October 24, 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
 
  • News last week wasn't great, and while the S&P 500 (SPY) hit new intra-day highs, disappointing reports from Snapchat (SNAP) and Intel (INTC) should have investors on high alert. Facebook will announce third-quarter results after the close Monday, the 25th, and investors should not expect much. We would not be surprised to see a big disappointment in light of the impact coming from Apple's (AAPL) iOS privacy changes, as revealed in the SNAP third-quarter release last week. However, much like what happened in 2018 when investors ran for the hills dumping Facebook stock, we're not panicking at all. We don't think online advertising is going away anytime soon, and we fully expect online advertising providers to move past the privacy issues with healthier ways of targeting customers in the coming 12-18 months, maybe even much sooner. For investors that didn't panic during 2018, Facebook has generated a trailing 5-year price-only return of ~146% versus the S&P 500 price-only return of 111.8%. When investors overreact to near-term noise, they tend to make poor long-term decisions, as we're sure many did during 2018 with Facebook.
Image: There's probably not much good in the Facebook report, to be released after the close Monday, given last week's Snapchat results and the read-through, but even with all the Facebook "bashing" from every direction, the company still has a healthy chart, with support at the 200-day moving average. Facebook remains an incredibly strong franchise supported by future free cash flow expectations and a net cash rich balance sheet. The chart actually looks quite healthy at the moment. We'll be poring through the report Monday, the 25th, after the market close.
  • The markets have recovered very nicely the past couple weeks as several of our concerns have been assuaged, not the least of which is risk to the reappointment of Fed Chair Jerome Powell (Biden seems to still be in support, despite the trading controversies at the Fed) and a U.S. government crackdown on Bitcoin, with the SEC allowing the trading of a couple futures-based Bitcoin ETFs for the first time in history, the first the ProShares Bitcoin Strategy ETF (BITO). We remain bullish on stocks for the long haul, though we note the intraday high/breakout on the SPY was not bought heavily. We would have liked to see a stronger breakout and follow through, but it's likely upcoming earnings reports have some investors sidelined.
  • Though we still retain the put option exposure on the SPY in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, it seems more and more likely that we potentially made an unforced error. Back in September 2020, we wrote about three things we learned while managing the simulated newsletter portfolios the past 10 years: #1) Stay largely fully invested, #2) Don’t layer on too much protection all the time, #3) Not prioritizing the cash-based sources of intrinsic value early on. With the recent addition of portfolio "protection" to the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, in the event the "protection" does not pan out, the move could trim some of the strength of the overall newsletter portfolio returns this year – not by much, but nonetheless, it looks to be an unforced error. We like that we’re consistent, however, and we may still be right, but we have to continue to be more selective with adding protection as we learned the past decade.
  • In the coming weeks, we’ll talk more about AT&T (T), which had been one of our favorite high yield dividend considerations prior to the announcement that it will rightsize its payout, but this idea may fall into the category of unforced error #3: Not prioritizing the cash-based sources of intrinsic value. Yes, we were blindsided by CEO John Stankey’s decision to rightsize the dividend payout (as was most of the market) given that he wrote he would support it in the firm's latest Annual Report (2/8/21). We had thought AT&T posed a nice risk/reward situation (despite its huge net debt position), but we nonetheless did not prioritize a net cash position with respect to this high-yield dividend idea--as is common for most leveraged high yield dividend considerations. AT&T’s huge net debt position opened us up to a disappointment (albeit a small one given the diversification of the High Yield Dividend Newsletter portfolio). We still like AT&T, but the pending right-sizing of its payout is somewhat of a black eye given how excited we were about its income prospects some months ago. That said, high yield dividend stocks are inherently risky (see here), and there aren’t many net-cash-rich entities that have lofty dividend yields, so something like T, where a CEO does a 180 on us, was bound to happen eventually. T will still have a very nice dividend payout after the right-sizing, but we’ll likely be looking to swap out the stock from the High Yield Dividend Newsletter portfolio in favor of a few energy plays in the coming weeks.
  • We believe that stock selection can lead to better returns than traditional asset allocation methods. For example, a 60/40 stock/bond portfolio vastly underperformed an active stock selection process that only matched the SPY to the tune of ~120 percentage points the past 10 years, all before any additional fees that might be layered on during the rebalancing process. We care less and less about holdings-based analysis and care more and more about delivering great ideas that build long-term wealth and income potential with an eye toward risk management via stock selection. In this endeavor, we believe enterprise valuation, the discounted cash flow process, remains highly relevant to achieving long-term investment success. Please read more about the importance of net cash rich and free cash flow generating powerhouses, which dominated the last decade in the form of Apple and Microsoft (MSFT), and how those that held huge net debt positions and generated meager free cash flows relative to dividend payments such as the master limited partnership ("MLP") arena suffered -- all of this in the second edition of the book Value Trap >>  

Top News
 
  • On October 19, Johnson & Johnson reported third-quarter earnings for fiscal 2021 (period ended around the end of September 2021) that missed consensus top-line estimates but beat consensus bottom-line estimates. The healthcare giant also raised its full-year guidance (again) for fiscal 2021 as its ‘Pharmaceutical’ segment is growing at a robust pace, its ‘Medical Device’ segment is steadily recovering from the worst of the coronavirus (‘COVID-19’) pandemic, and its ‘Consumer Health’ segment is holding up well. We continue to like Johnson & Johnson as an idea in both the Best Ideas Newsletter portfolio and the Dividend Growth Newsletter portfolio. To read our write-up on J&N's third-quarter earnings >>
  • Facebook announced that it would rebrand its namesake, looking to help critics put into perspective that its Facebook property is but one under an umbrella of stellar platforms that include Instagram, WhatsApp, Oculus, and others. The move follows that of Google, which changed its name to Alphabet (GOOG) some years back. We think the name change will be a positive for perception, and we hope Facebook will continue to improve its business practices, which will only strengthen its economic moat. Facebook remains one of our favorite ideas. Here is its stock page >>
  • It was reported that PayPal (PYPL) is interested in purchasing Pinterest (PINS) for $45 billion. The investment bankers may make a strong case for this deal, but with PayPal being an idea in the Best Ideas Newsletter portfolio, we don’t like it at all. We’d rather PayPal focus more intensely on cryptocurrency adoption than trying to make inroads into social retail. Pinterest may make more sense for a brick-and-mortar retailer than a payments processor, in our view. We’re watching developments closely and hope this deal falls through.
  • Magellan Midstream Partners L.P. (MMP) announced this past week that the master limited partnership ('MLP') was modestly increasing its quarterly distribution, bringing it up to $1.0375 per unit, and had just authorized an additional $0.75 billion in equity repurchasing authority after recently completing its previous equity repurchase program. The new equity repurchasing program is set to run through 2024, and these events highlight management's growing confidence in Magellan Midstream's near-term outlook as the global energy complex continues to recover.
  • Netflix Inc (NFLX) reported third-quarter 2021 earnings this past week that saw the firm add 4.38 million net paying subscribers to its operations last quarter. The incredibly violent TV show Squid Game played a role here as Netflix noted that it represented "our biggest TV show ever" in its earnings press release.
  • On October 20, the electric utility firm NextEra Energy (NEE) reported third-quarter 2021 earnings that missed consensus top-line estimates but beat consensus bottom-line estimates. The company reaffirmed its medium-term guidance in conjunction with its earnings report. We include shares of NEE in the ESG Newsletter portfolio and continue to be huge fans of the name. NextEra Energy’s capital appreciation and dividend growth upside potential is quite substantial. Our fair value estimate for shares of NEE stands at $102 per share with room for upside, as the top end of our fair value estimate range sits at $124 per share of NextEra Energy. Shares of NEE yield ~1.8% as of this writing. To read our take >>
  • On October 21, Chipotle Mexican Grill (CMG) reported third-quarter 2021 earnings that beat both consensus top- and bottom-line estimates. Comparable restaurant sales grew 15% year-over-year last quarter as Chipotle’s e-commerce business held up well, with digital sales up 9% year-over-year (representing 43% of its total sales during this period), while customers resumed in-store dining activities in earnest. We liked what we saw in Chipotle’s latest earnings report. Shares of CMG are included as an idea in the Best Ideas Newsletter portfolio. To read our note >>
  • Crocs, Inc. (CROX) put up excellent third-quarter results and raised the low end of its guidance for fiscal 2021. We’re not completely convinced that this is a sustainable story, but the company’s fundamentals continue to strengthen. The stock doesn’t fit into too many portfolios, but it may be one for the ultra-speculative to consider. The high end of our fair value estimate stands at $190. Crox’s stock page >>
  • Kinder Morgan Inc (KMI) reported its third-quarter 2021 earnings this past week and raised its quarterly dividend by 3% on a year-over-year basis in conjunction with the report. The energy infrastructure company benefited from surging exports of US natural gas supplies, with an eye towards liquified natural gas ('LNG') export complexes along the Gulf Coast region (there is also an operational LNG export facility in the East Coast known as the Cove Point LNG facility) and pipeline exports to Mexico.
  • International Business Machines Corporation (IBM) reported third-quarter 2021 earnings this past week that disappointed investors as its company-wide revenue growth largely stalled, though its cloud-oriented businesses showed some signs of life. The company continues to progress towards separating its legacy business, Kyndryl, from its faster-growing operations, and we covered the planned separation in great detail here >>
  • On October 20, HP Inc (HPQ) announced guidance for fiscal 2022 that among other things called for the firm to generate at least $4.5 billion in free cash flow that fiscal year. Furthermore, HP noted that it "expects to return at least 100% of fiscal 2022 free cash flow to shareholders through dividends and share repurchases" which is largely why HP recently boosted its annualized dividend payout up to $1.00 per share (representing a 29% sequential increase).
  • Former President Donald Trump's new SPAC, Digital World Acquisition Corp (DWAC) has been turning some heads. Here's the press release >>
  • Dividend Growth Newsletter portfolio idea Honeywell (HON) reported decent third-quarter results but had to trim its forward guidance due to supply chain issues. We're not too worried about the news and maintain our view that Honeywell is one of our favorite industrial considerations for dividend growth. Honeywell's stock page >>
 
Economy
 
  • The Federal Reserve released its Beige Book for October. Here are some of the highlights: "Economic activity grew at a modest to moderate rate, according to the majority of Federal Reserve Districts. Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19...Employment increased at a modest to moderate rate in recent weeks, as demand for workers was high, but labor growth was dampened by a low supply of workers...Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks. Price pressures also arose from increased transportation and labor constraints as well as commodity shortages."
  • The National Association of Realtors reported that existing home sales advanced at an annual rate of 7% in September from August. The median existing home sales price leapt 13.3% on a year-over-year basis. We like the continued momentum in the housing market, though we expect things to slow a bit as we head into the winter months.
 
Valuations
 
  • 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.
 
Fed and Treasury
 
  • The Federal Reserve released new regulations that have banned officials from buying individual securities after it came to light that several Fed Presidents were trading securities while also being a part of policy setting. Here is the press release >>
  • There seems to be a consensus building that Fed members believe inflation will continue to run hot into 2022. Atlanta Federal Reserve President Raphael Bostic said as much on CNBC this week, while Fed Chair Jerome Powell echoed a similar sentiment during a panel discussion.
 
ETF News
 
  • Bitcoin futures-based ETFs have been the talk of the ETF community, but we're taking a wait-and-see approach even as BITO and BTF start to trade actively on exchanges. Bitcoin exposure could make sense for some, but we think speculators should be tactical when approaching any cryptocurrencies.

 
On Deck
 
  • We're excited to release the next two option ideas for the month of October in the coming weeks. Please be sure to add additional options commentary to your membership, if you are interested. Contact us.
  • 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
Contact Us

Valuentum Securities, Inc.
info@valuentum.com
www.valuentum.com
----------------------------------------------------------------------------------
This email, its contents, and the reports or articles (links) or comments referenced or attached in this email are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of the reports, articles, Best Ideas Newsletter, Dividend Growth Newsletter, Valuentum Exclusive publication, or any other communication and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the reports or articles and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at info@valuentum.com. The Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Any performance, including that in the Valuentum Exclusive publication, is hypothetical and does not represent actual trading. Past simulated performance, back-tested or walk-forward or other, is not a guarantee of future results. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. Valuentum is an investment research publishing company. No warranty or guarantee may be created or extended by sales or promotional materials, whether by email or in any other format. Further, this e-mail and attachments relating thereto, is intended for the abovementioned recipient. If you have received this e-mail in error, kindly notify the sender and delete it immediately as it contains information relating to the official business of Valuentum Securities Inc, which is confidential, legally privileged and proprietary to Valuentum Securities Inc.