October 3, 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
 
  • The Dow Jones Industrial Average closed the week at 34,326.46, with the DIA selling off 1.35%. Promising data from a Merck (MRK) pill (molnupiravir) that lessens the risks of hospitalization or death in those infected with COVID-19 failed to turn the market around on the week.
  • The S&P 500 closed the week at 4,357.04, with the SPY faring a bit worse than the blue chip index, closing down 2.18% last week. The S&P 500 faced broad-based selling, but the market-cap weighted index continues to overweight some of the strongest companies on the marketplace. We continue to like stocks.
  • The NASDAQ closed the week at 14,566.70, with the QQQ off more than 3.5% in the five-day period ending October 1. Weakness in biotechnology across COVID-19 players due to the strong Merck data and a sell-off in higher-beta, disruptive innovation names were common themes last week. We're monitoring the activity closely, but we don't see this sell-off as anything to panic about.
  • The cryptocurrency market continues to be resilient as equities sell off. The price of Bitcoin strengthened on the week and is trading north of $48,000. We'd expect substantial weakness in Bitcoin to be a precursor to any large market sell-off. On that note, we think the equity markets remain very healthy, despite concerns over supply chain issues and a rising 10-year Treasury rate.
  • If you recall, we added ExxonMobil (XOM) and Chevron (CVX) to the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio on June 27. These were the latest additions to the portfolio, not two of many or several since that time, emphasizing the very selective nature of our process. Though a small percentage of the overall S&P 500, the energy sector is bouncing back thanks to rising energy resource prices. In fact, the energy sector was the only sector to finish the month of September positive. The sector finished the month up 11%, while other areas such as materials and utilities dropped more than 6%. We're very happy to have "overweighted" energy in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio given the recent outperformance. Exxon's latest 8-K filing >>
  • We're not making any changes to the newsletter portfolios at this time and believe they continue to be well-positioned for increased volatility and any market pullback.
 
Top News
 
  • Merck's data regarding its pill (molnupiravir) for the coronavirus may have been the biggest news on the week sending the re-opening stocks higher. However, we maintain our view that stocks within the area of large cap growth have tremendous resilience in any economic environment and are largely shielded from any raw input costs. We like large cap growth in the midst of any sell-off, and we think the largest, strongest names will continue to put up excellent fundamental performance in the years ahead.
  • Best Ideas Newsletter portfolio idea Disney (DIS) outperformed this week thanks to a settlement regarding the movie Black Widow with Scarlett Johansson. Investors are cheering now that the legal distraction is behind the company. Disney finished largely flat on the week, but up more than 4% during the Friday session. Disney's stock page >>
  • The political environment continues to take center stage as both an infrastructure bill and talks to raise the debt ceiling continue. Though these make for great headlines, we think both will be resolved favorably with respect to the markets.
  • Dividend Growth Newsletter portfolio Honeywell (HON) raised its dividend ~5.4% on Friday, to $0.98 on a quarterly basis. The company now yields ~1.82% on forward basis. View Honeywell's stock page >>
  • Chinese equities continue to feel the pain from a whirlwind of negative momentum. A crackdown by the Chinese government in the regulatory, anti-trust and privacy domains has left shares of many US-listed Chinese equities hurting. Alibaba (BABA), one of the more attractively-valued Chinese stocks, is down more than 38% so far year-to-date, while the S&P 500, as measured on a price-only basis by the SPY, is up more than 16%. We continue to emphasize the need for caution if one is looking to invest in a US-listed Chinese name. Even though shares of these companies look cheap, there are exogenous forces at work that can hurt US-based investors considerably.
  • Netflix (NFLX) hit all-time highs during the week thanks to the roaring success of the 'Squid Game' series. A terribly violent international show from South Korea, 'Squid Game' is being watched in droves. The series speaks to Netflix's international opportunity. Netflix's stock page >>
  • Keurig-Dr Pepper (KDP), which yields a nice ~2.2%, announced this week that it would buy back up to 8% of its shares with a new authorization program (up to $4 billion of its stock). KDP is a hidden dividend growth gem, and one that we have on our watch list. Keurig-Dr Pepper's stock page >>
  • We're closely watching legal developments in the tobacco industry, as the US International Trade Commission ruled that both Altria (MO) and Philip Morris (PM) infringed on IQOS heated tobacco-related patents held by British American Tobacco (BTI). The legal picture remains mixed, however, as the courts have sided with Philip Morris in prior cases. PM will appeal the latest decision, and we expect legal wrangling to continue on this matter.
  • Virgin Galactic (SPCE) has now been cleared to fly again by the FAA after its latest flight went off course. The company's next flight is scheduled for later this month, and we'll be watching key developments across the space industry with the utmost fascination in coming months to years. The Disruptive Innovation industry >>
 
Economy
 
  • The US economy roared during the second quarter of 2021, with the latest second-quarter GDP figured revised upward to 6.7%. We think the market continues to underestimate the resilience of the US economy and the earnings power of S&P 500 companies, more specifically, in both good times and bad. Market volatility will remain elevated, in our view.
  • The Chicago PMI came in a bit lower than consensus for the month of September. Here's a quick summary: The Chicago Business Barometer...slipped to 64.7 in September, the lowest level since February. Among the main five indicators, Order Backlogs saw the largest decline, followed by Supplier Deliveries and New Orders. Only Employment increased through the month." The Chicago PMI doesn't factor much into our investment process, but it's worth watching for the broader economic trajectory.
  • Supply chain issues remain on top of mind for investors. Here's an excerpt from an open letter to the United Nations General Assembly: "We are witnessing unprecedented disruptions and global delays and shortages on essential goods including electronics, food, fuel and medical supplies. Consumer demand is rising and the delays look set to worsen ahead of Christmas and continue into 2022." We believe, however, that any earnings impact from late 2021 and into 2022 will likely result in pent-up demand and will be a largely transitory consideration.
 
Valuations
 
  • 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 1.465%. We continue to watch 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.
  • Many remain concerned about supply-chain issues that could impact third-quarter 2021 results for a great many companies. We think the market has been factoring this in the past few weeks, and we reiterate that near-term earnings are a small component of a company's entire valuation composition. Read more about this dynamic in Value Trap >>
  • 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.
  • "The bubble is in the bond market." -- Lee Cooperman, CEO of Omega Advisors
 
Fed and Treasury
 
  • The Federal Reserve continues to be awash in a public relations nightmare as Fed Presidents Eric Rosengren and Robert Kaplan announced their resignations amid certain security transactions. We continue to watch this story closely, but do not believe that it will have a material impact on the markets. More concerning is the buzz that Senator Elizabeth Warren has made regarding her opposition to the re-nomination of Fed Chair Jerome Powell, calling him a "dangerous man." We'll be watching if sentiment regarding Powell changes in the coming months, but we expect him to be re-nominated for another term.
  • Reuters reported that Philadelphia Federal Reserve Bank President Patrick Harker believes the central bank has met its inflation mandate, but that it may be some time before it reaches its employment goals. This means rate hikes won't happen for a long time yet. The Fed hasn't yet even begun to taper.
 
ETF News
 
  • There's another unique ETF in the pipe, this one the VegTech Environmental Impact and Plant-based Innovation ETF. The ETF will be actively managed, and while we're intrigued by its VegTech strategy, we're waiting to learn more about the offering. Its SEC filing >>
  • Another actively managed ETF, the Gen Z ETF, will invest in US companies that are most associated with that generation. Its prospectus >>
  • Evolve ETFs is the first ETF provider to list an ETF with direct exposure to Bitcoin and Ethereum; its ETF under the ticker ETC will be traded on the TSX. Here is the fact sheet for ETC >>
  • You will soon be able to bet more aggressively on the blockchain with an inverse and leveraged ETF, under the tickers KOLB and BLOC, respectively. We're not interested in such ETFs as they don't fit our long-term goals within the newsletter portfolios.
 
On Deck
 
  • Next up: The October edition of the Exclusive publication will be released this upcoming Saturday, October 9.
  • The October editions of the Best Ideas Newsletter, ESG Newsletter, and quarterly Gold level publications will be released October 15.
We are huge fans of the payment processing and payment solutions space. This industry is supported by secular growth tailwinds due to the global shift away from cash-to-card and card-not-present (e.g. online purchases) purchase options, and the ongoing proliferation of e-commerce. Furthermore, companies in this space benefit immensely from the network effect, which creates an economic moat for their business. These companies are incredibly lucrative with relatively high operating margins and impressive free cash flow generating abilities, aided by their relatively modest capital expenditure requirements to maintain a certain level of revenues. We include payment networks giant Visa as a “top-weighted” idea in the Best Ideas Newsletter portfolio and view its capital appreciation upside quite favorably, with the top end of our fair value estimate range sitting at $304 per share of Visa.
Image Shown: Visa Inc is a stellar free cash flow generator and is included as an idea in our Best Ideas Newsletter portfolio. Image Source: Visa Inc – Third Quarter of Fiscal 2021 IR Earnings Presentation.
The communications and media giant AT&T Inc is pivoting back to its roots, a strategy that we think will pay off handsomely in the long run, though there have been plenty of rough bumps along the way. Management has finally found a strategy that AT&T can stick with. We include AT&T as an idea in the High Yield Dividend Newsletter portfolio and shares of T yield ~7.7% as of this writing (note that the company will rightsize its dividend in the coming quarters, resulting in a yield adjustment lower).
Image Source: AT&T Inc – Second Quarter of 2021 IR Earnings Presentation. 
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Valuentum Securities, Inc.
www.valuentum.com
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