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
- In the shortened trading week due to the Labor Day holiday, the Dow Jones Industrial Average closed at 34,607.72, with the DIA off 2.1%.
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The S&P 500 closed at 4,458.58, with the SPY faring a bit better than the DIA, falling 1.69% on the week. From a technical perspective, the SPY continues to hold a strong uptrend, and we expect the broader market index to challenge, but bounce strongly off, technical support levels. The August Beige Book, released September 8, noted bullish product pricing trends that may translate into strong earnings expansion: "Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead."
- The NASDAQ held comfortably over 15,000 during the four-day work week, and we continue to like exposure in this area. The tech-heavy index closed at 15,115.49, with shares of the QQQ doing better than both the DIA and SPY, respectively, off 1.31% on the week.
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We continue to like the areas of large cap growth and big cap tech. Our favorites remain Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT), among other big cap tech giants, and we believe such names will remain the most resilient in any market correction, while leading the way in any bull market.
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Financial technology exposure remains a lucrative area, in our view. We generally don't like the traditional banks, and instead, prefer the likes of PayPal (PYPL) and Visa (V), the former advancing financial technology across the board, while the latter holds one of the strongest competitive advantages on the market, the network effect. We see little reason to include banking entities in the newsletter portfolios at this time.
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The real estate area remains one of the top performers so far in 2021, but it is among the worst performers during the past 5 years. The Real Estate Select Sector SPDR Fund (XLRE) has advanced over 28% on a year-to-date basis, but is up only ~46% during the past five years, on a price-only basis. By comparison, an ETF that tracks large cap growth has advanced more than 185% during the same five-year period. One of our favorite REITs remains Digital Realty (DLR): "Digital Realty Is a Stellar Income Growth Idea."
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There was a lot of news in the cryptocurrency market this week, with the Swedish central bank governor saying that crypto may collapse while equating it to "trading in stamps." SEC Chair Gary Gensler is working hard to issue regulations to safeguard investors in cryptocurrencies, with the agency recently releasing a Wells notice over Coinbase's (COIN) product Lend. Meanwhile, Bitcoin acceptance continues to increase with some of the largest restaurants beginning to accept the cryptocurrency in El Salvador, the first nation to adopt it as legal tender.
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Top News
- Microsoft noted that it has decided that it will not have U.S. employees return to its Washington state headquarters at this time as the Delta variant continues to spread and claim more lives. Here is the latest 'Interpretive Summary' of COVID-19 conditions from the CDC: "The United States recently surpassed 40 million COVID-19 cases since the start of the pandemic, with more than 4 million of these cases reported in the past few weeks. COVID-19 cases, hospitalizations, and deaths have generally increased throughout most of the country since the beginning of summer, fueled by the spread of the highly contagious Delta variant. Low vaccination coverage in many communities is driving these increases."
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Organizational consulting firm Korn Ferry (KFY) posted results for its first quarter of fiscal 2022 (period ended July 31, 2021) on September 8 that smashed past consensus top- and bottom-line estimates. Korn Ferry commented in the earnings press release that it had generated record quarterly fee revenue, the source of the lion’s share of its sales (alongside modest ‘reimbursed out-of-pocket engagement expenses’), and that its operating income, adjusted EBITDA, and diluted EPS all came in at all-time highs last fiscal quarter. The company’s business is rebounding strongly from the worst of the COVID-19 pandemic with room to run, "Best Idea Korn Ferry Posts a Stellar Earnings Update."
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Gold futures (Dec 2021) were weak during the Labor Day holiday trading week, closing at 1,788.2/oz. The case for gold as an investment continues to face pressure from the likes of cryptocurrency proliferation as the next generation of investors seems to prefer digital currency and inflation hedges. Newmont (NEM) is off roughly 5% so far this year, excluding dividends, but we still like some exposure to the yellow metal in the Dividend Growth Newsletter portfolio. Newmont yields close to 4%.
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Sonos (SONO), the maker of innovative speaker equipment that can link up to Alexa, said it will raise prices by 10% due to the semiconductor shortage. We continue to like the upward trend in product prices across sectors and believe this will favorably impact nominal earnings, and for companies with pricing power, real earnings expansion. We remain bullish on the prospects of manageable inflation.
- We're not reading too much into U.S. District Judge Yvonne Gonzalez Rogers' decision that ruled Apple cannot prevent game developers from bypassing its App Store. Noting that the change may "materially" impact operating results, Apple will appeal the injunction. Apple has far too many positive things going for it, including the impending launch of reportedly higher-priced iPhones, for us to be concerned at this juncture.
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Albemarle (ALB) has been one of the stronger-performing companies year-to-date, advancing more than 63% on a price-only basis. The company reaffirmed its outlook this week. Read our latest write-up on the company, "Dividend Aristocrat Albemarle Bets Big on Lithium."
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Meme-crowd favorite GameStop (GME) reported mixed fiscal second-quarter results this week and offered little in the way of new information on its conference call. We maintain our view that shares are significantly overpriced. GameStop's stock page >>
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Philip Morris (PM) updated investors at the Barclays Global Consumer Staples Conference this week. CEO Jacek Olczak had the following to say: “We remain on-track for an excellent performance in 2021, underpinned by better combustible volumes and continued strong demand for IQOS. We are today reaffirming our full-year EPS forecast and now expect to be toward the upper end of our 12% to 14% organic growth range. While the increased impact of the global semiconductor shortage is currently limiting our ability to realize the full potential of IQOS, the underlying momentum of the brand is clear – as evidenced by the positive early results for IQOS ILUMA in Japan following the launch last month.” Philip Morris' stock page >>
Economy
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The auto sector continues to suffer from the semiconductor chip shortage, with General Motors (GM) now expecting that it will manufacture 200,000 fewer vehicles in North America during the third and fourth quarters of 2021 than it did a year ago. China is not immune to the issues either, with auto sales in the country falling nearly 18% year-over-year during August, according to the China Association of Automobile Manufacturers. We think automaking will bounce back in the years ahead, and we think price for both new and used vehicles will remain resilient, padding both OEM and dealer bottom lines.
- Reuters, citing a report from Credit Karma, has noted that roughly one third of U.S. consumers that have been using the "Buy Now, Pay Later" functionality are behind on their payments. Though disconcerting, we're not reading too much into this credit development.
- The Beige Book for August was released September 8. Here's what was said about overall economic activity: "Economic growth downshifted slightly to a moderate pace in early July through August. The stronger sectors of the economy of late included manufacturing, transportation, nonfinancial services, and residential real estate. The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions. The other sectors of the economy where growth slowed or activity declined were those constrained by supply disruptions and labor shortages, as opposed to softening demand. In particular, weakness in auto sales was widely ascribed to low inventories amidst the ongoing microchip shortage, and restrained home sales activity was attributed to low supply. Growth in non-auto retail sales slowed a bit in some Districts, rising at a modest pace, on balance, across the nation. Residential construction was up slightly, on balance, and nonresidential construction picked up modestly. Trends in loan volumes varied widely across Districts, ranging from down modestly to up strongly. Reports on the agriculture and energy sectors were mixed across Districts but, on balance, positive. Looking ahead, businesses in most Districts remained optimistic about near-term prospects, though there continued to be widespread concern about ongoing supply disruptions and resource shortages."
Valuations
- 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.
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The refreshed 16-page stock reports and dividend reports, where available, for companies in the Disruptive Innovation industry can be accessed here. Reports for DE, DKS, DIS, and WSM have also been refreshed.
- The 10-year Treasury, a key benchmark rate used within discounted cash flow analysis, closed at 1.343%. The 10-year rate is slightly higher than the dividend yield on the SPY, which stands at ~1.25% on a trailing twelve month basis.
Fed and Treasury
- Fed officials Robert Kaplan (Dallas) and Eric Rosengren (Boston) were actively trading stocks during 2020. Though the trading activity didn't violate any Federal Reserve rules, both will sell all their stocks in favor of broadly-diversified vehicles.
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Echoing the chorus singing the same tune, Atlanta Fed President Raphael Bostic believes the Federal Reserve will start tapering this year, according to the WSJ. New York Fed President John Williams also noted that a reduction of asset purchases in the coming months may be appropriate. Many Fed officials continue to watch the impact from the Delta variant closely, however.
ETF News
- The Exclusive was released September 4, and we highlighted one of the most interested income ETFs around. Let us know if you may be interested in adding the Exclusive to your membership. The success rates of the publication continue to be phenomenal.
On Deck
- Next up: the first edition of the ESG Newsletter as well as the September edition of the Best Ideas Newsletter, both scheduled for release September 15.
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Subscribe to the new ESG Newsletter here >>
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We are huge fans of Alphabet and include Alphabet Class C shares (ticker: GOOG) as a top-weighted holding in the Best Ideas Newsletter portfolio. Our fair value estimate for Alphabet Class C shares sits at $3,500 per share, well above where GOOG is trading at as of this writing. Should Waymo, the company's self-driving unit, one day get commercialized, that upside is purely incremental to our fair value estimate, highlighting why we are such huge fans of the digital advertising behemoth.
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Image Shown: Shares of Alphabet Inc Class C have boomed higher year-to-date as of early-September 2021. We see ample room for additional upside. |
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Contact Us
Valuentum Securities, Inc.
www.valuentum.com
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