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At Valuentum, we think the best opportunities arise from a complete understanding of all investing disciplines in order to identify the most attractive stocks at any given time. Valuentum therefore analyzes each stock across a wide spectrum of philosophies, from deep value through momentum... More
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Valuentum Securities Inc.
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Valuentum Securities Inc.
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DCF Model for the Individual Investor
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  • Valuentum's Performance On Seeking Alpha

    Seeking Alpha recently published the returns of certain 'buy' and 'sell' calls for each author. We applaud the firm's ongoing dedication to transparency of its authors, if not by name, by track record. Valuentum Securities is an independent research firm headed by President Brian Nelson, CFA.

    Out of the 2,000+ articles Valuentum has published on Seeking Alpha, the Seeking Alpha study covered 567 of them, spanning from May 16, 2011, through June 25, 2014. Long ideas: 508; short ideas: 59. The articles in the study spanned all sectors and market capitalizations. The study pulled articles that were either tagged by Valuentum as 'long' ideas or 'short' ideas within the writer interface. The study also included articles on the same company published at multiple times during the time period, whether as a long idea or short idea or both.

    Valuentum was neither aware of the significance of tagging ideas as either long or short ideas at the time the article was published on Seeking Alpha, or the time horizon at which the study would measure, over a 3-month, 6-month, and 1-year period after publishing. Valuentum did not view the tagging mechanism within the Seeking Alpha interface as a submission of a long or short idea, as most submissions focus more on research and analysis. Said differently, there may have been significantly more or significantly less 'long' or 'short' ideas submitted if Valuentum had known the significance of the tagging prior to the study.

    The Seeking Alpha study--though not taking into consideration all of Valuentum's articles published on Seeking Alpha, or the Valuentum Buying Index rating or Valuentum's fair value estimates in the article--may still be helpful for readers in getting to know Valuentum and its track record. For example, there may be some readers that only follow Valuentum's periodically for its free submissions on Seeking Alpha and have not subscribed to the comprehensive research on the website, which aggregates real-time charting functionality, the comprehensive 16-page company report, recent article commentary, and dividend reports, where applicable.

    According to Seeking Alpha, the total return of long and short ideas was calculated using the first available closing price after the article was published. The measurement did not take into account the author's price target (or fair value estimate in Valuentum's case) or time frame (roughly 18-24 months in Valuentum's case). Seeking Alpha encourages readers to evaluate the articles in the study to clarify the author's intentions. Valuentum, for example, does not advocate shorting at all, so the study is for exploratory purposes.

    Results

    Valuentum is one of the most published authors on Seeking Alpha with one of the largest coverage universes. We're not aware of any other author that has published a larger number of articles across a larger range of companies on the Seeking Alpha platform. The breadth of coverage and 'randomness of articles selected' via the tagging mechanism speaks to an independent and significant study, albeit an incomplete one.

    In the study, 'tagged long ideas' averaged a 3.6%, 7.3%, and 18.6% return over the immediate 3-month, 6-month, and 12-month periods following publication.

    Tagged as Long
    3-m Avg6-m Avg12-m Avg
    3.56%7.33%18.63%

    In the study, 'tagged short ideas' averaged a -1.8% (negative 1.8%), 2.4% and 21.9% return over the immediate 3-month, 6-month, and 12-month periods following publication. Importantly, the 3-month average showcased a negative return over an immediate 3-month period.

    Tagged as Short
    3-m Avg6-m Avg12-m Avg
    -1.83%2.39%21.88%

    In the study, the long-less-short average was 5.4 percentage points, 4.9 percentage points, and -3.2 percentage points over the immediate 3-month, 6-month, and 12-month periods following publication.

    The positive difference between the 3-month and 6-month periods reveals that 'tagged long ideas' outperformed 'tagged short ideas' over the respective time period. The 3-month average has the largest number of data points in the study, and we point to those results as being the most significant.

    Long Avg less Short Avg
    3-m Avg6-m Avg12-m Avg
    5.39%4.94%-3.24%

    We believe a positive gap would be achieved for the 12-month average under different measurement criteria, though such analysis is beyond the scope of the article. For example, this linked article about Radio Shack (NYSE:RSH) on October 1, 2012, hurt short performance by contributing a positive 45% return to the 12-month average in the study. As of today, the article's short contribution would be a negative 67% (-67%), as Radio Shack continues to struggle. Also, perhaps Valuentum's three best (and most controversial) 'short calls' published on Seeking Alpha in Seadrill (NYSE:SDRL) here, American Capital (NASDAQ:AGNC) here, and Arena Pharma (NASDAQ:ARNA) here were not included in the study. These examples speak to the limitations of the study.

    Further, the time period of the study covered a very strong bull market, where overpriced stocks became more overpriced. Companies that contributed to the discrepancy on the short side in the 12-month average included Sprint (NYSE:S), Choice Hotels (NYSE:CHH), Boston Beer (NYSE:SAM), Lennar (NYSE:LEN), First Solar (NASDAQ:FSLR), LinkedIn (NYSE:LNKD), and Citigroup (NYSE:C). We do not consider these firms high-quality entities, and we do not advocating shorting them or any stock, for that matter.

    Though there are clearly limitations to the study, we do note that low-VBI-rated (poorly rated) stocks performed slightly better-than-expected during a concurrent and different trailing 12-month study of the Valuentum Buying Index (link provided later in article). The strong bull market has been particularly difficult for investors purely focused on shorting stocks.

    As followers of Valuentum know, the Valuentum Buying Index is not particularly designed as a short strategy. To increase efficacy, a forensic accounting, secular product evaluation, and liquidity and solvency analytical overlay to the VBI would be preferred. Valuentum may roll out a customized short strategy and portfolio in the future.

    Takeaways

    The Seeking Alpha study hints at the strong positive returns of high-VBI rated long ideas and weak (and sometimes negative) returns of low-VBI rated short ideas. We presented the results of the study with no modification or adjustments, as we believe this may be the best way to present the performance, in the spirit of transparency and independence.

    Though there are certainly limitations of the Seeking Alpha study, this performance also speaks to the sentiment readers may have on Valuentum's stock-selection ability, which we view as significantly positive. For the purest measure of Valuentum's performance and the Valuentum Buying Index system in action, please view the performance of the Best Ideas portfolio. We also encourage readers to learn more about the Valuentum Buying Index rating system via the concurrent trailing 12-month study, results revealed here. Thank you for reading!

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SDRL, AGNC, ARNA, SAM, S, LNKD
    Oct 12 8:22 PM | Link | 2 Comments
  • Valuentum Dividend Cushion Catches Another: Cliffs Natural Resources!

    After we predicted a dividend cut in November 2012, Cliffs Natural Resources (NYSE:CLF) finally cut its dividend after posting poor results for 2012. The firm slashed its quarterly payout 76% to $0.15 per share.

    Results for Cliffs were actually a bit better than consensus estimates on both the revenue and earnings side. Total revenue declined 4% year-over-year to $1.5 billion, while earnings dipped 59% year-over-year to $0.62 per share (after adjusting for a $1 billion goodwill impairment). Free cash flow for the year was incredibly weak, falling to a negative $613 million, explaining why the dividend needed to be cut. If we only took into account the payout ratio, Cliffs' adjusted earnings per share of $3.45 for 2012 would seem to give the dividend ample cushion (its prior annual dividend payout was $2.50 per share, an adjusted payout ratio of 72.5%). However, Cliffs is a perfect example of the significant and potential tragic pitfalls of using the payout ratio as a measure of dividend safety and why the Valuentum Dividend Cushion is one of the most important metrics for income investors to use to safeguard their portfolios from dividend-growth blow-ups.

    << FAQ: Where Can I Find the Valuentum Dividend Cushion Score?

    Capital management at the firm seems relatively weak, as the company had to write down $1 billion related to its acquisition of Thompson Iron Mines in 2011. The company also had to raise capital by selling 9 million shares of common stock and 20 million shares of preferred stock. With the firm giving relatively positive guidance (shown below) for 2013, we're a bit shocked by this move since it has upset existing shareholders (Sources of Images: CLF).

    (click to enlarge)

    (click to enlarge)

    The company's outlook suggests stronger profitability, as China and the US are expected to have improved industrial performance in 2013. The move to raise capital is fairly prudent, in our view, since Cliffs' balance sheet is not great, and some of the new equity will be used to reduce the company's debt balance. Also, commodity prices have been particularly volatile-to the point that it has been rumored that producers may be buying in the spot market to help control supply. The company also intends to allocate $800-$850 million for capital expenditures during the year, so even significantly improved operating cash flow may not be able to cover the increased capital investment.

    We're currently taking a close look at the firm's valuation, and we expect to publish an updated report soon. We don't think the dividend will return to the previous bloated levels anytime in the near future. After the firm's steep price decline today, we continue to believe shares of Cliffs are fairly valued. We have no interest in adding the company to the portfolio of our Best Ideas Newsletter.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: CLF, EXC, dividends
    Feb 19 1:18 PM | Link | Comment!
  • What's The Best Way To Use Valuentum's Process

    As we celebrate over 2,500 hundred followers on Seeking Alpha, we thought it important to remind you how we use our stock-selection process. After all, our methodology combines a rigorous DCF valuation, relative valuation and technical and momentum assessment into one easy-to-interpret rating. And oftentimes, our readership may not know that it is that rating, the Valuentum Buying Index score (click here), that is paramount to our process -- not any one component by itself.

    But first, let's get this out of the way. Firms in our Best Ideas portfolio should be considered our best ideas at any point in time. The Best Ideas portfolio can always be found on page 8 of our monthly Best Ideas Newsletter, which we only house on our website. We have commented on hundreds of companies, but only the cream of the crop make it to our portfolio, which we only disclose to members.

    Furthermore, we've noticed via our statistical backtesting that the momentum factor behind our process tends to be much more pronounced (powerful) over longer periods of time. This was one of the interesting findings of our academic white paper study. And we try to replicate this dynamic with the update cycle of our reports (and the time horizon for our ideas to work out). That's why our reports are updated regularly or after material events and not daily. There's just too much noise in daily price movements. We expect our best ideas to work out over a 6-18 month time horizon -- any shorter than that is mostly luck, in our view.

    So, in other words, we tend to add firms to our Best Ideas portfolio when they register a 9 or 10 on our Valuentum Buying Index and tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our Valuentum Buying Index. However, we don't blindly and immediately add firms to our portfolio once they score a 9 or 10 (and we do not add all firms that score a 9 or 10 to our portfolio). For example, recently Google (NASDAQ:GOOG) registered a 10 on our scale, but we remained patient and didn't add the company to our portfolio until after it reported earnings, which provided us with an even better entry point.

    After adding firms to our portfolio, we may tactically trade around these positions when they have VBI ratings between 3 and 8 depending on the size of their weighting in our portfolio or the attractiveness of them relative to other opportunities. We tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our process. Importantly, however, firms in our Best Ideas portfolio should be considered our best ideas at any point in time.

    Take eBay (NASDAQ:EBAY), as another example, the firm initially flashed a rating of 10 in late September 2011 (at $32)--click here for that excellent call--and we added it to our Best Ideas portfolio. The VBI rating changed to a 6 in December 2011 and then back to a 10 in May 2012. Because the rating never breached a 1 or 2, we did not remove the position from our portfolio. In fact, we tactically added to it. eBay is probably one of the better examples to use for illustrating the prolonged outperformance driven by undervalued stocks that are beginning to generate good momentum.

    Though eBay may register a lower VBI rating in a subsequent update, we would still view it as one of our best ideas, as it is a holding in our Best Ideas portfolio (it has never flashed a 'We'd Sell' signal, 1 or 2). Obviously, there have been more straight-forward opportunities in our Best Ideas portfolio, especially in the case of EDAC Tech (NASDAQ:EDAC), which has tripled since we added it to the portfolio (never registering below a 9 along the way). The VBI ratings on our most recent 16-page reports, downloadable directly from our website, reflect our current opinion on the company.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Some of the firms mentioned in this post are included in our actively-managed portfolios.

    Tags: EBAY, EDAC, GOOG
    Nov 29 5:07 PM | Link | Comment!
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