Value Investment Fund – End of Year 2021 Report

Value Investment Fund

During 2021, the Value Investment Fund recorded an outstanding 41.08% return on its December 31, 2020 balance of $116,231. The Value Investment Fund ended 2021 with a balance of $168,430.

The effective annual return on the investment equals 41.08%. The target for a value investor is more than 30% per year. What helped boost this good return was the overall market gains during 2021. The DOW Jones Industrial Average increased 18.73% which is an outstanding year for the DOW. Over the last 20 years, the DOW averages an annual return of 11.3%. A similar pattern holds against the S&P 500. During 2021, the S&P 500 generated a return of 26.61% and over the last 10 years it averaged 12.15%. Even with adjustments for the better than average returns across the board in the market, this site’s Value Investment Fund still beat the goal of at least 30% per year.

Wells Fargo Bank – One Year Report

Wells Fargo Bank

One year ago on January 12, 2021, the Value Investment Fund purchased its first tranche of Wells Fargo Bank. At that time, shares were purchased for $33.24. In addition, financial analysis stated that the price per share would recover to about $53 per share within a year assuming the Federal Reserve would lift its growth penalty. Today, the stock surpassed $56 per share. The facilitator for the Value Investment Fund has twice raised the sale price. The first time was back about six months ago whereby it was increased to $58 per share. Most recently, it again was raised to $63 per share.

There are several positive forces that will see the price per share hit $63 prior to mid-year 2022. One, Wells Fargo is expected to report an outstanding 4th quarter for 2021 not only with good revenues, but outstanding profits too. Secondly, in March of this year, the Federal Reserve will raise the interest rates which push the revenues for all banks higher.

Value Investing – Churning (Lesson 18)

Churning

Churning refers to agitating. It is commonly used with the dairy industry to refer to the process of turning liquid cream into butter. The churning process breaks down the fat membranes allowing the fats to join together. In effect, churning means to work the liquid into a solid. With investing, churning has two different connotations. The first is the more common negative connection to brokers getting their clients to buy and sell frequently in order to increase overall commissions for the brokerage. The positive connotation is rarely used and it refers to working one’s portfolio of investments to maximize overall return. That is what this lesson is about. How does a value investor work their portfolio to maximize overall portfolio return?

The ideal method to maximize return is buying low and selling high at the right time with investments that have quick recovery time frames. Ideally, all the cash proceeds from a sale should be immediately reinvested into new opportunities. Often, this is not the case. When the respective markets such as the DOW, S&P 500 or the S&P Composite 1500 experience highs, it is difficult to find good quality investments at low prices. This is further hampered when a value investment fund has limited options. In order to provide ample opportunities for reinvestment of cash, value investment funds require at least five pools of industries and a minimum of 40 stocks. The ideal fund will have around eight pools of potential investments with no less than 60 potential securities.

Sold PUTS on Huntington Ingalls Industries

Huntington Ingalls Industries

Today, the Value Investment Fund sold an options contract (PUTS) for 116.9591 shares of Huntington Ingalls Industries at $5.90 per share netting $4.90 per share. The strike price is $170 per share which is 4% lower than the buy price as set for this particular member of the Military Contractors Pool. The intrinsic value of Huntington Ingalls Industries is currently calculated at $185 per share. Current market price today, January 7, 2022, is $192 per share. 

Value Investment Fund – Status on November 30, 2021

Value Investing

As stated in October’s report, the Value Investment Fund created the Military Contractors Pool of potential investments and researched several opportunities. One of those opportunities is Huntington Ingalls Industries. On November 30, 2021, the Fund proceeded to purchase 112 shares of Huntington Ingalls due to the market price hitting the required margin of safety requirements related to intrinsic value. Please read Huntington Ingalls Industries – Market, Intrinsic and Value Investing Prices for more information about this particular company. From this article, even if this investment takes two years to recovery to the market recovery price of $251, it will still generate in excess of 23% annual returns. 

Value Investment Fund – Status on October 31, 2021

Value Investment Fund

During October, the Fund continued to hold Wells Fargo as its only investment. During the month, Wells Fargo improved $5,166 over September’s ending balance, a 10.48% improvement. As stated in other articles related to Wells Fargo, this is a long-term investment tied to the removal of the Federal Reserve penalty now going into its fourth year. This penalty is designed to prevent Wells Fargo from growing beyond its current $1.9 Trillion of assets. In the interim, Wells Fargo has improved the quality of its balance sheet by improving its percentage of non-interest bearing deposits and the quality of loans. Currently, the Fund has set the sale price for this security at $58 per share. Initially, it was hoped that the Federal Reserve restriction would be lifted by year-end 2021, but that is looking unrealistic now. If the restriction is lifted by end of June 2022, the stock should reach the target goal of $58 per share thus generating an estimated $22,950 return on a $40,000 investment basis over a course of approximately 18 months. This equates to an annual return of about 25%. 

Huntington Ingalls Industries – Market, Intrinsic & Value Investing Prices

Value Investing

The largest subsidiary of Huntington Ingalls Industries is their Newport News Shipbuilding division. They are the sole builder of the United States Navy’s aircraft carriers. Newport News Shipbuilding has been in business for over 140 years. Huntington Ingalls Industries has three distinct segments of operations. In addition to Newport News Shipbuilding, Huntington Ingalls Industries has its Ingalls division which builds non-nuclear combatant vessels including Coast Guard Cutters. A third division is their Technical Solutions segment which provides intelligence services to the Navy. With 44,000 employees and a backlog of $50 Billion of work, Huntington Ingalls Industries is an excellent inclusion in any value investing portfolio. With this site’s Value Investment Fund, this particular company is included in the Military Contractor’s Pool of investments.

The current market price as of November 20, 2021 is around $185 share. With 40.6 Million shares in the market, its market value is around $7.5 Billion. Therefore, this company is considered a mid-cap investment. However, the company consistently generates increasing amounts of revenue and outstanding profits. For investors, it also pays excellent dividends that often exceed a 2.5% dividend yield. The risk associated with a deep decline with the stock’s price is practically non-existent and more importantly, even if one occurred, the likelihood it will stay depressed for more than two years is remote. Even though this company falls within the mid-capitalization group of investments, it behaves like a large-cap. Simply stated, if a value investor can snap up shares at a good price, odds are, the investment will provide superior returns when the stock’s price returns to a favorable market price. The questions are now: ‘What is Huntington Ingalls Industries, Inc.’s intrinsic value, value investing buy price and the market recovery price for the purpose of value investing?’.

Purchased Huntington Ingalls Industries

Huntington Ingalls Industries

Today, November 30, 2021, the market saw a decline of 650 points with the DOW Jones Industrial Average. This pushed the price of Huntington Ingalls Industries lower by 2.32% below the predetermined intrinsic value of $185. At 1:15 PM, the price dipped to the buy point as set by this site’s Value Investment Fund for this particular potential investment in the Military Contractors Pool of investments. The Fund purchased 112.9943 shares at $176 each (paid $177 including the $1 per share transaction fee). Total invested capital equals $20,000.

Currently, there are 39 potential investments among six pools. Every single one, with the exception of Huntington Ingalls Industries, is selling at or near their respective historical highs. Thus, opportunities to buy low are non-existent in this current market. Having an opportunity such as this is a welcomed relief. The sell point for this stock is preset for $251 per share netting $73 per share gain after fees (another $1 per share fee at the sale of the stock). It is expected that it will take approximately six quarters to recover to this preset market recovery price point.

Wendy’s – Intrinsic Value of Stock

Value Investing

Wendy’s is the second largest publicly traded informal eating-out (fast-food) hamburger chain. Its current market capitalization places it around $5 Billion. Therefore, it falls into the mid-cap arena of stocks. At the time of this article’s inception, November 2021, Wendy’s was trading on the NASDAQ at $23 per share. Its intrinsic value is a little less than half the market value and a value investor’s buy point is around $8 per share. The company does pay a small dividend. Current dividend yield is slightly less than 2%. Overall, the company is profitable but stagnant related to growth. Stated succinctly, Wendy’s is nowhere near worth a current market value of more than $20 per share. 

This company runs the industry financial model commonly used with other fast-food restaurant chains. It has three revenue and expense segments of operations. The first and core segment is the traditional corporate owned locations. Wendy’s has 361 company owned stores. As such, they have a traditional profit and loss calculation associated with this segment. A second segment and the real driving force of profit is the franchising arm of the company. There are 6,467 franchisees, with corporate owned stores, Wendy’s totals 6,828 restaurants. This segment is driven by the 4% franchise fee placed on all sales of the franchisees. Similar to McDonalds, the core source of profitability stems from the franchising aspect of operations. A third and not as profitable as franchising is the real estate arm. Just like McDonalds and other well managed restaurant chains, Wendy’s negotiates long-term leases of property in ideal locations and in turn negotiates beneficial long-term leases with franchisees to pay rent for the use of that land. The franchisee uses their capital to build the store, equip it and initiate operations at that site.

Shake Shack – Intrinsic Value of Stock

Shake Shack Intrinsic Value

One of the members of the informal eating out industry, fast-food restaurants, is Shake Shack. Shake Shack is one of the few fast-food restaurants that sells beer and wine at a limited number of its locations. The company is relatively young by any business standard opening its first restaurant back in 2001 and going public in 2014. Thus, the company does not qualify as a value investment opportunity but is used as a comparative tool in this site’s Value Investment Fund’s Fast-Food Restaurants’ Pool.

In general, Shake Shack’s market price is several times greater than the company’s intrinsic value. It is trading at this high price purely on conjecture that it will morph into the next McDonald’s. Based on its business plan, historical earnings, and capital raising capacity; it will take every bit of twenty (20) years to justify the current market price – trading at more than $70 per share (November 2021). No value investor in their right mind would spend $70 plus on hope. It is simply irresponsible.

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