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
- The Dow Jones Industrial Average finished up last week, with the DIA advancing 0.65% thanks in part to reassurance from the Federal Reserve that it will continue to support the U.S. economy.
- The S&P 500 also finished higher during the five-day period ending last Friday, with the SPY jumping 0.57% on the week.
- The NASDAQ was weaker, with the QQQ falling 0.13% last week. Concerns about China's regulatory crackdown coupled with the SEC taking a hard look at cryptocurrencies have many tech traders on the defensive. We continue to like exposure to the NASDAQ, however, as it includes some of the strongest secular growth powerhouses.
- The cryptocurrency market is holding up, all things considered. China reported last week that it will make cryptocurrency transactions illegal, while former Treasury Secretary Lawrence Summers has called on the crypto industry to embrace regulation to ensure that criminal activity can be curbed. Meanwhile, the SEC is looking more broadly into whether crypto trading and lending platforms violate rules, more specifically whether crypto is a security and whether distributors should have registered before selling such currencies to the public. Bitcoin is trading at ~$43,800 at the time of this writing.
Top News
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We never like to see a 10-rated stock sell off, even if it’s up more than 30% so far this year and up over 140% since it registered a 10 on the Valuentum Buying Index in January 2019, but that’s what we’ve been closely following with Facebook (FB). The stock experienced similar selling pressure during the summer of 2018, and while we’re huge fans of this underpriced tech giant in the long run, we think shares may face more selling pressure in the near term. Nonetheless, we’re reiterating its 10-rating on the Valuentum Buying Index and our $515 fair value estimate. Shares closed Friday at ~$353 each. Read more >>
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Apple’s (AAPL) new iPhone 13 seems to be a hit in China already. According to the South China Morning Post, roughly 5 million pre-orders have been made in a little over a week. We remain bullish on Apple’s long-term prospects. Apple’s stock page >>
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Things at Cisco Systems (CSCO) are beginning to turn around and management made sure to highlight the company’s improving outlook during its big Investor Day event held on September 15. We include Cisco Systems as an idea in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios as the firm has a fortress-like balance sheet (i.e., large net cash position), tremendous free cash flow generating abilities, and its growth outlook has improved immensely since contending with serious headwinds from the worst of the coronavirus (‘COVID-19’) pandemic. Shares of CSCO yield ~2.6% as of this writing. Read more >>
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We view Honeywell International (HON) as one of the best industrial plays out there and include shares of HON as an idea in the Dividend Growth Newsletter portfolio. Honeywell has exposure to the aerospace and downstream energy markets--industries that were hit hard by the coronavirus (‘COVID-19’) pandemic but are now recovering in earnest--and to the proliferation of e-commerce and “smart buildings.” Furthermore, in the event that a bipartisan infrastructure bill currently awaiting approval in the US House of Representatives gets signed into law, Honeywell has exposure to the expected surge in domestic infrastructure investments. Our fair value estimate for Honeywell sits at $240 per share with room for upside as the top end of our fair value estimate range sits at $288 per share. As of this writing, shares of HON yield ~1.7%. Read more >>
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The commercial and military opportunities in the realm of space have been growing at a brisk pace of late, and in our view, the growth runway in this area is immense. Lockheed Martin Corp (LMT) is a giant defense contractor with a sizable space business that caters to national defense, governmental, and commercial needs. We include Lockheed Martin as an idea in the Dividend Growth Newsletter portfolio, and shares of LMT yield ~3.1% as of this writing. The company has four core business operating segments and ‘Space’ is one of those segments, which generates a sizable amount of its annual sales. Read more >>
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Adobe’s (ADBE) shares faced some selling pressure after it released a strong fiscal third-quarter report last Tuesday. The market was a bit concerned about the pace of annual recurring revenue growth, but it may have just been some profit taking given that shares are up ~25% year-to-date. The high end of our fair value estimate range is below where shares are currently trading, too. Adobe’s stock page >>
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FedEx (FDX) reduced its earnings expectations as a result of expense pressures when it released its fiscal first-quarter 2022 results. “Earnings per diluted share of $18.25 to $19.50 before the MTM (mark-to-market) retirement plan accounting adjustments, compared to the prior forecast of $18.90 to $19.90 per diluted share.” We think the cost hiccups at FedEx are solvable with shipping rate hikes, which should be expected. FedEx’s stock page >>
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General Mills (GIS) posted a solid fiscal first-quarter report on Wednesday, beating on both the top and bottom lines. Shares are about fairly valued and its Dividend Cushion ratio is solid, though we’d prefer measure to be a bit higher. Its shares yield a very healthy ~3.5%, however. General Mills’ stock page >>
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Disney (DIS) issued an update that revealed that it expects worldwide subscriber expansion for Disney+ to slow in the current quarter. CEO Bob Chapek said that the pace of increase will be a the “low single-digit millions,” which isn’t too bad, in our view. We continue to like shares of Disney in the Best Ideas Newsletter portfolio. Disney’s stock page >>
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Nike (NKE) reported mixed performance for the quarterly period ending August 31, 2021, as the firm noted that it had experienced supply chain issues, especially in Vietnam. We don't expect supply chain issues to persist indefinitely and believe Nike remains one of the top brands for long-term consideration. Nike's stock page >>
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McDonald's (MCD) upped its payout 7%, to $1.38 per share on a quarterly basis. Shares of the fast-good giant continue to roar higher. See McDonald's stock page >>
Economy
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Natural gas prices in the US measured by the Henry Hub benchmark based in Erath, Louisiana, have surged higher over the past several months. This is partially due to the slowdown in domestic oil & gas development activity that occurred back in 2020 in the wake of the coronavirus (‘COVID-19’) pandemic and low crude oil prices. Though crude oil prices, measured by the domestic WTI and international Brent benchmarks, have since recovered, that has not resulted in domestic drilling activity returning to levels seen in 2019, though development activity has recovered somewhat. Henry Hub futures are trading north of $5 per million British thermal units (‘MMBtu’) through February 2022 as of this writing, dropping just below $5 per MMBtu for March 2022 deliveries. Crude oil prices have also been strengthening of late. Booming Natural Gas Prices Great News for Chevron and ExxonMobil >>
- According to the National Association of Realtors ('NAR'), existing home sales in the US fell by 2% in August 2021 from July 2021 levels and were down 1.5% from year-ago levels. This indicates that the tight supply of housing and the related surge in housing prices seen since 2020 is starting to scare off some home buyers, in particular, first-time buyers.
- The Mortgage Bankers Association ('MBA') recently reported that for the week ended September 17, total mortgage loan application volumes in the US were on the rise (on a seasonally adjusted basis) after a Labor Day lull, seen through the 4.9% increase in its Market Composite Index from the prior week. This indicates that the pace of home sales in the US may pick up this month or next.
- The US Department of Labor reported that initial weekly unemployment claims rose to 351,000 on a seasonally adjusted basis for the week ended September 18, up 16,000 from the prior week's revised level. It appears the Delta variant of COVID-19 has slowed down the recovery in US employment somewhat, though we expect the domestic economy will continue to stage a robust rebound over the coming months.
Valuations
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No fair value estimate changes this week. The latest industry refresh was the Disruptive Innovation industry, which can be accessed here. Reports for DE, DKS, DIS, and WSM were also refreshed recently.
- The 10-year Treasury jumped higher on the week, closing at 1.454%. We're watching the 10-year Treasury rate closely for any unusual spikes, but our valuation models already factor in comparatively higher discount rates than what may be implied via spot measures.
- We continue to expect material earnings growth in S&P 500 companies, and while forward price-to-earnings ratios for the index as a whole are above historical norms, comparisons continue to be muddied by changed corporate tax policy, strong net-cash-rich balance sheets, and solid future expectations of free cash flow. We remain bullish on stocks for the long run.
Fed and Treasury
- The Federal Reserve communicated after its latest two-day meeting that the tapering of its monthly asset purchase program could begin as soon as its next meeting in early-November of this year. Additionally, there is a growing possibility that the Fed will begin raising its key short term interest rate benchmark in 2022 from its current near zero level. Here are some of the highlights from its FOMC statement, released September 22: "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 rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors. 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 Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."
- US Treasury Secretary Janet Yellen continues to push for Congress to either raise or suspend the federal government's debt ceiling. The federal government will soon run out of stopgap maneuvers to keep making good on its obligations without issuing more debt, something that is expected to occur this upcoming October if there is no movement on this front. We're not too concerned, however.
ETF News
- Crypto ETFs continue to be on top of the minds of issuers. Invesco and Galaxy Digital Holdings are the latest to team up to offer a suite of crypto ETFs. We’ll have to see how the crypto market evolves given recent commentary from the SEC, however.
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A new ETF that seeks to capitalize on deflation and potentially negative rates is now available, the Quadratic Deflation ETF (BNDD). We’re not interested in shares of the ETF as we believe economic conditions remain very healthy and inflation will remain manageable, if not a positive catalyst for long-term equity investors as nominal prices move higher.
On Deck
- Next up: Members to our additional options commentary should expect the second two options ideas for the month of September soon.
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One of our favorite high-yielding plays is Philip Morris International---5.0% yield---the tobacco giant behind the Marlboro cigarette brand (excluding the US market) and the incredibly popular IQOS product, a heated tobacco unit (‘HTU’) offering. Shares of PM are included as in idea in the High Yield Dividend Newsletter portfolio and as of this writing, Philip Morris’ stock price is up 23% year-to-date before taking dividend considerations into account. The top end of our fair value estimate range sits at $119 per share of Philip Morris, indicating there is ample room for shares of PM to run higher still.
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Image Shown: Shares of Philip Morris International Inc have performed quite well over the past year. |
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Contact Us
Valuentum Securities, Inc.
www.valuentum.com
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