1 Date: 11/15/12 Analyst: Chris Letcher CIF Sector Recommendation Report (Fall 2012) Sector: Financials Review Period: 10/31 – 11/9 Section (A) Sector Performance Review Copy/paste “Sector Review Spreadsheet” (the entire spreadsheet) here Review sector performance relative to the broad market (SP500) and explain why; Include a two‐week (for the two‐week window reviewed) price chart of the SPDR sector ETF and SP500 (on the same chart) FIN Ticker Current Beg. Stop-loss Target % Cap # Shares Current vs. Sector vs. S&P 500 Price Price Price Price Gain Value S&P 500 $INX 1379.85 1410.99 -2.21% Sector ETF XLF $15.50 $15.86 -2.27% 10730 $166,315.00 -0.06% Current Holdings BlackRock Inc. BLK $186.83 $189.09 $160.45 $200.00 -1.20% 150 $28,024.50 1.07% 1.01% Capital One Financial Corp. COF 58.37 60.33 51 75 -3.25% 590 $34,438.30 -0.98% -1.04% #DIV/0! $0.00 #DIV/0! #DIV/0!
Transcript
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Date: 11/15/12
Analyst: Chris Letcher
CIF Sector Recommendation Report (Fall 2012)
Sector: Financials Review Period: 10/31 – 11/9
Section (A) Sector Performance Review
Copy/paste “Sector Review Spreadsheet” (the entire spreadsheet) here
Review sector performance relative to the broad market (SP500) and explain why; Include a two‐week (for the two‐week window reviewed) price chart of the SPDR sector ETF and SP500 (on the same chart)
FIN
Ticker Current Beg. Stop-loss Target % Cap # Shares Current vs. Sector vs. S&P 500Price Price Price Price Gain Value
Capital One Financial Corp. COF 58.37 60.33 51 75 -3.25% 590 $34,438.30 -0.98% -1.04%
#DIV/0! $0.00 #DIV/0! #DIV/0!
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During my review period the XLF outperformed the S&P 500 until the day following the election when it took a hit. Since then the XLF has been underperforming.
Highlight noteworthy headline news from the sector (company‐, industry‐, or sector‐ level news)
The recent election impacted the financial sector greatly because investor confidence was affected by the re election of President Obama. Many large banks in the financial sector were hoping that Mitt Romney would be elected because he planned to loosen some of the regulation that came as a result of the financial crisis. The day following the election many investors pulled out of the financial sector. Recently President Obama suggested a 1.6 trillion dollar increase in tax revenue over the next decade (Wall Street Journal). This could have a major influence on companies in the financial sector.
Highlight the biggest (+) and the biggest (‐) movers from the sector holdings during the review period. Are there notable reasons why the stocks had big moves (e.g., earnings surprises, etc)?
Some of the biggest positive movers in the financial sector over the past month were State Street Corp (+7.13%), Public Storage (+5.36%), and American Tower Corp (+4.79%). Some of the biggest negative movers were BB&T Corp (‐16.89%), Huntington Bancshares (‐13.03%), and Regions Financial Corp (‐12.65%). State Street Corp had very good Q3 earnings, which were up 23% from the same quarter the previous year. In addition they have shown positive EPS growth over the last year and a very high net profit margin (The Street). BB&T Corp actually had good third quarter earnings but they did not quite meet expectations so their stock price fell over 7% following the earnings report (Bank Watch). Even with these slightly lower results, analysts are fairly bullish on BB&T. They see it as a growing company that has shown solid earning growth.
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In addition, BB&T has plans for expansion into Texas where 30 new branches are planned to open (Austin Business Journal). This could be a good indicator of future growth and with the stock price low it could be a good value buy.
Highlight the largest two holdings from the sector and note any headline news on the companies
The two largest holdings in the financial sector are Wells Fargo & Co (WFC) and Berkshire Hathaway ‘B’ (BRK.B). Wells Fargo has 8.51% of the sector ETF while Berkshire Hathaway has 8.37% holdings. Since the start of my two week review period the stock prices for Wells Fargo and Berkshire Hathaway have dropped 5.38% and 1.8% respectively (From Reuters). Much of these drops in price can be attributed to the recent election results. Shareholders of the financial sector were hoping for a Romney presidency, which would have resulted in less strict regulation. On November 6th, Wells Fargo announced that it will be expanding its wholesale banking capabilities into Canada. This will help the company to better serve large Canadian corporations, which may help generate revenues (from Wells Fargo). Berkshire Hathaway recently reported strong Q3 earnings which far exceeded estimates, although operating revenues were down. CEO Warren Buffet is known for making smart investment decisions, but even he admits that Berkshire Hathaway may not be as successful moving forward (Seeking Alpha).
Comment on short‐term outlook of the sector (including noteworthy upcoming events) In the short term the sector looks to be fairly strong. Following the election a lot of investors pulled out of the financial sector for fear of stricter regulation, but on Friday the Fed delayed some of those regulations. Following the financial crisis, congress passed the Dodd Frank Act which put stricter regulations on banks. Parts of the act have yet to be implemented and Friday’s announcement that Basel lll will be delayed was good news to investors of banks (Market Watch).
Section (B) Sector Holding Updates
Company #1: BlackRock, Inc. (BLK)
Date Recommended: 10/18/2012
Date Re‐evaluated: 11/09/2012
Company Update
During my review period not a whole lot changed with BlackRock Inc. Recently they made a statement which undermined the importance of the Eurozone crisis by saying “the Euro zone
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crisis, at least for the moment seems less of a concern” (Reuters). BlackRock executives believe that the Chinese market and the growing U.S. Economy will support growth in commodities markets. This is important since commodities make up a large portion of the funds BlackRock offers. Another area of concern is SEC proposed regulation. The SEC aims to make sure that funds stay more stable during economic downturns. They believe panic during the financial crisis led to quick withdrawals from money market funds, which significantly decreased lending in the economy. Lately, the uncertainty in the market has caused heightened SEC pressure on companies like BlackRock and Fidelity. Recently, BlackRock proposed a plan to charge extra fees to investors when a fund is under stress (Reuters). Finally, BlackRock has recently begun to expand their exchange traded funds. They are now offering lower cost funds to retail investors. To market these funds they will even use television ads (New York Times). BlackRock executives believe that with an uncertain market these lower cost funds will be attractive to investors.
Relative Performance
Over the past few months BlackRock has performed very well and they have recently managed to outperform the S&P 500. In addition, the stock price fell only a little bit following the election as opposed to a lot steeper declines throughout the sector. This is most likely because BlackRock has been a favorable alternative to investors leading into possible recession. While banks are hurt by stricter regulation, BlackRock has diverse holdings in their mutual funds, which could soften the concerns of investors.
Price Charts
Three Month Price Chart
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One Year Price Chart
Valuations Analysis
Original Analysis
Ratio Analysis Company Industry Sector P/E (TTM) 14.98 57.78 32.8 P/S (TTM) 3.63 31.58 5.3 P/B (MRQ) 1.31 .96 1.27 P/CF (TTM) 12.56 60.04 12.44
Re‐evaluation Analysis
Ratio Analysis Company Industry Sector P/E (TTM) 14.45 41.29 35.64 P/S (TTM) 3.58 24.50 5.53 P/B (MRQ) unlisted 3.42 1.74 P/CF (TTM) 12.30 42.06 12.55
Since the stock was originally evaluated all of these key ratios have slightly gone down. This is likely because of uncertainty in the future market. For example the Price to Cash flow ratio has lowered, which could indicate that earnings growth will not be as high in the future. However, sometimes a higher P/CF ratio could indicate an overvalued stock so these ratios do not tell the whole story. Historical Surprises
Original Analysis
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Re‐evaluation Analysis
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Since the stock was originally evaluated, the Q3 earnings report came out. The report looked good as BlackRock’s EPS and revenues both beat analyst estimates. Over the past few quarters BlackRock has consistently outperformed estimates in EPS. Consensus Estimates
Original Analysis
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Re‐Evaluation Analysis
Since the Q3 earnings report analysts have increased their revenue and EPS forecasts for the upcoming quarters and years end. In addition, analysts have generally adjusted EPS forecasts upward.
Estimate Revision Analysis
Original Analysis (10/18/2012)
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Re‐Evaluation Analysis
Over the past week no analysts have adjusted their forecasts, however the general trend for revisions is moving upward. Analysts’ Recommendations
Original Analysis
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Re‐Evaluation Analysis
Currently, the mean rating is still 2.15 so analysts remain bullish on the stock. Most analysts believe it will outperform or hold. A few said buy and just one said it would underperform. In addition, analysts seem to be more bullish as time goes on.
Company #2: Capital One Financial Corp. (COF)
Repeat the above for Company #2, and all other sector holdings in CIF.
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Date Recommended: 10/30/2012 Date Re‐evaluated: 11/09/2012 Company Update
Capital One Financial Corp has seen its stock price decline slightly since my review period begun on October 31st. Hurricane Sandy could be playing a role in this decline considering on September 30th,18% of the companies total loans were in areas hit hardest by the storm. These places included Connecticut, New Jersey, and New York (The Street). The company does not know the extent of these losses yet. The company also stated “historically, insurance proceeds and government support that follow natural disasters have significantly mitigated our losses” (The Street). The company does not want to see investors panic and sell off too many shares. In addition, Capital One was recently named a top 100 military employer by G.I. Jobs (Reuters). This shows that they have continued commitment to hiring veterans, which helps their public relations.
Relative Performance
Over the past few weeks Capital One has outperformed both the XLF and the S&P 500. Recently though, they have seen their stock price decline along with most of the financial sector. This is most likely because of the Hurricane Sandy and the recent election results. Over the past decade Capital One has transformed itself from being primarily a credit card issuer to a bank relying on deposits (Reuters). They are now one of the largest banks in the United States. With heavy reliance on loans the re election of president Obama made many investors skeptical. One good piece of news is Capital One has already taken provisions to ensure that they will be able to maintain a common ratio of 8% by 2013. Eight percent is the proposed amount by the Basel 3, which Obama is expected to uphold (Reuters).
Price Charts
Three Month Price Chart
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One Year Price Chart
Valuations Analysis
Ratio Analysis Company Industry Sector P/E (TTM) 9.82 20.99 33.02 P/S (TTM) 1.76 4.78 5.41 P/B (MRQ) .90 1.62 1.51 P/CF (TTM) 9.3 5.84 12.37
Ratio Analysis Company Industry Sector P/E (TTM) 9.70 24.50 35.64 P/S (TTM) 1.71 4.79 5.53 P/B (MRQ) .87 1.88 1.74 P/CF (TTM) 7.35 7.11 12.55
These ratios have stayed pretty similar since the stock was originally reviewed on October 30th. One ratio that dropped the most was P/CF. This could indicate an expected slowdown of future
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earnings growth. In addition, Capital One’s P/CF ratio went down, but the industry and sectors rose.
Historical Surprises
Original Analysis:
Re‐evaluation Analysis:
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Capital One was reviewed very recently so these estimates have not changed since the original review date. I did notice that in the most recent quarter Capital One outperformed revenues estimates by 2.48% and Earnings estimates by 21.14%. These are good signs for the company moving forward.
Consensus Estimates
Original Analysis:
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Re‐evaluation Analysis:
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Interestingly, even with the election and Hurricane Sandy earnings and revenues estimates for next quarter have slightly risen. In addition, since last year earnings and revenues estimates have substantially risen. This could be partially due to the fact that they purchased ING Direct near the beginning of this year (Reuters).
Estimate Revision Analysis
Original Analysis:
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Re‐evaluation Analysis:
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Since the original review, only a few analysts have adjusted earnings and revenues estimates. I noticed that most estimates for this year are up, however, estimates for next year are mostly being revised downward. This could reflect a general skepticism toward the future of the financial sector as a whole.
Analysts’ Recommendations
Original Analysis:
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Re‐evaluation Analysis:
Analyst recommendations have not changed since the original review. Overall the rating is very bullish at 1.86. Most analysts say it is a buy or it will outperform. Interestingly, analysts have become more bullish overtime.
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Section (C) Sector Recommendations
You will make recommendations on whether CIF should continue to own its sector holdings
Provide your views on the sector. Are you bullish, bearish or neutral on the sector, and why?
Discuss whether you recommend CIF to (1) stay put with its current sector holdings, or (2) sell out of the sector, and why?
After reviewing the market, I believe that the Cougar Fund should continue to own its financial sector holdings. Both BlackRock and Capital One Financial Corp have performed very well as of late and seem at least temporarily prepared to handle a possible recession. Analysts have a bullish attitude toward them, and neither one has significantly risen or declined since purchase. I do believe that we must pay close attention to these holdings though because of the historical volatility of the Financial Sector. I recommend that next analyst to review this sector take another close look at the market and re evaluate. Overall, I still have a bullish attitude towards the Sector as a whole. President Obama doesn’t plan to implement Basel III until next year and the sector has still been performing quite well even with its recent slide. In addition, the Holiday season could help boost earnings for Capital One and maybe help BlackRock as well. Even though I am bullish, I am still prepared to pull out as soon as the sector begins to seriously underperform. Section (D) Sector Holding Recommendations
Based on your analysis, are there stocks CIF currently owns from your sector you would recommend to:
1. Sell and why? 2. Adjust “target price” and why? If you recommend an adjustment, you must suggest a new
“target price” 3. Adjust “stop‐loss price” and why? If you recommend an adjustment, you must suggest a
new “stop‐loss price”
I recommend that we keep everything the same. The main reason is this sector was just reviewed on Tuesday and not much has changed since then. Both companies still have potential to grow and we could benefit by having them in our portfolio.
Provide your recommendations in the following table
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