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  • Why Ford's Equity Is 'Built Ford Tough' [View article]
    karman6557,

    A best idea in Valuentum parlance is a holding in the Best Ideas portfolio and/or the Dividend Growth portfolio.

    We typically add shares to the Best Ideas portfolio when they register a high rating (a 9 or 10 = a “we’d consider buying” rating) on the Valuentum Buying Index and hold them until they register a low rating (a 1 or 2 = a “we’d consider selling” rating) on the Valuentum Buying Index. Ford is included in the portfolio.

    We don’t add all firms that register a high score on the Valuentum Buying Index to the actively-managed portfolios due to sector weighting or overall market valuation considerations, among others. The Valuentum Dividend Cushion is a key factor behind adding companies to the Dividend Growth portfolio and is used in conjunction with a company’s annual dividend yield, its price-to-fair value ratio and Valuentum Buying Index rating.

    Said differently, the Valuentum Buying Index is a methodology that acts to inform our process, but the Valuentum team decides as to which firms are included in the Best Ideas portfolio (i.e. which firms constitute a best idea). The methodology is used as a starting point for further analysis. It is not a rigid, quantitative system, nor is it a step-function system (a company can move from a 6 to a 9, for example, without stopping at 7 or 8).

    In Ford's case, the company is on the cusp of being considered undervalued on a DCF process, and excluding the forward P/E, its relative valuation can be considered attractive. Under even minor tweaks, the company could register a higher score on the Valuentum Buying Index. The qualitative overlay by the analyst team identifies these dynamics and recognizes these opportunities.

    Valuentum seeks to deliver on the goals of each newsletter portfolio, and the Valuentum Buying Index assists with this process. Each portfolio has specific goals, and these are the goals that we are driven to achieve. Pasted below is more information about the newsletters and Valuentum Buying Index:

    Newsletters: http://bit.ly/15mt0mQ

    Valuentum Buying Index: http://bit.ly/viu9MH

    Thanks for the question!

    The Valuentum Team
    May 31 10:14 AM | Likes Like |Link to Comment
  • Why Teekay Remains Dependent On Future Equity Issuance [View article]
    Rick D,

    Apology accepted. Thanks for participating!

    The Valuentum Team
    May 30 06:09 PM | Likes Like |Link to Comment
  • Why Teekay Remains Dependent On Future Equity Issuance [View article]
    Ernie Mac,

    Thank you for your question. Our five year revenue-growth curve accelerates through the discrete forecast horizon: 4% (2014), 3% (2015), 4% (2016), 5% (2017), 6% (2018). We're embedding significant growth.

    If TGP simply made a business structure change to a corporation, our fair value estimate would drop to the low end of our fair value range. The market is not taking into account its growth capex, but it is giving it credit for the cash flow generated by that growth capex. We generally have reservations about the MLP structure as a whole.

    Though we apologize for the login-only access of the following link, pasted below is an explanation of the key risks of MLPs in our view:

    http://bit.ly/1hDMXLo

    Thank you for reading!

    The Valuentum Team
    May 29 09:28 PM | 1 Like Like |Link to Comment
  • Why Teekay Remains Dependent On Future Equity Issuance [View article]
    Rick D,

    Thanks again for your comment. We think it poses an opportunity for the Seeking Alpha community to learn as much about their investments as possible.

    When a company has excellent cash flow coverage of a dividend, under the structure of a corporate, the analytical community is talking about free cash flow, not cash flow from operations, which does not include capital expenditures at all. Distributable cash flow includes only maintenance capital expenditures, not growth capital expenditures.

    Distributable cash flow coverage would be a decent measure if it were to make two adjustments -- either 1) exclude the growth in cash flow from operations related to growth capex (which is excluded from the calc), or 2) factor in growth capex in the calculation since it inevitably drives cash flow from operations higher. As distributable cash flow is shown, it reveals an imbalance.

    Therefore, and by extension, distibutable cash flow and cash flow from operations do not reflect the true free cash flow of the entity. To fund growth capex and to drive future increases in cash flow from operations, typically MLPs (including Teekay) will have to issue new units. This is not uncommon, but it does make them increasingly more dependent on the health of the capital markets than a general industrial corporation.

    Though evaluating the business operations may reveal a company that is on sturdy ground, its business structure, by definition, is risky and its debt load is significantly elevated. Unitholders are compensated with a 6%+ distribution yield for this risk. However, we see significant valuation risk as well, as embedded within the price, is the view that growth capex will continue to be funded by the market. How wonderful it must be to operate a business where all of future funding is provided by the market -- and the market only judges the business on the basis of distributable cash flow (not free cash flow).

    Thank you for sharing the investor presentation. We think these risks are not well-known as there are a variety of different measures of cash flow, but traditional free cash flow will always be the best measure, in our view.

    Kind regards,

    The Valuentum Team
    May 29 09:21 PM | Likes Like |Link to Comment
  • Why Teekay Remains Dependent On Future Equity Issuance [View article]
    Hi Rick D,

    Thank you for your comment!

    Though we appreciate your confidence in the distributions to holders, the value of any asset is based on the future free cash flows of the asset discounted back at a risk-adjusted rate. It is this concept (valuation) that we point to as the primary concern for shareholders.

    As we noted in the article, most investors may be only focused on the sustainability of the distribution that is funded in part by the health of the capital markets. The stability of the firm's operations only in part mitigates the company's financial (debt) and capital-market risk. However, we're not writing this to spook holders, but to inform them of the real risks to their investment from an independent source. The debt is real; the equity issuance is real. Importantly, however, we don't think our concerns will come to fruition until the next economic downturn, which may not be for years.

    In any case, we think it is understandable to have confidence until then, but the company's financials tell a much different story about the company's long-term risk profile. There is no guarantee that contracts will receive higher rates upon expiration as well. They can also receive lower rates.

    Hope this helps clarify the risks, and thanks for reading!

    The Valuentum Team
    May 29 11:11 AM | Likes Like |Link to Comment
  • Why Teekay Remains Dependent On Future Equity Issuance [View article]
    Hi Not_Quite_Phidippides,

    Thanks for the comment! Here's an excerpt about how we think about forecasting within our modeling framework:

    "An author/analyst may tell the story of a company through his/her eyes, but the author/analyst must still convert his/her thoughts and qualitative considerations into quantitative future forecasts to arrive at the fair value of a stock. These future forecasts ultimately determine the intrinsic value of the equity. Without an in-depth valuation process on the basis of future free cash flows, stock analysis is a story that has no end…no tangible conclusion.

    Sometimes investors may not want to see all of data (at times, it can be overwhelming), but we think it’s important that investors know it’s here at Valuentum. Investors are learning that most of the articles found on the web today (even from seemingly-reputable firms) do not have a three-stage discounted cash-flow valuation process – or any robust and systematically-reviewed valuation process – supporting the conclusions.

    Buying a stock after reading an article without examining its valuation model is like buying a house without examining the foundation. The house may look pretty on the outside, but there’s really nothing supporting it. You may get lucky and be on sturdy ground, or you may not. Just like we don’t want our house to sink, we don’t want our stocks to collapse either.

    That said, the best place to start with how we think about forecasts is with a statement that may shock you: There are more than 40 analysts deriving Google’s (GOOG) earnings estimates for this year alone. And the large number of analysts isn’t a phenomenon unique to Google or just large companies – it’s like this for almost every mid/large cap – F5 (FFIV), for example, has over 30. Some of the analysts will be right some of the time, and some of the analysts will be wrong some of the time. It’s just the way the stock-research business works. No analyst is right all of the time. But that shouldn’t be the takeaway from this article – investors already know analysts are not perfect (that’s why there are earnings beats and misses all the time).

    Are we interested in competing with 40 other analysis on this year's numbers? No. First of all, we don’t think we could do a better job than these 40 analysts collectively – just like we don’t think we could beat out the ultra-fast algorithmic traders – nor do we want to. Trust me -- I’ve made earnings estimates for a research firm that’s listed in Google’s coverage. I’ve been spot on at times. I’ve been wrong at times. But I can tell you with certainty – next year’s earnings have little to do with the intrinsic value of a stock.

    Simply put, we just don’t see much value in spending our time competing with 40 other analysts (on Google alone), where the majority of them will be wrong. Our top- and bottom-line forecasts for the next two years, therefore, do not vary much from consensus estimates or management’s provided guidance. Where we do differentiate ourselves is in the intermediate- and long-term forecasts that are more important to the derivation of a fair value estimate than anything else.

    Sell-side analysts are spending the majority of their time analyzing factors that impact the stock within the next few years, a time frame that accounts for less than one fifth of Google’s equity value (image shown in original). We like to spend the majority of our time looking just past the focus of those 40 analysts, the area in which the most value is created.

    We don’t care to differ much from consensus estimates during the next couple years – it’s not where we’re going to "win the game" or where most of the value is generated. We’re laser-focused on getting our long-term assumptions correct -- a time frame some sell-side analysts may not even be looking at!

    Our fair value estimates reflect the base-case scenario of the firm (they do not represent an optimistic case or a pessimistic case, but the scenario that we think will occur). That said, we’re well aware that valuation is not a precise exercise, and the upside and downside cases of our forecasts result in our fair value range for each company (encapsulating the concept of a margin of safety)."

    Thanks for reading!
    May 29 10:31 AM | Likes Like |Link to Comment
  • BlackBerry Is Not An Investment; It's A Gamble [View article]
    HRob200304,

    If you are interested in learning more about financial analysis, we make our DCF model template available at the following link:

    http://bit.ly/xf6xWg

    Thanks for reading!

    The Valuentum Team
    May 28 07:25 PM | 1 Like Like |Link to Comment
  • BlackBerry Is Not An Investment; It's A Gamble [View article]
    Hi Bob,

    Thanks for your comment. The distribution of fair values will never be symmetrical for every company. We're not after precision in investing, but identifying valuation outliers. Here's an excerpt from Valuentum's e-book:

    "9) Value Is a Range and Not a Point Estimate. I can't begin to tell you how surprising it is to hear even well-seasoned analysts say a company's shares are worth precisely $25 each or a firm's stock is worth exactly $100. The reality is that, in the first case, the company's shares are worth somewhere between $20 and $30, and in the latter case, the stock is worth somewhere between $75 and $125. Value is not a precise point estimate, but a range of probable outcomes. Why? Because all of the value of a company is generated in the future (future earnings and free cash flow), and the future is inherently unpredictable (unknowable). If you or I could predict the future with absolute certainty, then we can say a company's shares are worth precisely this, or that a firm's stock is worth precisely that. But the truth is that nobody knows the future, and we can only estimate what a company's future free cash flow stream will look like. Certain factors will hurt that free cash flow stream relative to forecasts, while other factors will boost performance. That's how a downside fair value estimate and an upside fair value estimate is generated, or in the words of Warren Buffett and Benjamin Graham a "margin of safety." We call the "margin of safety" a fair value range at Valuentum. Only the most likely scenario represents a point fair value estimate. Any investor that says a stock is worth a precise figure--whether it's $1 or $100--doesn't understand one of the most important factors behind valuation. Key takeaway: The value of a company is a range of probable outcomes based on its future free cash flow stream. Value is not a precise point estimate."

    Thank you for reading!

    The Valuentum Team
    May 28 07:21 PM | 1 Like Like |Link to Comment
  • BlackBerry Is Not An Investment; It's A Gamble [View article]
    Gout Attack,

    Thank you so much for your question. We think some of the best investments are the ones that investors don't make. Hope this helps answer your question.

    Kind regards,

    The Valuentum Team
    May 28 07:18 PM | 1 Like Like |Link to Comment
  • Why Tesla's Growth Will Be Supported By China's Government [View article]
    Hi surferbroadband,

    Thanks for the comment!

    Kind regards,

    The Valuentum Team
    May 20 01:44 PM | 1 Like Like |Link to Comment
  • Throw Out Amazon's Multiples; Focus On Cash Flow Potential [View article]
    eenk,

    Thank you so much for your comment. We use a fair value range in our process. We think Amazon is worth between $236-$393 per share, as a result of its wide range of future financial outcomes. Here's an excerpt from Valuentum's e-book on the 13 steps to understand that stock market.

    "9) Value Is a Range and Not a Point Estimate. I can't begin to tell you how surprising it is to hear even well-seasoned analysts say a company's shares are worth precisely $25 each or a firm's stock is worth exactly $100. The reality is that, in the first case, the company's shares are worth somewhere between $20 and $30, and in the latter case, the stock is worth somewhere between $75 and $125. Value is not a precise point estimate, but a range of probable outcomes. Why? Because all of the value of a company is generated in the future (future earnings and free cash flow), and the future is inherently unpredictable (unknowable). If you or I could predict the future with absolute certainty, then we can say a company's shares are worth precisely this, or that a firm's stock is worth precisely that. But the truth is that nobody knows the future, and we can only estimate what a company's future free cash flow stream will look like. Certain factors will hurt that free cash flow stream relative to forecasts, while other factors will boost performance. That's how a downside fair value estimate and an upside fair value estimate is generated, or in the words of Warren Buffett and Benjamin Graham a "margin of safety." We call the "margin of safety" a fair value range at Valuentum. Only the most likely scenario represents a point fair value estimate. Any investor that says a stock is worth a precise figure--whether it's $1 or $100--doesn't understand one of the most important factors behind valuation. Key takeaway: The value of a company is a range of probable outcomes based on its future free cash flow stream. Value is not a precise point estimate."

    Thanks for reading!

    The Valuentum Team
    May 16 12:24 PM | Likes Like |Link to Comment
  • Why Oracle Is Worth A Look [View article]
    Hi Mathew,

    Thank you so much for your comment. Our forecasts consider the economic substance of a firm's business on a forward-looking basis, not its accounting representation. In Oracle's case, we're looking at non-GAAP figures on a go-forward basis. The bottom-line number in our projection period is in-line with consensus non-GAAP forecasts for fiscal year 2014 of $2.91 per share. As is customarily in an intrinsic value assessment, adjustments are made to better reflect the economic reality of a company.

    Hope this helps. Please let us know if we can be of any further assistance.

    Kind regards,

    The Valuentum Team
    May 14 05:55 PM | Likes Like |Link to Comment
  • Evaluating Tencent's Cash-Flow-Derived Intrinsic Value [View article]
    Hi lotus position,

    Thanks for the question. The proforma statements are modeled in Chinese yuan (CNY). Please let us know if we can be of any further assistance.

    Kind regards,

    The Valuentum Team
    May 8 09:50 PM | Likes Like |Link to Comment
  • Why 3M Is Ridiculously Overpriced [View article]
    Hi JPV,

    Thank you for your contribution! Pasted below is an excerpt that goes into how to think about firms with significant competitive advantages. It is from Valuentum's e-book:

    "5) The Stronger the Competitive Advantage the Lower the Stock Return. This can't be! No way! You refuse to admit it! Everybody can't be wrong! But what about Buffett? Well, you don't have to take my word for it. Ask one of the most well-known investment firms out there that does Warren Buffett's economic moat analysis. All else equal, the firm concluded that companies with wide economic moats underperform stocks with narrow economic moats, and that stocks with no economic moats had the best returns, over the time period studied -- Source: Miller, 1/1/2013, Morningstar. This relative outperformance of no-moat stocks is driven more by the context of valuation as opposed to any competitive-advantage assessment. Higher risk stocks, by definition, will advance at a higher annual pace than lower-risk stocks over time, all else equal (they have higher discount rates in a discounted cash-flow process to reflect their heightened risk profile – think risk premium). But there’s also another dynamic at play. As markets remain benign through up-cycles, riskier stocks are re-priced higher using lower discount rates (credit availability is improved). The longer duration cash-flow profile of higher-risk, no-moat companies is then magnified when the cost of borrowing is reduced. This makes no-moat firms very volatile through the credit cycle, but it also is responsible for their significant outperformance during good times. Moaty stocks are less impacted by credit availability, and therefore, their discount rate and intrinsic value does not experience much volatility. Investors sometimes like stocks with moats because they tend to be less volatile, not because they are better performers. Most investors cannot sleep at night if their portfolio experiences wild swings, and moaty stocks, by definition, should be less volatile through the course of the credit cycle than no-moat stocks. Investors accept lower volatility for lower returns over certain market cycles. As empirical research has concluded over recent history, wide moat stocks tend to underperform no-moat stocks across almost every valuation bucket. Investors should expect stocks to advance at their discount rate in a discounted cash-flow model less the dividend yield over the long term. This percentage is higher for no-moat stocks (most don’t pay dividends) than it is for wide moat stocks, and both empirical and academic research supports this view. Investors should probably expect a long-term annual return of about 5%-8% for moaty stocks and about 8%-10% for no-moat stocks. But investors shouldn't buy stocks with the worst fundamental qualities either. We can’t forget about individual bankruptcy risk and the potential evaporation of equity in higher-risk small and micro caps that may occur under tightening credit cycles. That said, investors may do well with a basket of no-moat stocks over a long-enough time period, but without broad diversification across firm-specific risk, an individual investor can be harmed should any particular no-moat equity fail – that is, if a firm declares bankruptcy. A concentrated portfolio of fundamentally poor companies is simply a bad idea, in my view. For us at Valuentum, our Best Ideas portfolio seeks to attain low levels of volatility while capturing significant outsize returns – the best of both worlds. The Valuentum strategy generates significantly more return for the level of risk taken. Key takeaway: Competitive advantage analysis alone will not lead you to the best-performing stocks. It actually has been shown that it will lead you to underperformance."

    Thanks for reading!

    The Valuentum Team
    May 6 12:05 PM | Likes Like |Link to Comment
  • Why 3M Is Ridiculously Overpriced [View article]
    Mike,

    Thank you so much for brining this up. We are rather concerned about 3M's valuation, and we may bring up this topic again in coming weeks. We want investors to know that we were out there warning them about this cyclical industrial priced beyond peak earnings.

    We don't think the use of the word 'ridiculous' is exaggerating. We truly believe that it is rather strange that a strong firm such as 3M can have this large of a valuation disconnect. The cyclical industrial is being priced beyond peak earnings, when mid-cycle earnings need to be applied.

    Thank you for reading!

    The Valuentum Team
    May 6 12:03 PM | Likes Like |Link to Comment
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