Value Investment Fund – April 30, 2022 (Monthly Report)

Value Investment Fund

Risk reduction is an incredible tool to protect one’s portfolio during market downturns. Over the first four months of 2022, the market as a whole has decreased more than 10% on average. Yet, this site’s Value Investment Fund improved slightly. When a value investor buys a security at less than intrinsic value, there is dramatic resilience against continued losses or sudden market downturns. In effect, there is less volatility. In exchange for this increased security, the value investor gives up instantaneous value growth due to the greater than normal stability of the respective investments. The secret to making a profit is to buy low and wait patiently for the market price recovery; the returns are still considered outstanding. Again, with value investing, expect returns above 30% on average per year. Do not expect returns greater than 40% as these are highly stable companies and well respected; thus, their market prices will rarely deviate dramatically in either direction.

Bank of New York Mellon – Monitor Closely

Bank of New York Mellon

Overall, Bank of New York Mellon is in good financial condition and even with the adjustment for a reduction in revenue tied to Russian transactions, the bank will regain market value once the entire market shifts towards a positive position in comparison to the various index values on 12/31/21. However, the current market price is still too high to warrant a ‘Buy’. Intrinsic value is set at $42 per share and given the additional risk associated with securities valuation and the impact reduced fees will have in the short-term related to earned amounts from Russian activity, a 9% discount is warranted. Thus, a ‘Buy’ price is now set at $38 per share. 

Domino’s Pizza Inc. – Intrinsic Value

Domino's Pizza

Domino’s Pizza is the third largest publicly traded fast-food chain in the world. With over 18,800 locations worldwide, the business model is three pronged with franchising as the primary profit center. However, it has one glaring flaw, the company is highly leveraged to the tune of more than $5 Billion. There is ZERO equity in this company. It’s average annual earnings over the last five years are around $380 Million. The interest expense alone has almost doubled from $99 Million in 2016 to $192 Million in five years. 

Even with an average annual earnings of $525 Million per year, it will take 10 years to get the debt under control. Domino’s Pizza Inc. keeps recapitalizing its debt every couple of years. This recapitalization process increases the aggregated interest paid and given the current Federal Reserve’s attitude towards interest rates, this is going to be a detrimental problem for Domino’s in a few years. The weighted average borrowing rate is currently 3.8% and will remain stable for several years due to timing issues. However, there is a $1.2 Billion refinancing requirement in 2025 which will most likely result in an increase the average borrowing rate. Thus, the ability of Domino’s to continue profitability at more than $600 Million per year after 2025 is questionable.

End of 1st Quarter 2022 Report – Value Investment Fund

Value Investment Fund

During the first quarter of 2022, all major indices experienced dramatic retrenchment with the market value of their respective index. At some point during the quarter, most indices had double digit value reduction; the last half of March 2022 saw all of the various types of funds recover from the low points earlier in the quarter. However, this site’s Value Investment Fund experienced continued growth. This is the result of exercising highly selective buys that reduce risk dramatically. In turn, this risk reduction principle minimizes any type of potential loss associated with an economic wide downturn.

McDonald’s Intrinsic Value

McDonald's

President, Chief Executive Officer and Director of McDonald’s Inc. said it best in the earnings call in late January 2022, we are “… witnessing the beginning of the next great chapter at McDonald’s, …”. He continued with “2021 was a record-setting year for McDonald’s on many dimensions, …” Simply put, McDonald’s had the best financial performance ever in its history during 2021. It just didn’t marginally exceed records, McDonald’s dramatically surpassed all financial records in its entire history. McDonald’s was already the standard bearer in the informal-eating-out industry; it took this standard to a whole new level. When a company has net profits of more than 20%, it is labeled a ‘darling’; over 25%, it is just unheard of financial results; in 2021, McDonald’s net profit was greater than 32%. This sets such a high standard for fast-food restaurants; it is unlikely to be matched by others – EVER.

When a company performs to this level, intrinsic value soars. Intrinsic value is built on a company’s inherent worth. The more stable and reliable a company, the greater the intrinsic value for that company. The reason is simple, the discount rate used with evaluating earnings improves because management demonstrates that it can indeed perform and in this case, perform at exceptional levels.

What is even more fascinating is this: 

If you look at McDonald’s balance sheet, total assets on 12/31/21 are $53.8 Billion; total liabilities are $58.4 Billion. McDonald’s has a NEGATIVE EQUITY POSITION OF $4.6 BILLION. You read that correctly. In simple layman’s terminology, this is called ‘Bankrupt’. Every business textbook used in college defines bankruptcy as liabilities exceeding assets. This makes McDonald’s performance just that more impressive. They are so solid, even creditors ignore this situation and will still loan money to McDonald’s. During 2021, McDonald’s was able to acquire long-term loans totaling $1.154 Billion.  To further validate the incredible worthiness of McDonald’s, from page 57 of their filed SEC Form 10-K (annual report), “There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business.” You can only count on one hand the number of companies that have this level of credit. 

McDonald’s is financially rock solid.

Value or Growth Investing – Which is the Superior Investment Strategy?

Value Investing

There are about a dozen popular investment strategies. Two of them stand out in the crowd as the best due to similar standards of research required; they are value and growth investing. From these two top tier investment methods, which investment strategy is superior, value or growth investing?

Many that are unfamiliar with investing consider value and growth investing as synonymous. The truth is, both are starkly different. First, both have a completely different approach towards risk. Secondly, one places greater emphasis on holding the investment for extended periods of time. A third difference relates to the reliability of the supporting information when researching the potential investments. Finally, one of the methods has a superior dividends payout ratio over the other. 

This article will delve into these four distinct differences and how they play into results. When done, the reader should be able to quantify the value each provides depending on the mindset of the investor. Before getting into the four core differences, readers should understand the emphasis each form of investing has in order to discriminate the four core differences.

Intrinsic Value – Balance Sheet Fundamentals

Intrinsic Value - Balance Sheet Fundamentals

Novice and unsophisticated investors place greater reliance on net profits over the balance sheet to determine intrinsic value. However, most so-called experts forget what intrinsic value means; intrinsic value refers to the universally accepted core value of a company. In many cases, this can be easily derived from the balance sheet. If not derived from the balance sheet, the balance sheet can act as additional assurance that certain intrinsic value formulas are superior and best suited given the balance sheet information.

Understanding how a balance sheet is laid out, works and reports this information greatly assists value investors with determining intrinsic value. Gaining knowledge about balance sheet fundamentals takes a value investor to the next level of comprehension of value investing.

This is the second part in a series about intrinsic value. It is the first in a four-part series about the balance sheet and different intrinsic value formulas that are tied to the balance sheet. The next lesson in this balance sheet series delves deep into analysis of asset matrixes and proper interpretation of that information. It also includes how to tie the asset matrix to the liability layout. Understanding this relationship allows the value investor to apply certain intrinsic value formulas which are explained and illustrated.

Watch Huntington Ingalls Industries

Value Investing

Today is March 17, 2022. If you are value investor, you need to watch Huntington Ingalls Industries market price closely. Get ready to buy. 

Back in November 2021, this site’s Value Investment Fund purchased a $20,000 position in this company. On December 12th, the facilitator posted an article detailing the intrinsic value, buy price and market conditions. In February, the Fund updated the sell point due to the quality of financial performance during the fourth quarter of 2021. Last week, the Fund sold its position in Huntington Ingalls Industries when there was a sudden upward spike with the market price. It turned out as an excellent value investment; one that any value investor desires as a performance investment. 

Intrinsic Value – Definition and Introduction

Intrinsic Value

Intrinsic value has several different definitions when used in the business context. The word intrinsic refers to ‘innate’ or ‘inherent’. Whereas value refers to the exchange mindset between two or more parties. Thus, intrinsic value refers to the core understanding between parties of the worth of something. When looking at the market price for a security, having knowledge of the intrinsic value prevents over paying for an investment. The key is determining this price range for the security. The primary rule for intrinsic value is straight forward; it is a RANGE and not an exact dollar value.

With value investing, the goal is to narrow this range to a set of values that are REASONABLE and OBJECTIVELY verified. Therefore, rule number two, intrinsic value must be reasonable and objectively determined. Finally, all users of intrinsic value must understand and appreciate that intrinsic value is not static. It changes every day and for highly stable companies, it should improve every day in a predictable manner with a high level of confidence.

Sold Huntington Ingalls Industries – 103.48% Annualized Return on Investment

Huntington Ingalls Industries

Today, 03/07/22, at 10:28 AM, the market price for Huntington Ingalls Industries reached my preset sales price of $226 per share netting the Value Investment Fund $225 per share after transaction fees. Initial investment on 11/30/2021 was $20,000 including transaction fees (Purchased HII). Total number of shares purchased and sold was 112.9943 shares. Capital gain from this transaction was $5,423.72. During this 98 day holding period, the Fund earned $133.33 in dividends. Total earnings over 98 days were $5,557.05 for an absolute return on the $20,000 investment of 27.785%. Annualized, this equals 103.48%.

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