THE VALUENTUM TEAM

* Redistribution strictly prohibited. 

March 2020 

THE EXCLUSIVE

Confidential*

 

 

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Table of Contents

We Closed Out Five More Winning Ideas and Caution That the Macro Picture is Getting Bleak……………………………….…….............................................3 Thoughts on Three Watchlist Names: AJRD, RGS, ROKU...………...………5 Yeti Holdings is an Interesting Enterprise...…………………………………..7 Tracking Exclusive Idea Simulated Performance ….……………………..11-16

Income…………………………………………………………………………………11 Capital Appreciation…………………………………………………………………....13 Short Idea Considerations……………………………………………………………....15

Income Generation: JPM-PRC, Preferred Shares Series EE……………........17 Capital Appreciation: ProShares UltraPro Short Dow30 (SDOW)....................21 Short Idea Consideration: Manchester United (MANU)......................................24 Inaugural Letter to Members, July 2016…………………………….……….28

 

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We Closed Out Five More Winning Ideas and Caution That the Macro Picture is Getting Bleak

   

Dear Exclusive members, We recently closed some of our open ideas for nice theoretical gains including October 2019 income generation idea Life Storage (LSI) at $118.36 (or $119.36 when including dividends received) for a ~11% gain when including dividends, November 2019 income idea VICI Properties (VICI) at $27.56 (or ~$27.86 when including dividends received) for a ~15% gain when including dividends, December 2019 short idea consideration Jumia Tech (JMIA) at $5.32 per share for a ~9% gain, and January 2020 capital-appreciation idea Chewy (CHWY) at $30.72 per share for a ~5% gain, and please note these ideas were closed on February 24. Here’s the link to that announcement: http://campaign.r20.constantcontact.com/render?m=1110817109903&ca=5ed4e7ec‐caff‐4235‐aae7‐63b83f12cd44 

 

Furthermore, on March 5 we closed our December 2016 short idea consideration Royal Bank of Scotland (RBS) at 

$4.19 per share for a modest theoretical gain as well after taking dividend considerations into account. Please note 

that after closing RBS as a winner, 16 out of the first 16 short‐idea considerations worked out favorably in the 

Exclusive publication: LE, VSLR, LYG, GPRO, SRG, RBS, SQBG, SPWH, FIT, SC, SNAP, MNK, DLAKY, DFRG, FRGI, IMKTA. 

Here’s the link to that announcement: 

 

http://campaign.r20.constantcontact.com/render?m=1110817109903&ca=ba9ed5e5‐1c9c‐4c42‐bdde‐6d089e6674b2 

 

Regarding the income generation ideas Life Storage and VICI Properties, both names had run up nicely in such a short period of time and we thought it was prudent to lock both of those in as winners. For the long idea consideration Chewy, while we continue to like its long-term trajectory, the threats posed by exogenous forces such as the ongoing novel coronavirus (‘COVID-19’) epidemic that’s spreading worldwide prompted us to lock in that winner before the recent fall in global equities. Pivoting now to short idea consideration Jumia Tech, in a market dominated by price-agnostic trading and monetary policy we tend to prefer to lock in our short ideas sooner rather than later once they become nice winners. While shares of Jumia Tech continued to plummet since then alongside global equities, due in part to its terrible earnings report, we aren’t looking back as we pivot to new short idea considerations. Here we would like to highlight that January 2018 short idea consideration Shake Shak (SHAK) has been trending materially lower of late after issuing out weak forward guidance in February. Shifting gears a bit, we think it’s prudent to highlight that our team has been monitoring the ongoing COVID-19 epidemic quite closely. As of this writing, over 100,000 cases of COVID-19 have been confirmed and the numbers will likely continue rising. Global equity markets are selling off over fears relating to the epidemic, but please note that the global economy (especially on the industrial side of things) was already slowing down in late-2019 and into early-2020. US auto sales peaked a few years ago, Japan recently had to raise its VAT rate to better cover its enormous public debt load and that move may very well send its economy into a technical recession (we’ll see when Japan reports GDP figures for the first quarter of 2020), Germany is sliding towards a technical recession as well, and China’s economic growth trajectory is slowing down (as was the case pre-COVID-19, and a V-shaped recovery is unlikely in our view).

By Callum Turcan

 

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Governments around the globe seek to offset these headwinds by launching massive stimulus packages. The International Monetary Fund (‘IMF) just launched a $50 billion stimulus package aimed towards emerging and developing markets, which includes interest-free loans and those funds will be made available to nations that don’t have a preexisting program with the IMF. The World Bank (‘WB’) launched a $12 billion stimulus package that’s also geared towards emerging and developing markets, particularly to help those countries out as it relates to healthcare investments. South Korea launched a nearly $10 billion stimulus package to offset the negative economic impact the spread of COVID-19 is having on its economy, with investments being made in childcare, healthcare, and small businesses. Many are now looking towards China to see if Beijing will launch a large-scale stimulus effort to offset the negative impacts of COVID-19, on top of the modest measures already taken. While stimulus-related headlines and the hopes for additional stimulus will give investors and equity markets some hope, we think that optimism is ephemeral and that some large funds out there are taking a myopic view of the ongoing COVID-19 epidemic. This is a very serious issue, one that prompted the US to pass an emergency package worth north of $8 billion to help prepare the nation for COVID-19. US President Trump has signed that emergency spending package into law, and furthermore, reports are coming out that note the current administration is contemplating stimulus efforts (such as a payroll tax cut) to keep the economy growing. The US Federal Reserve just recently emergency-cut its benchmark interest rate by 50 basis points, bringing it down to a range of 1.00% to 1.25%. We view these actions more so as a sign of desperation, not one that should instill a whole lot of confidence in investors. As this cycle of economic expansion gets long in the tooth, one wonders when the next recession might rear its ugly head. It appears that time may be upon us, depending on how quickly the COVID-19 epidemic can get contained. Right now, the virus is still spreading, and a vaccine remains at least months away, if not longer. Furthermore, beyond the aforementioned countries and economies that are slowing down, please note Canada’s and Mexico’s economies have been slowing down as well. That’s in part due to ongoing weakness in raw energy resource prices, particularly for crude oil, as both nations are material raw energy resource producers. During the latest OPEC and non-OPEC meetings held on March 5 and 6, respectively, Gulf states led by Saudi Arabia were unable to reach a new production curtailment agreement with Russia, resulting in WTI and Brent sliding towards $40 per barrel. That will further stress both the Canadian and Mexican economies at a time when COVID-19 could potentially slow or shut down economic activity in the US. While lower raw energy resource prices bode well for some nations, like India which is a major oil importer, the slowdown of major economies in East Asia, Western Europe, and North America will more than offset any potential gain from a lower energy import bill. During times like these we like to close out our winners when they yield a nice theoretical gain, and we hope you continue to be impressed with the performance of our Exclusive publication’s success rate. We hope everyone and their loved ones stay safe during these harrowing times. Disclosure: Callum Turcan does not own shares in any of the securities mentioned above. * Success rate: The percentage of ideas highlighted in the Exclusive that have moved in the direction of our thesis (i.e. up for capital appreciation ideas and down for short idea considerations) through the current price or closed price, with consideration of cash and stock dividends. Success rates do not consider trading costs or tax implications. Trading is simulated. Past results are not a guarantee of future performance.

 

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Thoughts on Three Watchlist Names

 

   

In addition to our three Exclusive idea considerations in this edition, here are our thoughts on a few watchlist names. We’re trying to keep a number of ideas in front of you as we navigate this volatile market: AJRD, RGS, ROKU Long: Aerojet Rocketdyne Holdings (AJRD) Some thoughts on Aerojet Rocketdyne Holdings (AJRD), a designer, developer, and manufacturer of products for the defense and aerospace industry. The firm is in the business of selling products for space and launch systems, in-space propulsion and power, missile defense and strategic systems, tactical systems, and advanced systems. Additionally, Aerojet is also invested in the California real estate market via its Easton subsidiary (really the firm is seeking to sell excess real estate at a good price and is pursuing zoning changes to make that happen). The company does not pay out a dividend at this time. In December 2019, Aerojet won a subcontract from Lockheed Martin (LMT) to develop a conventional hypersonic missile for the US government (that can travel at Mach 5 speeds). The deal is valued at $81.5 million with room for upside, and the reasoning behind the US military seeking to develop hypersonic weaponry and missile defense systems is straight forward. Being able to hit a target faster matters, as does the reduced chance of intercepting such a missile given it’s traveling at over 60 miles per minute. Not having these capabilities matters as other nations, namely China and Russia, are looking deeply into hypersonic weaponry (and next-age weaponry more broadly). Link to article covering the hypersonic weapons race: https://www.sciencemag.org/news/2020/01/national-pride-stake-russia-china-united-states-race-build-hypersonic-weapons China in 2018 tested out a hypersonic missile design, the Xingkong-2, which reportedly traveled at Mach 6, but no video footage was released. Russia has the Kinzhal missile design, which supposedly can go Mach 10. There are other hypersonic missile designs and tests that were conducted by China and Russia in the recent past, and what matters most is that it’s now truly a race. Given the gravity of the situation, seeing as how having superior missile technology in the 21st Century can be what determines winners from losers, if Lockheed Martin and its partner Aerojet can successfully develop this technology, this could be a huge source of upside for Aerojet. When looking at Aerojet’s financials, the firm has seen its sales climb steady higher over the past few years (from $1.6 billion in fiscal 2014 to $2.0 billion in fiscal 2019). During this period, Aerojet flipped from a net loss (~$0.05 billion in fiscal 2014) to a net profit (~$0.15 billion in fiscal 2019). The firm’s free cash flows have about doubled during this period, hitting $0.2 billion in fiscal 2019. At the end of December 2019, Aerojet was sitting on ~$0.95 billion in cash and cash equivalents versus $0.3 billion in short-term debt and ~$0.35 billion in long-term debt, good for a nice net cash position. Mild dilution needs to be kept in mind (share-based compensation and other factors), as the firm does not appear to actively repurchase its stock in meaningful quantities. Going forward, the fiscal 2020 US defense bill (almost $740 billion, up modestly form fiscal 2019 levels) and the creation of a space force within the US military are potential catalysts, as is the hypersonic program. The company has a good amount of concentration risk, but that’s to be expected in this business (there are only so many large defense contractors, and the US DoD remains the dominant source of demand for the kinds of products Aerojet makes). Increased space-related spending, the resiliency of the US defense budget, and the hypersonic weapons contract are three main growth levers for Aerojet.

 

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Short: Regis Corporation (RGS) Regis Corporation (RGS) operates salons in the US (including Puerto Rico), Canada, and the UK. The firm seeks to transition to a franchise model, and it owns the SmartStyle, Supercuts, and Cost Cutters brands. However, this transition hasn't been easy. The CFO departed in November 2019, and while a quick look at his LinkedIn profile indicates the former CFO does move around often (in terms of jobs), Andrew Lacko was only at the Regis CFO job for just over 2 years. At the end of 2019, Regis got some bad news when The Beautiful Group ('TBG') decided to transfer back 200 mall-based salons operating under the Regis and Mastercuts brands (the Mastercuts brand was transferred back as part of this arrangement) to Regis, which means the firm is now on the hook for the lease payments on these locations (along with the employee compensation arrangements). An additional 300 locations operated by TBG under Regis' various brands are expected to be closed as there were no lease obligations remaining on those properties. This signals not only that many of Regis' salon locations are likely struggling, but it comes at a time when Regis has been consistently free cash flow negative. Regis mentioned the goal would be to change operatorship of those assets, likely meaning franchising those locations, but that's no easy task given that TBG gave up. RGS posted operating losses in fiscal 2018 and fiscal 2019 (after posting operating income from fiscal 2015 to fiscal 2017). Revenues declined substantially from fiscal 2015 to fiscal 2019. Its liabilities are enormous, its current ratio is below 1.0x, and its cash balance is relatively small. The firm's outlook looks bleak. Same-store sales at both franchised (when including the mall locations Regis just got back) and company-operated salons declined in fiscal 2019. The big risk is that the transition to a franchise model sharply increases profitability at Regis, but so far that hasn't been the case and even the transition process is facing material hurdles (such as Regis receiving 200 locations back from TBG on top of having TBG close 300 locations, which will increase costs and hurt franchise revenue). Its financials are weak and the lackluster same-store sales performance in fiscal 2019 does not paint a promising outlook for the future. Short: Roku (ROKU) We’re quite bearish on Roku’s shares, especially when we look at the firm's rising operating expenses and how that may influence sentiment should its growth trajectory show signs of slowing down. Its adjusted EBITDA and operating margins are coming under fire, limiting its ability to generate cash flow (Roku hasn't been free cash flow positive recently). The company has a nice balance sheet with $0.5 billion in cash and cash equivalents on the books and just $0.1 billion in total debt (inclusive of short-term debt) as of the end of December 2019, but compared to its ~$12 billion market cap, that net cash position provides only a modest bump to Roku's intrinsic value. Roku is betting big on advertising, recently acquiring dataxu to help bolster its efforts on that front. Additionally, Roku is pushing deeper into international markets (with an eye on Europe) and may announce plans to enter new markets in 2020 (Roku recently expanded into Brazil, for example). Those efforts will support Roku's top-line growth trajectory, but also will prompt the firm to incur meaningful incremental operating expenses which will highlight the relative weakness of its cash flow profile. For a company that generated sales of $1.1 billion in 2019, Roku seems to be trading at a very lofty valuation. Should Roku's technicals show signs that sentiment is turning against it (on a relative basis, Roku's growth trajectory is still decent, just not strong enough to justify a ~$12 billion market cap), that would be a good time to consider ROKU as a short-idea consideration. Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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Yeti Holdings is an Interesting Enterprise  

   

Image Source: Yeti Holdings Inc – Fourth Quarter and Full Year Fiscal 2019 IR Earnings Presentation

By Callum Turcan Yeti Holdings Inc (YETI) became popular largely due to its coolers which are more premium consumer discretionary products in nature (the Roadie 20 retails at $199.99 on its website and the rugged Tundra 350 retails at $1,299.99), before branching out and expanding into other categories such as drinkware, bags, pet products (such as dog bowls), apparel, and more. The firm went public back in October 2018 and since then the share price of YETI has gone up substantially, as of this writing. Please note that the success of Yeti Holdings depends enormously on its ability to maintain its premium brand power, which historically has been the case. We appreciate Yeti Holdings’ positive free cash flows, rising revenues, expanding gross margins, reasonable net debt load, and its GAAP net income profitability levels. Additionally, please note YETI was included as our November 2019 Exclusive long idea consideration and that idea was closed out for a nice theoretical gain of ~9% on February 11, 2019. Shares of YETI have come under fire from the ongoing novel coronavirus (‘COVID-19’) epidemic, as have global equity markets at-large. Scalable Business Model On February 13, the company reported earnings for the fourth quarter and full year period covering fiscal 2019 (which ended on December 28, 2019) which beat consensus market expectations on both the top- and bottom-lines. Additionally, the company set guidance for fiscal 2020 that was ahead of consensus market expectations as well. Shares of YETI still initially sold off modestly on the news, potentially because it was already priced for perfection, and then more recently shares of YETI came under fire due to the ongoing COVID-19 epidemic.

 

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For a company selling products that have no “moat” per se, in the sense that there are already many other companies out there that are selling coolers and drinkware, it’s becoming increasingly clear that for now, Yeti Holdings has built up quality brand recognition. That brand recognition allows the firm to command real pricing power. Furthermore, Yeti Holdings’ direct-to-consumer sales could potentially hold up better during the ongoing COVID-19 epidemic as consumers stay indoors, as compared to companies that are heavily dependent on in-person sales at physical stores. That being said, Yeti Holdings will still face pressures from the epidemic that can’t be feasibly mitigated. As Yeti Holdings is currently in the process of scaling up, launching new products, and expanding into new markets, its GAAP operating expenses increased materially in fiscal 2019 over fiscal 2018 levels. SG&A expenses rose by 37% to $386 million, which saw Yeti Holdings’ GAAP operating income drop by 12% year-over-year to $90 million as its GAAP operating margin shifted lower by ~330 basis points. In the graphic below, Yeti Holdings highlights its push into international markets.

Image Shown: Yeti Holdings is pushing into Canadian, UK, European, Japanese, and Australian markets after establishing a powerful presence in the US. Image Source: Yeti Holdings Inc – Fourth Quarter and Full Year Fiscal 2019 IR Earnings Presentation

With that in mind, please note Yeti Holdings was still GAAP profitable in fiscal 2019 as its GAAP net income came in at $50 million. On a GAAP diluted EPS basis, Yeti Holdings’ generated EPS of $0.58. Its diluted GAAP EPS was down year-over-year due to mild dilution (weighted average shares outstanding on a diluted basis rose by a tad over 3% year-over-year in fiscal 2019) and rising operating expenses. However, we still appreciate Yeti Holdings being profitable for a relatively young firm, which was founded back in 2006.

 

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Image Shown: Yeti Holdings notes it announced 12 new products in fiscal 2019. Selling new products and moving into new markets is how the firm intends to keep growing. Image Source: Yeti Holdings Inc – Fourth Quarter and Full Year Fiscal 2019 IR Earnings Presentation

Here’s an excerpt from Yeti Holdings’ latest earnings press release highlighting management’s guidance for fiscal 2020, keeping in mind fiscal 2020 is a 53-week period versus the 52-week fiscal 2019 period: For Fiscal 2020, a 53-week period, compared to a 52-week period in Fiscal 2019, YETI expects:

Net sales to increase between 13.0% and 15.0% compared to Fiscal 2019 (including the impact of the 53rd week, which is expected to contribute approximately $7 million) with strong growth across both channels and led by the DTC [direct-to-consumer] channel;

Operating income as a percentage of net sales between 15.3% and 15.6%; Adjusted operating income as a percentage of net sales between 16.3% and 16.6%, reflecting margin

expansion of 70 to 100 basis points, driven by higher gross margin; An effective tax rate of approximately 25.0%; Net income per diluted share is now expected to be between $1.24 and $1.29, reflecting 112% to 122% growth; Adjusted net income per diluted share between $1.34 and $1.39, reflecting 26% to 30% growth; Diluted weighted average shares outstanding of 87.7 million; Adjusted EBITDA between $202.1 million and $207.9 million, or between 19.6% and 19.8% of net sales,

reflecting 18% to 21% growth; Capital expenditures between $30 million and $35 million; and The impact of the 53rd week, which is included in this outlook, is expected to contribute approximately $7 million to net

sales and have a nominal contribution to earnings. Management is clearly communicating that Yeti Holdings’ growth story is expected to keep going strong for the foreseeable future.

 

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Dividend Commentary As of this writing, Yeti Holdings does not pay out a common dividend and doesn’t intend to for the foreseeable future (there are also credit facility covenant concerns at play here, at least as of early-2019 when its last 10-K filing was published), but it has paid out special dividends in the past. Here’s a brief excerpt from its fiscal 2018 Annual Report:

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our Board of Directors may deem relevant.

Additionally, the Credit Facility prohibits us and our subsidiaries, and any future agreements may prohibit us and our subsidiaries, from, among other things, paying any dividends or making any other distribution or payment on account of our common stock with certain exceptions.

In May 17, 2016, we declared and paid a cash dividend of $5.54 per common share, as a partial return of capital to our stockholders, which totaled $451.3 million (“Special Dividend”). As part of the Special Dividend, we continue to pay dividends to certain option holders.

Concluding Thoughts When compared to other firms that recently went public (within the last few years), Yeti Holdings stands above the rest. Its relatively strong stock price performance (even after the COVID-19 induced selloff, shares of YETI are still up comfortably from their IPO levels) is rooted in its strong fundamentals, and we appreciate its GAAP net income streams and positive free cash flows. Its push into new markets and the launch of new products, along with rising direct-to-consumer sales, underpins its growth trajectory going forward. While the wide range of Yeti Holdings’ potential outcomes in terms of future free cash flows makes for more volatile trading activity than some other firms, the company is interesting nonetheless.

Image Shown: A look at Yeti Holdings’ rising revenues. Image Source: Yeti Holdings Inc – Fourth Quarter and Full Year Fiscal 2019 IR Earnings Presentation

Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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Tracking Exclusive Idea Simulated Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Many members have said that they prefer to focus on the long-term income-oriented dynamics of the income ideas, and we think this makes sense. The formatting of the table reflects a greater focus on the trajectory of the dividend as well as the current forward expected annualized dividend yield. We hope that you find this layout more helpful as you sort through the prior income ideas.

INCOME IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Annual Divs per 

Share at 

Highlight

Current Fwrd 

Dividends per 

Share

Current Fwrd 

Exp Dividend 

Yield

Time Horizon

Income Ideas

Jul, 16 Universal Corp (UVV) 57.74 2.12 3.04 6.2%Closed ‐ 

2/12/2017

Aug, 16 B&G Foods  (BGS) 51.54 1.68 1.90 11.6%Closed ‐ 

7/17/2017

Sep, 16Maxim Integrated 

(MXIM)41.12 1.32 1.92 3.4%

Closed ‐ 

2/12/2017

Oct, 16Douglas  Dynamics 

(PLOW)31.94 0.94 1.12 2.7%

Closed ‐ 

2/12/2017

Nov, 16 Ennis Inc. (EBF) 14.60 0.70 0.90 4.5%Closed ‐‐ 

11/12/2016

Dec, 16 Watsco, Inc. (WSO) 150.57 4.20 6.40 3.6%Closed ‐ 

2/12/2017

Jan, 17 Star Group (SGU) 11.21 0.41 0.50 5.5% 0‐5 yrs

Feb, 17 Moelis & Co (MC) 35.00 1.28 2.04 6.9%Closed ‐ 

6/22/2017

Mar, 17 Park National (PRK) 108.59 3.76 4.08 4.6% 0‐20 yrs

Apr, 17American Software 

(AMSWA)10.44 0.44 0.44 2.7%

Closed ‐ 

6/22,23/2017

May, 17 NW Natural (NWN) 59.20 1.88 1.91 2.9%Closed ‐ 

10/25/2018

Jun, 17 Japan Tobacco (JAPAY) 19.03 0.60 NA NAClosed 

11/8/2019

Jul, 17 Vectren Corp (VVC) 58.21 1.68 Acquired AcquiredClosed 

8/30/2017

Aug, 17National Retail 

Properties (NNN)40.50 1.90 2.06 3.8%

Closed ‐ 

10/25/2018

Sep, 17 STORE Capital (STOR) 25.72 1.16 1.4 4.2%Closed ‐ 

10/25/2018

Oct, 17 Fortis (FTS) 36.14 1.27 1.43 3.3%Closed ‐ 

4/18/2019

Nov, 17 Black Hills (BKH) 61.23 1.78 2.14 2.7%Closed ‐ 

10/25/2018

Dec, 17Four Corners Propety 

Trust (FCPT)26.03 0.97 1.22 4.0%

Closed ‐ 

10/25/2018

Jan, 18 TransCanada Corp (TRP) 49.47 1.98 2.44 4.7%Closed 

11/6/2019

Feb, 18 Siemens (SIEGY) 71.13 2.18 2.12 4.2% 0‐20 yrs

 

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INCOME IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Annual Divs per 

Share at 

Highlight

Current Fwrd 

Dividends per 

Share

Current Fwrd 

Exp Dividend 

Yield

Time Horizon

Income Ideas

Mar, 18Philips 66 Partners 

(PSXP)49.63 2.71 3.50 6.4%

Closed ‐ 

10/25/2018

Apr, 18 PS Business Parks (PSB) 113.68 3.40 4.20 2.7%Closed ‐ 

10/25/2018

May, 18 Hubbell (HUBB) 103.97 3.08 3.64 2.7%Closed ‐ 

2/11/2019

Jun, 18Park Hotels & Resorts 

(PK)32.43 1.72 1.80 10.9%

Closed ‐ 

5/3/2019

Jul, 18Healthcare Trust of 

America (HTA)27.36 1.22 1.26 3.7%

Closed ‐ 

2/11/2019

Aug, 18 QTS Realty Trust (QTS) 44.01 1.64 1.88 3.3%Closed ‐ 

4/18/2019

Sep, 18 Atmos Energy (ATO) 93.62 1.94 2.30 2.1%Closed ‐ 

10/25/2018

Oct, 18Veolia  Environment 

(VEOEY)19.70 0.99 1.03 3.3%

Closed 

4/18/2019

Nov, 18 Roche Holding (RHHBY) 29.82 1.08 1.15 2.7%Closed ‐ 

2/11/2019

Dec, 18 OGE Energy (OGE) 40.46 1.46 1.55 3.9%Closed ‐ 

2/11/2019

Jan, 19 BAE Systems (BAESY) 24.32 0.92 0.97 3.1%Closed ‐ 

2/11/2019

Feb, 19EastGroup Properties 

(EGP)107.58 2.88 3.00 2.3%

Closed 

11/6/2019

Mar, 19Canadian Natural 

Resources (CNQ)26.76 1.01 1.27 5.2%

Closed ‐ 

9/24/2019

Apr, 19 Evergy (EVRG) 57.32 1.90 2.02 2.8%Closed 

11/6/2019

May, 19 National Health (NHI) 76.43 4.20 4.41 5.4%Closed 

11/6/2019

Jun‐19Corporate Office 

Properties Trust (OFC)28.94 1.10 1.10 4.1% 0‐20 yrs

Jul‐19Nuveen Real Estate 

Income Fund (JRS)10.63 0.76 0.76 7.6% 0‐20 yrs

Aug‐19South32 Limited 

(SOUHY)10.01 0.28 0.22 2.9% 0‐20 yrs

Sep‐19

Bank of America 

Preferred Stock (ISIN: 

US0605052291)

26.87 1.50 1.50 5.6% 0‐20 yrs

Oct‐19 Life Storage (LSI) 105.41 4.00 4.28 3.6%Closed 

2/24/2020

Nov‐19 VICI Properties  (VICI) 24.28 1.19 1.19 4.8%Closed 

2/24/2020

Dec‐19 Comerica  (CMA) 71.37 2.68 2.72 5.8% 0‐20 yrs

Jan‐20

Vanguard International 

High Dividend Yield ETF 

(VYMI)

63.78 2.68 2.68 4.8% 0‐20 yrs

Feb‐20 Omnicom Group (OMC) 75.74 2.60 2.60 3.8% 0‐20 yrs

    

The information provided in the tables is offered for the convenience of the reader, for illustrative purposes only, and no actual trading is taking place. Actual results may differ from the simulated information being presented. Valuentum is a publisher of financial information, not a money manager, broker, or financial advisor.

 

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CAPITAL APPRECIATION IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Capital Appreciation Ideas

Jul, 16 Bloomin Brands (BLMN) 17.87 19.28 0.07 8.3%Closed ‐‐ 

11/12/2016

Aug, 16Healthcare Srvs Group 

(HCSG)38.91 41.02 0.369 6.4%

Closed ‐ 

2/12/2017

Sep, 16Grupo Aeroportuario 

(ASR)157.87 181.61 ‐ 15.0%

Closed ‐ 

4/5/2017

Oct, 16Swedish Match 

(SWMA.ST)314.80SEK 417.40SEK 17.7 38.2%

Closed ‐ 

6/1/2018

Nov, 16 Symrise AG (SYIEY) 16.25 16.34 ‐ 0.6%Closed ‐ 

4/5/2017

Dec, 16 Tootsie Roll (TR) 37.80 38.96 0.90 5.4%Closed 

4/18/2019

Jan, 17Texas Capital 

Bancshares (TCBI)78.05 85.10 ‐ 9.0%

Closed ‐ 

2/12/2017

Feb, 17 Arconic (ARNC) 25.90 29.62 ‐ 14.4%Closed ‐ 

2/12/2017

Mar, 17 Tesaro (TSRO) 180.84 122.62 ‐ ‐32.2%Closed ‐ 

7/17/2017

Apr, 17 Yum China  (YUMC) 31.15 37.67 ‐ 20.9%Closed ‐ 

5/23/2017

May, 17 Galapagos (GLPG) 87.67 76.13 ‐ ‐13.2%Closed ‐ 

7/17/2017

Jun, 17 Huntington Ingalls (HII) 193.79 206.39 ‐ 6.5%Closed 

8/18/2017

Jul, 17 Orbital ATK (OA) 102.33 104.65 ‐ 2.3%Closed 

8/18/2017

Aug, 17 Wingstop (WING) 32.28 66.17 3.61 116.2%Closed ‐ 

10/25/2018

Sep, 17 Qualys (QLYS) 51.10 75.44 ‐ 47.6%Closed ‐ 

10/25/2018

Oct, 17Guidewire Software 

(GWRE)78.24 87.50 ‐ 11.8%

Closed ‐ 

10/25/2018

Nov, 17 Ferrari N.V. (RACE) 117.43 123.26 0.71 5.6%Closed ‐ 

2/11/2019

Dec, 17 Square (SQ) 38.22 72.61 ‐ 90.0%Closed ‐ 

10/25/2018

Jan, 18 Planet Fitness (PLNT) 33.70 46.41 ‐ 37.7%Closed ‐ 

10/25/2018

Feb, 18 Insulet Corp (PODD) 75.84 82.69 ‐ 9.0%Closed ‐ 

10/25/2018

Mar, 18 Preferred Bank (PFBC) 64.01 47.66 2.22 ‐ 0‐20 yrs

Apr, 18Esperion Therapeutics 

(ESPR)66.43 40.94 ‐ ‐38.4%

Closed ‐ 

4/18/2019

 

   

Many capital appreciation ideas are based on a long-term thesis. However, rapid price-to-fair value convergence may mean we close the ideas relatively quickly, or sooner than expected. Our decision to close an idea may or may not be relevant to you given varying goals and risk tolerances.

 

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CAPITAL APPRECIATION IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Capital Appreciation Ideas

May, 18Heidrick & Struggles 

(HSII)37.65 40.77 0.41 9.4%

Closed ‐ 

3/9/2019

Jun, 18 Green Dot Corp (GDOT) 72.86 24.54 ‐ ‐66.3%Closed 

11/8/2019

Jul, 18 Wix.com (WIX) 105.30 111.93 ‐ 6.3%Closed ‐ 

2/11/2019

Aug, 18Tactile Systems  

Technology (TCMD)50.84 63.52 ‐ 24.9%

Closed ‐ 

10/25/2018

Sep, 18 Invitae (NVTA) 13.95 20.84 ‐ 49.4%Closed ‐ 

3/9/2019

Oct, 18 Cigna (CI) 215.72 149.00 0.04 ‐30.9%Closed 

4/18/2019

Nov, 18 Yeti Holdings (YETI) 16.50 17.99 ‐ 9.0%Closed ‐ 

2/11/2019

Dec, 18 Spotify (SPOT) 135.31 139.65 ‐ 3.2%Closed ‐ 

4/18/2019

Jan, 19 Suncor Energy (SU) 29.32 32.05 ‐ 9.3%Closed ‐ 

2/11/2019

Feb, 19 Delek Holdings  (DK) 32.12 37.31 0.27 17.0%Closed ‐ 

4/18/2019

Mar, 19Physicians Realty Trust 

(DOC)17.82 17.80 0.69 3.8%

Closed 

11/6/2019

Apr, 19 Everbridge (EVBG) 72.75 98.43 ‐ 35.3%Closed 

7/24/2019

May, 19 Teladoc Health (TDOC) 60.93 68.09 ‐ 11.8%Closed 

7/24/2019

Jun‐19 Alteryx (AYX) 95.15 119.29 ‐ 25.4%Closed 

7/24/2019

Jul‐19 CrowdStrike (CRWD) 67.21 86.42 ‐ 28.6%Closed 

7/24/2019

Aug‐19Inovalon Holdings 

(INOV)17.12 17.59 ‐ 2.7%

Closed 

12/5/2019

Sep‐19 Avalara (AVLR) 81.10 85.14 ‐ 5.0%Closed ‐ 

2/3/2020

Oct‐19 Cloudflare Inc (NET) 17.27 18.72 ‐ 8.4%Closed 

12/5/2019

Nov‐19 Shopify (SHOP) 297.64 369.08 ‐ 24.0%Closed ‐ 

12/5/2019

Dec‐19 Datadog (DDOG) 35.91 46.21 28.7%Closed ‐ 

2/3/2020

Jan‐20 Chewy (CHWY) 29.34 30.72 4.7%Closed 

2/24/2020

Feb‐20 HDFC Bank Limited 58.76 51.40 0‐20 yrs

 

   

Success rate: The percentage of ideas highlighted in the Exclusive that have moved in the direction of our thesis (i.e. up for capital appreciation ideas and down for short idea considerations) through the current price or closed price, with consideration of cash and stock dividends. Success rates do not consider trading costs or tax implications.

 

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SHORT IDEA CONSIDERATIONS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Short Idea Considerations

Jul, 16 Lands' End (LE) 16.76 16.10 NA 3.9%Closed ‐‐ 

12/2/2016

Aug, 16 Vivint Solar (VSLR) 2.94 2.85 NA 3.1%Closed ‐‐ 

12/2/2016

Sep, 16 Lloyds Banking (LYG) 3.31 2.78 NA 16.0%Closed ‐‐ 

11/4/2016

Oct, 16 GoPro (GPRO) 16.68 11.16 NA 33.1%Closed ‐‐ 

11/4/2016

Nov, 16Seritage Growth 

Properties (SRG)44.31 42.13 0.25 4.4%

Closed ‐‐ 

1/6/2017

Dec, 16Royal Bank of Scotland 

(RBS)4.91 4.19 0.68 0.8%

Closed 

3/5/2020

Jan, 17Sequential Brands 

Group (SQBG)4.62 4.18 ‐ 9.5%

Closed ‐ 

2/12/2017

Feb, 17Sportman's  Warehouse 

(SPWH)6.85 6.11 ‐ 10.8%

Closed ‐ 

2/12/2017

Mar, 17 Fitbit (FIT) 6.07 5.71 ‐ 5.9%Closed ‐ 

4/5/2017

Apr, 17Santander Consumer 

(SC)12.51 11.65 ‐ 6.9%

Closed ‐ 

5/23/2017

May, 17 Snap, Inc (SNAP) 23.19 17.19 ‐ 25.9%Closed ‐ 

5/10/2017

Jun, 17 Mallinckrodt (MNK) 42.65 36.41 ‐ 14.6%Closed ‐ 

8/18/2017

Jul, 17Deutsche Lufthansa  AG 

(DLAKY)23.38 21.42 0.94 4.4%

Closed ‐ 

10/25/2018

Aug, 17 Del Frisco's  (DFRG) 14.35 11.93 ‐ 16.9%Closed ‐ 

10/16/17

Sep, 17Fiesta  Restaurant 

Group (FRGI)15.90 14.36 ‐ 9.7%

Closed ‐ 

2/11/2019

Oct, 17 Ingles Markets (IMKTA) 26.50 24.20 ‐ 8.7%Closed ‐ 

10/16/17

Nov, 17 Fogo de Chao (FOGO) 10.85 15.62 ‐ ‐44.0%Closed ‐ 

3/3/2018

Dec, 17 TrueCar (TRUE) 12.07 10.97 ‐ 9.1%Closed ‐ 

12/28/17

Jan, 18 Shake Shack (SHAK) 44.17 52.25 ‐ ‐ 0‐2 yrs

Feb, 18

iShares  Core US 

Aggregate Bond ETF 

(AGG)

107.20 104.63 1.93 0.6%Closed ‐ 

10/25/2018

 

   

The tables  above are provided for the sole purpose of transparency, to allow readers  to measure Exclusive ideas  in a way they feel  is  most appropriate. Ideas  within the Exclusive are not constructed as  a 

portfolio, nor should they be viewed as  a portfolio, and performance information is  hypothetical  and "trading" is  simulated. "Hypothetical  annualized returns," now labeled "Capital  Efficiency," cannot be 

achieved and are provided for the sole purpose of rightsizing each idea to a common measurement period (one year), to compare ideas  'closed' within one year to ones  'open' longer than one year, taking 

into account capital  efficiency. A reader, for example, may view a 20% hypothetical  return over a period of five weeks as  much better than a 20% hypothetical  return over a period of five years. Whereas  

both represent 20% hypothetical  returns, hypothetical  annualized performance is  much different under each case. Readers  may have different views  and time horizons. To retain independence, neither 

Valuentum nor Brian Nelson own any shares, nor do they plan to own any shares, of any companies  highlighted in the Exclusive. Importantly, shorting stocks  involves  a number of abnormal  risks, 

including theoretically the infinite loss  of capital, and is  not for everyone. Valuentum is  a financial  publisher not a financial  advisor. Please contact your personal  financial  advisor to determine if any 

idea in the Exclusive may be appropriate for you.

 

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SHORT IDEA CONSIDERATIONS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Short Idea Considerations

Mar, 18

iShares iBoxx $ High 

Yield Corporate Bond 

ETF (HYG)

85.75 86.68 4.936 ‐6.8%Closed ‐ 

4/18/2019

Apr, 18Houghton Mifflin 

Harcourt (HMHC)7.25 6.70 ‐ 7.6%

Closed ‐ 

6/1/18

May, 18Noodles & Company 

(NDLS)7.25 7.04 ‐ 2.9%

Closed ‐ 

2/11/2019

Jun, 18

iShares International 

High Yield Bond ETF 

(HYXU)

52.40 50.94 ‐ 2.8%Closed ‐ 

10/25/2018

Jul, 18Installed Building 

Products (IBP)56.15 40.10 ‐ 28.6%

Closed ‐ 

9/28/2018

Aug, 18 Veritiv Corp (VRTV) 38.80 36.35 ‐ 6.3%Closed ‐ 

9/28/2018

Sep, 18 Box (BOX) 24.55 24.30 ‐ 1.0%Closed ‐ 

9/28/2018

Oct, 18Modine Manufacturing 

(MOD)14.73 12.00 ‐ 18.5%

Closed ‐ 

10/25/2018

Nov, 18Beazer Homes USA 

(BZH)9.01 12.06 ‐ 0‐2 yrs

Dec, 18 Vera  Bradley (VRA) 10.22 9.95 ‐ 2.6%Closed ‐ 

8/23/2019

Jan, 19 RH (RH) 117.84 106.99 ‐ 9.2%Closed ‐ 

4/4/2019

Feb, 19 QuinStreet (QNST) 14.77 12.79 ‐ 13.4%Closed ‐ 

3/9/2019

Mar, 19 Dycom Industries (DY) 47.20 41.74 ‐ 11.6%Closed ‐ 

8/23/2019

Apr, 19Diplomat Pharmacy 

(DPLO)5.69 5.29 7.0%

Closed ‐ 

5/16/2019

May, 19 Match Group (MTCH) 61.91 60.90 1.6%Closed 

11/6/2019

Jun‐19 Tailored Brands (TLRD) 5.56 4.94 0.18 11.2%Closed ‐ 

7/24/2019

Jul‐19 Realogy Holdings (RLGY) 6.55 5.60 14.5%Closed ‐ 

7/24/2019

Aug‐19 Party City Holdco (PRTY) 6.04 4.50 25.5%Closed ‐ 

8/8/2019

Sep‐19 LendingTree (TREE) 309.02 285.36 ‐ ‐Closed ‐ 

December 13

Oct‐19 Peloton (PTON) 23.01 24.98 0‐2 yrs

Nov‐19Ollie's Bargain Outlet 

(OLLI)60.07 59.68 0.6%

Closed ‐ 

12/5/2019

Dec‐19 Jumia Tech (JMIA) 5.85 5.32 9.1%Closed 

2/24/2020

Jan‐20 Grubhub (GRUB) 47.17 51.90 0‐2 yrs

Feb‐20 Yum China (YUMC) 42.71 42.57 0.12 0‐2 yrs

   

 

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Income Generation 

   Time Horizon: Long‐term 

“So when you step back because we are Complete, Global, Diversified and At Scale, we were able to 

maximize the benefit of the macro backdrop and take that and invest to make us more Complete, more 

Global, more Diversified, and more At Scale… this has positioned us well to face more difficult operating 

environments with both cyclical and secular challenges… we have gained share across our businesses, 

and these share gains have come not just from us getting more than our fair share of market growth but 

even in businesses where wallets have been flat or down, we have seen share growth as clients 

consolidate their wallets with the better, more complete providers.” ‐‐‐ CFO Jennifer Piepszak at the 

Annual Investor Day February 25, 2020 

JPM-PRC, Preferred Shares Series EE

Thesis Our March 2020 income generation idea is JPMorgan Chase’s (JPM) preferred issue: JPMorgan Chase & Co. Dep. Pfd. (Rep. 1/400th Pfd. Series EE), quoted as (JPM-PRC), that as of midday Friday, March 6, yielded ~5.45%. Before getting deeper into why we like those securities as a high-quality income generation opportunity, let’s first take stock of where we are regarding the ongoing novel coronavirus (‘COVID-19’) epidemic and how that impacts the banking sector. Global equity prices have come under tremendous pressure of late due largely to fears over COVID-19. The stock market has sold off its recent highs and bank stocks have clearly been among the leaders on the way down. There are a few reasons for this. The first is that (both long and short) interest rates have come down, which will pressure revenue from Net Interest Margins (‘NIMs’). NIMs is the money earned by borrowing cheaply and lending the same money back out at a higher rate to clients. Secondly, the market seems to start baking in some probability that the spread of COVID-19 could tip the world into a recession. Thirdly, and perhaps most troubling, we think the tail risk probability of financial crisis (again – caused by the ongoing COVID-19 epidemic) has been rising, as evidenced in part by stress in banking shares and bonds as well as junk bonds more broadly.

Corporate Profile According to JPMorgan Chase’s (JPM) 2019 10-K Filing: “JPMorgan Chase & Co, a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the US, with operations worldwide. JPMorgan Chase had $2.7 trillion in assets and $261.3 billion in stockholders’ equity as of December 31, 2019. The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing and asset management. Under the J.P. Morgan and Chase brands, the firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients… For management reporting purposes, JPMorgan Chase’s activities are organized into four major reportable business segments, as well as a Corporate segment. The Firm’s consumer business is the Consumer & Community Banking (“CCB”) segment. The Firm’s wholesale business segments are the Corporate & Investment Bank (“CIB”), Commercial Banking (“CB”), and Asset & Wealth Management (“AWM”).”

 

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To put it simply, if one had perfect foresight and knew we are to avoid a recession and financial crisis, then investors should be buying bank shares with arms wide open at current valuation levels. Price to earnings ratios are below 10 for many banks and as low as 6- or 7-times earnings and dividend yields are up to 5% for quite a few banks. Unfortunately, we are not in this camp with the rosy shades. It appears to us that a US recession is quite likely as consumers exhibit “cocooning” behavior as the virus spreads throughout the community in more and more states and the world at-large. We also don’t like the rising probability of another financial crisis. While the banks in the US are in quite a healthy state to start, banks in Europe, Japan, and China are all quite susceptible to a global downturn in economic activity. So, where can one look within the banking universe for high yielding opportunities? Like a previous pitch of Bank of America (BAC) preferred shares, we are now advocating consideration of JPMorgan’s preferred shares. When times get tough and scary probabilities are rising, it is always time to retreat to high ground in the banking sphere. And JPMorgan is the highest ground amongst the large universal banks. Let’s discuss the merits of the JPMorgan franchise before continuing with the logic for investing in JPMorgan preferred shares. As you can see in the upcoming graphic down below, this bank is very well diversified and enjoys very high returns on capital in its Consumer & Community Banking segment and Asset & Wealth Management Segment. The former is a business where scale matters and JPMorgan enjoys that scale benefit. Everything from developing customer facing apps to streamlining back office software and processes to mass market advertising to building and maintaining large scale fleets of bank branches and ATMs are all a scale game. JPMorgan, Bank of America, and Wells Fargo (WFC) are the three largest scale players in the US and they dominate businesses like credit card issuing and lending.

Image Source: JPMorgan Chase ‐ Annual Investor Day 

 

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Next let’s look at comparisons between JPMorgan and the other BIG SIX banks in the US. The upcoming graphic down below shows comparisons from the 2019 calendar year and it is quite clear that JPMorgan is growing more quickly, is more efficient, and is harvesting the highest returns on tangible capital. These comparisons not only speak to the strength of the bank, but also the margin of safety when it comes to dealing with tough times. If a flood were to come along in the form of a severe recession or financial crisis, it will wipe out the banks with the lowest earning power and capital bases first. JPMorgan stands on the highest ground with remarkably strong capital, liquidity, earnings power, and return on capital.

Image Source: JPMorgan Chase ‐ Annual Investor Day 

Zeroing in on growth, the upcoming graphic down below proves that one of the biggest banks in the country and the world, JPMorgan, can still grow at an impressive rate. While it has been against a benign macro backdrop, the bank grew its revenues at a 9% CAGR from 2015 to 2019. This is a blistering pace for such a behemoth. Competitive advantages are leading to market share gains and reinvestment in the bank is further bolstering competitive advantages.

Image Source: JPMorgan Chase ‐ Annual Investor Day 

 

20 | P a g e   

 

   

We think the run through of some high-level metrics in the graphic on the bottom previous page (Page 19) proves that JPMorgan is on high ground in the banking space and is only improving its formidable position. As we have discussed in other pieces, only Bank of America is within spitting distance and attempting to close the gap. Now, why do we think income-oriented investors should consider JPMorgan Chase & Co. Dep. Pfd. (Rep. 1/400th Pfd. Series EE), quoted as (JPM-PRC)? First, as of Friday, March 6 at midday, these preferred shares are yielding 5.45%, which is a juicy yield as compared to 10-year government bonds now trading with a yield well under 1%. Bank deposit and CD yields are also coming down from already low levels as the Federal Reserve cuts rates. So, that’s the reward, what about the risks? We already talked about how JPMorgan is on high ground in the global and especially the US banking industry. In fact, we think the bank could make it through a depression and take market share in the process. As we know, however, it’s not always that simple. In the Great Financial Crisis, the US Congress and Treasury decided to inject capital into ALL of the big banks, causing dilution of equity holders. While that is an argument about the risk of owning straight equity, it bolsters the case for owning the preferred shares. If we were to hit another severe recession and global financial crisis, we think the preferred shares of JPMorgan would remain nearly bullet proof. Despite what regulators would have you believe with the relatively newly developed living wills for the orderly unwinding of distressed large banks, JPMorgan and the other big six banks (and others beside) remain too big to fail. If the regulators were to try to allow for orderly failures in a financial crisis, we are convinced that the result would be FAR from orderly. In fact, chaos would ensue if not only equity but also preferred shareholders of banks like JPMorgan were to be wiped out. In such a scenario, it would imply that ALL US banks had failed. Do you think the US Treasury and Congress would allow such an outcome on their watch? We don’t think so and hope we are never proven wrong as it would be catastrophic indeed. Another backstop aside from the government is the likes of Berkshire Hathaway (BRK.A) (BRK.B) with their more than $125 billion cash hoard. We think they would jump on the opportunity to invest in distressed securities of such a high-quality bank like JPMorgan if times were ever that tough. Such an investment would likely come alongside at the preferred equity level (possibly with warrants attached), or possibly lower in the capital stack at the common equity level. Either way, existing preferred shareholders would be protected even in such a dire scenario. So, these preferred shares offer a juicy yield with your backside covered even in the direst of economic scenarios. We like this risk/reward trade off. We would be remiss if we didn’t take the opportunity to wish Jamie Dimon well following heart surgery this past week. He has an incredibly strong team to run the bank while he recovers. And we wish him a speedy recovery indeed. Disclosure: Matthew Warren does not own shares in any of the securities mentioned above.

 

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Capital Appreciation  

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profile “ProShares UltraPro Short Dow30 seeks daily investment results, before fees and expenses, that correspond to three times the inverse (-3x) of the daily performance of the Dow Jones Industrial Average,” as presented on ProShares website. The ETF comes with a 0.95% expense ratio, which is a bit on the pricey side.

Thesis The capital appreciation idea for the March 2020 edition of the Exclusive is a unique one, a very unique one, and an idea that came to us as a result of a number of questions from members asking about different types of “crash protection” besides options, as COVID-19 continues to spread aggressively around the world. Let’s first get this out of the way. The ProShares UltraPro Short Dow30 is NOT a long-term holding (far from it!), and we’re

ProShares UltraPro Short Dow30 (SDOW)

“This short ProShares ETF seeks a return that is ‐3x the return of its underlying benchmark (target) for a 

single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, 

holding periods of greater than one day can result in returns that are significantly different than the 

target return and ProShares' returns over periods other than one day will likely differ in amount and 

possibly direction from the target return for the same period. These effects may be more pronounced in 

funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor 

their holdings as frequently as daily. Investors should consult the prospectus for further details on the 

calculation of the returns and the risks associated with investing in this product.” ‐‐‐ ProShares 

only highlighting SDOW in the March edition because we think there’s an opportunity for a trade/hedge as the Dow Jones Industrial Average may continue its swoon as it has the past couple weeks.

 

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Though investors should expect ongoing fiscal and monetary stimulus from sovereigns and central banks around the world (which may cause ongoing upside volatility), the news with COVID-19 looks like it is getting worse, and a vaccine may be more than a year away--and that’s if there is no material mutation in the pathogen. Frankly, even some of the most experienced medical professionals know very little about COVID-19, other than it is very deadly among individuals aged 70+ with pre-existing medical conditions such as cardiovascular disease or diabetes, that it spreads aggressively and that it is hard to contain without draconian measures.

COVID-19 is global with hotspots in China, South Korea, Italy, and Iran, among others, and New York, Washington state, and California have already declared state of emergencies. We’ve talked about this extensively on our website and in emails, and we think a swoon of another 10-20% in the Dow Jones Industrial Average, as implied by our S&P 500 target range is a good base case at this point. Here’s more background on what we know at the moment:

According to the World Heath Organization, as of Situation Report – 47, dated March 7, there are over 101,000 confirmed cases of COVID-19 across the globe, with over 21,000 confirmed outside of China in over 90 countries. The WHO Risk Assessment for China, Regional Level and Global Level remains ‘Very High.’ The WHO now believes that the death rate of COVID-19 is much higher than previously, estimated at 3.4% globally.

As we have reiterated, the illness is materially more deadly than the seasonal flu, and by some estimates, the death rate of those aged 70 and older is 8%+, and those with cardiovascular disease is 10%+. COVID-19 is a serious illness. China, South Korea, Italy, Iran, and soon to be the United States, Japan France and Germany are key hotspots of COVID-19.

In addition to community spread in Seattle (with some saying the city is a ‘ghost town’), Chicagoland, California (which is in a state of emergency), there are now cases of “unknown origin” (community transmission) in New York, New Jersey, Tennessee, and Nevada, among other states. We believe there are hundreds more cases of community transmission in the United States that have yet to be documented…

…We have written extensively about our valuation expectations and target on the S&P 500 in the past, so please don’t mistake this reference as the extent of our thinking. We do not think a sell-off on the S&P 500 to the range is 2,350-2,750 is too far-fetched, as it really only gets the broader markets back to late 2018 levels (a mere year ago or so), and reflects a reasonable 16x forward expected earnings, as of February 14, hair cut by 10% as a result of the impact of COVID-19. The Fed put may not matter much anymore in the wake of this “biological” crisis, and increased fiscal spending may not be enough to offset what could be sustained weakness across the global economy.

The SDOW is one way to play this near-term valuation thesis, as the ETF moves 3x in the opposite of the Dow Jones Industrial Average each day, before fees and expenses. It’s worth emphasizing, however, that this ETF is an eroding/wasting asset in the sense that volatility can erode its price over time. On the next page, we show a longer-term chart of the SDOW relative to the Dow Jones Industrial Average (DIA), offering a perspective of how this ETF could be hazardous if held over long periods of time. On the next page, however, we also show a short-term chart that reveals how SDOW could be opportunistic as a trade/hedge (without using options). That’s the long and short of it. We’d be looking to potentially close this trade in the event the SDOW hits the $55-$60 range. Should it break below $35-$40, we’d be looking to close it at a “loss.” Be careful with this idea; this one is not for the long term, but rather a short-term trade/hedge.

 

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Image (top): It is instructive to get a feel for how the SDOW moves relative to the Dow Jones Industrial Average (DIA). Since June of last year, while the DIA advanced about 4%, the SDOW fell more than 23%, revealing how holding periods of greater than one day can result in vastly different outcomes than one might have expected. SDOW is a short-term trading/hedging vehicle, not a long-term holding.

Image Source: ProShares 

Image (bottom): While the top image shows the eroding/wasting price characteristics as a result of volatility and compounding daily returns over long periods of time, this bottom image shows how the SDOW can be an effective near-term hedge/trade in the event of a market crash (without the use of options). For example, we estimate the SDOW advanced more than 34% since February 20, while the Dow Jones Industrial Average (DIA) fell more than 11%.

 

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Manchester United (MANU)

Short Consideration 

 

   

   

  

 

 

     

Corporate Profile Manchester United plc (MANU) is based in the Cayman Islands and its primary offices are in Manchester, the United Kingdom. Manchester United owns the Old Trafford soccer stadium in Manchester. The English soccer team is one of the most well-known sports teams in the world with a global brand and participates in various tournaments all around the world. The late American businessman Michael Glazer acquired Manchester United in 2005, which is now effectively controlled by his descendants due to the company’s dual share class structure. Manchester United reports its earnings in British Pound Sterling and pays a semi-annual dividend.

Thesis

Our March 2020 Exclusive short idea consideration is the company that owns the Manchester United plc (MANU) sports brand and team. We want to stress that this is a short-term idea based on a few things including the ongoing novel coronavirus (‘COVID-19’) epidemic continuing to spread in Europe and potentially forcing live sporting events to be cancelled, Manchester United’s deteriorating financial performance of late, its growing net debt load, and the lack of real shareholder voting rights for its publicly traded Class A shares. Additionally, Manchester United reports its financials in British Pound Sterling, yields ~1.1% as of this writing, and pays out a semi-annual dividend. A major revenue generator for Manchester United is its Old Trafford soccer stadium in the Greater Manchester region, and the firm refers to the related operations as its ‘Matchday’ revenues.

Time Horizon: Short term 

“As a reminder, year‐on‐year comparisons relative to fiscal 2019 have been impacted by the absence of 

Champions League broadcasting revenues and the cadence of matches on a quarterly basis. In terms of 

headline figures, total revenues for the second quarter were £168.4 million, down £40.2 million versus the 

prior year, with adjusted EBITDA of £72.1 million down £32.2 million versus the prior year.” ‐‐‐ Cliff Baty, 

CFO of Manchester United, during the firm’s second quarter fiscal 2020 conference call 

The company notes that “Matchday revenue is a function of the number of games played at Old Trafford, the size and seating composition of Old Trafford, attendance at our matches and the prices of tickets and hospitality sales” and during its latest full fiscal year (fiscal 2019 ended June 30, 2019), this segment generated GBP£111 million in sales for Manchester United (~18% of fiscal 2019 revenues). Manchester United generated GBP£241 million from its ‘Broadcasting’ segment in fiscal 2019 (~38% of fiscal 2019 revenues) from its deals with the Premier League, the UFEA Champions League (organized by the Union of European Football Associations), and through Manchester United TV Online (‘MUTV’). Please note that should Manchester United not perform well during competition games, that adversely impacts its revenues. Additionally, should games get cancelled in order to contain the ongoing COVID-19 epidemic (as part of a UK-wide curtailment of all live events and large gatherings), that could adversely impact Manchester United’s financial performance in a very meaningful way.

 

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In the event that the Manchester United soccer team is not able to play or in the event that the soccer team can play but for the safety of the players the stadiums are intentionally kept “empty” (meaning fans are forced to watch the game from home to stop the epidemic from spreading) with only relevant coaches and staff there, the company’s financials would suffer materially. There’s also the risk of players getting COVID-19 and not being able to play, which could negatively impact the performance of Manchester United and game viewership (if a star gets sick, some fans may opt not to watch until that player returns). Nowhere in Europe has been hit harder by COVID-19 than Italy. As of this writing, there are over 4,600 confirmed cases of COVID-19 in the country with the northern regions getting hit the hardest. Unfortunately, that included almost 200 fatalities and our sincere thoughts go out to those affected by this epidemic. The Italian government recently imposed restrictions on soccer games along with other sporting events, ordering those events to be spectator free until early-April. Reportedly, the Italian government is considering expanding the number of quarantine zones to get the epidemic under control. Other nations in Europe including Germany, France, and the UK are witnessing the spread of COVID-19 as well, with reported COVID-19 cases rising aggressively. There are now over well over 100 confirmed cases of COVID-19 in the UK and the nation recently reported its first fatality. This is quickly becoming a global pandemic and we want to stress here that the UK may impose similar policies as Italy in order to bring the epidemic (as it stands as of this writing) under control. Even before COVID-19 started to become an epidemic (and potentially a pandemic, though that remains to be seen), Manchester United’s financials had been weakening. While new sponsorship deals have helped its ‘Commercial’ revenues, that was completely offset by materially weaker Broadcast revenues and marginally weaker Matchday revenues during the first half of its fiscal 2020 (period ended December 31, 2019). As it relates to its Broadcast revenues (down over 33% year-over-year during the first half of fiscal 2020), that was because Manchester United failed to make it into the Champions League in fiscal 2020 (calendar year 2019) and instead played in the less lucrative Europa League, according to management. This highlights how important it is for publicly traded sports teams to win, and the pitfalls these types of equities pose for shareholders.

Image Source: Manchester United – 6K SEC Filing covering the second quarter of fiscal 2020 

Keeping in mind there are timing effects here as it relates to A-list player salaries and trading activities, Manchester United’s net debt load grew to $391 million at the end of December 2019 versus $318 million at the end of December 2018. A rising net debt load combined with uneven cash flows makes dealing with events such as COVID-19 no easy task. Some of those top tier players include midfielders Frederico Rodrigues de Paula Santos (commonly referred to as Fred) and Nemanja Matic, along with defenders Harry Maguire and Brandon Williams, among numerous others.

 

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Please note that Manchester United’s cash flow statement doesn’t read like most due to ‘payments for intangible assets’ representing a key part of its investment strategy as that “primarily relate[s] to player and key football management staff registrations” with conventional capital expenditures representing a small portion of the firm’s total investments. In the upcoming graphic down below, we highlighted (in red) the traditional line-items we look for as it relates to free cash flows and dividend obligations, and furthermore, we highlighted (in blue) key unconventional line-items that are industry-specific investments Manchester United is making in its players and coaching staff.

Image Source: Manchester United – 20‐F SEC Filing covering fiscal 2019 with additions from the author  

Manchester United doesn’t possess the financial strength required to ride out the COVID-19 epidemic without shareholders taking a serious hit, in our view. Please note that a good chunk of Manchester United’s debt load is in US dollars, which could become hard to service in the event ongoing trade negotiations between the UK and the EU don’t go well, pressuring the British Pound Sterling relative to the US dollar. While that is supposedly offset by Manchester United generating a material amount of its revenues in US dollars (particularly from its sponsorship deals), please note there are some foreign currency considerations here that at the very least create a more complicated environment for Manchester United.

 

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Here’s what management had to say during Manchester United’s second quarter fiscal 2020 conference call:

“Turning to the balance sheet. At the end of December, cash balances were £100.9 million, down £89.6 million primarily due to higher player capital expenditures. As mentioned in the first quarter, this higher player CapEx reflects the accelerated payment and deferred proceeds profiles of our summer activity. Net debt at the period-end was £391.3 million an increase of £73.6 million compared to the prior year due to the lower cash balances, offset by the impact of foreign exchange movements on our U.S. dollar-denominated debt. Our gross debt in U.S. dollar terms remains unchanged.”

Pivoting now to our final point as to why shares of MANU make for a good short idea consideration. It’s worth noting that MANU Class A shareholders do not have serious voting power due to the “enhanced” voting power of Class B shares as noted in Manchester United’s 20-F filing for fiscal 2019 (emphasis added):

Trusts and other entities controlled by six lineal descendants of Mr. Malcolm Glazer collectively own 7.44% of our issued and outstanding Class A ordinary shares and all of our issued and outstanding Class B ordinary shares, representing 97.07% of the voting power of our outstanding capital stock.

That effectively gives Class B shareholders, the descendants of the late Malcolm Glazer who was a successful American businessman, entire control over the company. Here’s more from the 20-F filing for fiscal 2019 (emphasis added):

For special resolutions… the voting power permitted to be exercised by the holders of the Class B ordinary shares will be weighted such that the Class B ordinary shares shall represent, in the aggregate, 67% of the voting power of all shareholders. As a result, the holders of our Class B shares will be able to exert a significant degree of influence or actual control over our management and affairs and control all matters submitted to our shareholders for approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. The interests of the holders of our Class B shares might not coincide with the interests of the other shareholders.

While there are companies out there with dual share class systems that can still represent interesting opportunities on the long side, for a firm like Manchester United, this insulates the company from any serious outside opinion. Shares of Manchester United very well could face significant downward pressure as fears mount over the potential negative impacts the ongoing COVID-19 epidemic could have on its ability to continue operating as is. Even if the UK “only” adopts the speculator-free sporting events rule like Italy, that would still have a profoundly negative impact on Manchester United’s financial performance. Furthermore, as UK and other consumers pivot towards spending on consumer staples goods and away from discretionary goods like apparel (particularly Manchester United-branded apparel), sports equipment, etc., that could further pressure the firm’s financials in the near-term if not longer. While this is a short-term idea, we think the market hasn’t fully reflected the seriousness of the situation, with shares of Manchester United still trading well above recent lows reached in the Fall of 2019 as of this writing. Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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Inaugural Letter to Members  

 

 

 

   

Dear Valued Member, Welcome! You are one of a very limited number of members that will ever bear witness to the pages that follow. The launch week of the Nelson Exclusive coincided with news that Britain has voted to leave the European Union. The decision, while sending the European banks tumbling violently, does little to muddy the context setting the background of the inaugural edition of this publication. Broader stock market valuations are at frothy levels, and interest rates continue to hover near all-time lows. The investment-decision landscape is more complicated today than ever before for all types of investors, from those seeking long-term capital appreciation to those that are targeting certain income goals. Cyclicals today are trading at peak multiples on peak earnings, and even consumer staples equities have reached valuation levels that may be more appropriate for aggressive growth equities, not mature operators. Said differently, the market has laid down the gauntlet. The next few years in the markets may be among the most difficult witnessed since the Great Recession. Even a broader market pullback 20% from current all-time highs wouldn’t be abnormal given that the collective market valuation of S&P 500 companies has effectively tripled from the March 2009 panic bottom. The launch of the Nelson Exclusive in such conditions can be considered perilous as broader market performance inevitably will act as ballast to the returns of ideas surfaced. In this spirit, I want to remind you that not all ideas in this publication will be successful, and some that are eventually may encounter tough sledding over extended periods of time. As a swimmer cannot achieve his best time swimming against the current, a stock selector cannot achieve his best performance in a down market. Regardless, the value placed on a steady hand during challenging times is priceless. Let’s first cover what the Exclusive is and then we’ll talk about what it is not. As you know, the Valuentum investment coverage universe is vast, and what we’re seeking to deliver in this publication is ideas that fall outside its reach. We’re breaking down the traditional barriers of equity coverage to identify underfollowed gems across the investing spectrum, delivering in each monthly edition one idea for income investors, one idea for readers seeking long-term capital appreciation, and a bonus idea for those looking for a “short” consideration (1). Underfollowed doesn’t mean obscure, however, and the ideas that we’re targeting will be investable ones, avoiding thinly-traded instruments and penny stock “traps.” We’ll clearly define our expected time horizon for each consideration, and where applicable, we’ll update our theses in subsequent editions. We’ll keep score, tracking performance over time. Let’s talk about what the Exclusive isn’t. The Exclusive does not constitute individual investment advice, and the ideas within it are not personal recommendations. Each of you reading should always work with your

July 1, 2016

 

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personal financial advisor who knows your individual goals and risk tolerances. I do not. Only you and your personal financial advisor know what’s best for your life circumstances. The personal financial advising markets and what we do at Valuentum via financial publishing are two different verticals in the same industry, but they are different nonetheless. I just want to be very clear about this because I can never tell you to buy or sell anything at any time, even if this may be what you want. It’s not that I don’t have conviction in my work – it’s the rules of the business. Within the twelve editions of the Nelson Exclusive each year, we’ll be highlighting in total 36 ideas for consideration with varying investment parameters. That’s a lot. Depending on the time horizon set forth with each idea, fantastic performance might mean a success rate of 60%, great performance might be 55%, average performance might be 50%, while anything below that mark may constituent a poor showing. Obviously, I’m aiming for a 100% success rate, but I also have to be realistic. The great Joe DiMaggio may have hit safely for 56 consecutive games in the last baseball season before the United States was thrust into World War II, but he “only” hit .357 that year. That season of ‘41, the great Ted Williams would be the last player to hit .400, meaning that one of the best hitters in baseball…ever…was still called out ~60% of the time. The greatest investors face a similar paradigm. Stock selection is a process where there will be homeruns and strikeouts. You know me. The Exclusive is not a “get-rich-quick” product, and you should keep a close eye on your wallet if you encounter anyone promising anything of the sort. In the inaugural edition of the Nelson Exclusive, I’m going to take 36 swings – they are going to be hard and through the zone, and I’m not going to pull my shoulder out or take my eye off the ball. Market conditions are expected to be stormy in coming years as “reversion-to-the-mean” dynamics rain down, and a crafty lefthander with great “stuff” may be on the mound, but we’re stepping up to the plate and digging in. Batter up! Sincerely, Brian Nelson, CFA President, Investment Research & Analysis Valuentum Securities, Inc. brian@valuentum.com P.S. On a very personal note, I wanted to thank you for your continued support. Without you, neither the Nelson Exclusive publication nor Valuentum would exist. This fact is not lost on me. I thank you deeply.

 

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(1) From the SEC’s website: A short sale is the sale of a stock that an investor does not own or a sale

which is consummated by the delivery of a stock borrowed by, or for the account of, the investor. Short

sales are normally settled by the delivery of a security borrowed by or on behalf of the investor. The

investor later closes out the position by returning the borrowed security to the stock lender, typically by

purchasing securities on the open market.

Investors who sell stock short typically believe the price of the stock will fall and hope to buy the stock

at the lower price and make a profit. Short selling is also used by market makers and others to provide

liquidity in response to unanticipated demand, or to hedge the risk of an economic long position in the

same security or in a related security. If the price of the stock rises, short sellers who buy it at the

higher price will incur a loss.

Brokerage firms typically lend stock to customers who engage in short sales, using the firm’s own

inventory, the margin account of another of the firm’s customers, or another lender. As with buying

stock on margin, short sellers are subject to the margin rules and other fees and charges may apply

(including interest on the stock loan). If the borrowed stock pays a dividend, the short seller is

responsible for paying the dividend to the person or firm making the loan (Source: SEC

https://www.sec.gov/answers/shortsale.htm)

Short selling is not for all types of investors, and readers should consult their personal financial advisor

that understands their individual goals and risk tolerances before considering any investment or any

strategy. Potential losses for an investor engaging in a short selling strategy are theoretically infinite.

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The Nelson Exclusive: Volume 5, Issue 3

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