising both adjusted diluted earnings per share guidance and adjusted free cash flow guidance for 2021 when it reported third-quarter earnings. Shares yield ~1.4% at the time of this writing. Don’t Throw Out These Garbage Stocks >>
  • One of our favorite mining plays is the gold miner Newmont Corporation (NEM), which has producing assets around the world including in Australia, Argentina, the Dominican Republic, Ghana, Mexico, Peru, Suriname, Canada, and the US. Newmont has a robust development pipeline in those countries via new producing mines and expansion projects (roughly 88% of Newmont’s reserves are in the Americas and Australia), along with potential upside in Japan, Ethiopia, Colombia, and elsewhere. The company’s management team is incredibly shareholder friendly (its quarterly payout has grown from $0.14 per share in 2019 to $0.55 per share currently and the firm is actively buying back its stock), and Newmont’s free cash flow generating abilities are impressive. We like Newmont as an idea in the Dividend Growth Newsletter portfolio. As of this writing, shares of NEM yield a nice ~4.1%. Newmont’s Third Quarter Earnings Disappoints Though Management Remains Very Shareholder Friendly >>
  • Tesla’s (TSLA) share price continues to be extremely volatile as speculators pile into and out of the name. The stock is up over 50% in the past month alone, a huge move for a company with a $1.23 trillion market capitalization. More of what we prognosticated in the book Value Trap is coming to fruition. Here's what we said many months ago now ”...since the dawn of the new century, value-conscious investing, or investors that buy and sell on firm-specific intrinsic value calculations, has been slowing as index and quantitative investing have become a greater part of trading activity. The example of Longfin (in the book) shows how index investors (and those anticipating changes in index fund composition) drive share prices, and more pointedly, how indexing can create market inefficiencies, significantly in some cases and less materially in others. The example also reveals how price-agnostic trading could lead to huge losses, as Longfin would eventually become a penny stock, trading under a $1 per share by the end 2018. Several studies indicate that stock prices are being driven in part by their index membership and, by extension, the trajectory of other stocks in the index. What might a stock market look like if most trading becomes index or quantitative-related, driven by price-agnostic decisions that are largely dislocated from fundamental enterprise valuations? Could most stocks, even large caps, and maybe even an index fund such as that tracking the S&P 500 trade in such a volatile manner as that of Longfin? Probably not to such a degree, and probably not all the time, but only time will tell (Value Trap).” As we had predicted in the book, we’re starting to see abnormal levels of volatility in some of the largest stocks now.
  • Peloton Interactive's (PTON) shares were in free fall after it reported calendar third-quarter (fiscal first quarter) results, missing consensus expectations on both the top and bottom lines. The company followed up the weak quarterly results with disappointing guidance, and the news may be just the beginning of a further resetting of investor expectations lower. We’re not interested in catching this falling knife at all. As households are venturing back outside more and more after getting shut in during the earlier phases of the COVID-19 pandemic, demand for its exercise bikes and treadmills may continue to recede.
  • Zillow (ZG) is bowing out of the iBuying home space. Its attempt to build up a business that involves using algorithms to buy homes, repair them quickly, and flip them for a decent profit has run into numerous stumbles, and the company is now working towards selling off those homes at a sizable loss (Zillow took a ~$0.3 billion write-down on its iBuying business in the third quarter and expects to take another ~$0.25 billion write-down on this business in the current quarter as it exits the space). Shares of ZG have plummeted this past week.
  • Shares of Ford (F) moved higher this past week after the automaker reported a stellar third-quarter 2021 earnings report. Ford announced it was resuming its quarterly dividend in conjunction with its latest earnings update as its free cash flow performance has impressed of late.
  • "Congress passes $1.2 trillion bipartisan infrastructure bill, delivering major win for Biden" -- CNN Politics
  • U.S. Nonfarm Payrolls increased by 531,000 in October, coming in better than expected, while the September reading was revised up materially to 312,000. The unemployment rate fell to 4.6% from 4.8% in September, slightly better than what economists had been forecasting. The Employment Situation Summary >>
  • Crude oil prices continue to hover around $80/bbl, despite efforts by the U.S. to pressure OPEC-producing nations to increase production by more than originally planned. The 22nd OPEC and non-OPEC Ministerial Meeting concluded with no change to the existing production trajectory by OPEC-producing nations. We believe crude oil may continue to find support at these levels, and crack spreads may pinch the consumer at the pump this winter.
  • “Economic activity in the services sector grew in October for the 17th month in a row — with the rate of expansion setting a record for the fourth time in 2021 — say the nation's purchasing and supply executives in the latest Services ISM Report On Business.” To continue reading >>
  • “US service providers registered a steep upturn in business activity during October, according to the latest PMI data. The rise in output was the quickest for three months and was supported by a stronger expansion in new business.” To continue reading >>
  • 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 1.47% 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 Reserve issued an FOMC Statement on November 3. Here are some of the highlights: “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer's rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy continues to depend on the course of the virus.” To continue reading >>
  • FOMC Press Conference, November 3, 2021. Watch the video >>
ETF News
  • In the hopper is a new ETF from VanEck that seeks to invest more than 80% of its assets in “green metals companies,” defined as companies “involved in the production, refining, processing and recycling of green metals.” According to the SEC filing, “green metals are metals, including certain rare earth and strategic metals, used in the applications, products and processes that enable the energy transition from fossil fuels to cleaner energy sources and technologies. To be initially eligible for the Index, companies must generate at least 50% of their revenues from green metals or have mining projects with the potential to generate at least 50% of their revenues from green metals when developed.” Its ticker symbol will be GMET.
  • 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 -- a huge win for readers.
On Deck
  • Next up are the November editions of the Best Ideas Newsletter and ESG Newsletter, to be released 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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