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Eamon Trebilcock
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Eamon is currently a finance student and part-time investor. He focuses on both deep value plays and event-driven opportunities, but also employs quantitative strategies to take advantage of short-term trends in the marketplace. He currently manages a diversified equity portfolio that seeks to... More
  • Financial Stocks Outlook - Asset Managers, Large And Mid Cap Banks 0 comments
    Jul 19, 2014 4:42 PM | about stocks: BLK, FII, FRC, FITB, NYCB, BOH, C, GS

    Summary:

    The following article provides some insights into the financial industry. Below I will provide a general overview of three groups within the sector, along with Buy/Sell recommendations for each group. This article covers: Asset Management, Mid-Cap Banks, and Large-Cap Banks.

    Industry Group

    Return

    1-month

    3-month

    YTD

    Payments

    2.40%

    5.10%

    -3.10%

    REIT

    3.00%

    8.60%

    22.70%

    Mortgage REIT

    -2.00%

    2.40%

    16.20%

    Large Cap Bank

    -0.40%

    3.60%

    2.90%

    Specialty Finance

    -0.60%

    -5.70%

    -16.10%

    Asset Mgrs - Alt.

    2.10%

    5.40%

    3.00%

    Asset Mgrs - Trad.

    0.60%

    3.40%

    0.10%

    Mid Cap Bank

    -3.40%

    -1.40%

    -0.40%

    Life Insurance

    0.10%

    6.70%

    0.20%

    S&P 500

    0.80%

    5.00%

    5.90%

    Asset Managers

    Overview:

    1. Given the current macro environment and volatility, this group will not perform better than the broader market. However, this group has seen modest inflows of capital, but it will not be enough to offset the outflow from equity mutual funds. Investors on the side-lines will be waiting for an affirmation of fund flows to make a decision.

    Performance/Value:

    • Alt. Asset Managers +3.0% YTD
    • Trad. Asset Managers 0.1% YTD
    • Both Alternative Asset Managers and Traditional Asset Managers are both trading at higher multiple than their historical average.

    Equity Recommendations:

    BUY: BlackRock (NYSE:BLK)

    BLK appears to be strategically positioned to capitalize on the current asset management environment. Strong benefits to this company are it's ETF platform and dominance in alternative investments (up 3.0% compared to trad. Asset managers of +0.1%). I expect strong returns and EPS growth in the months to come.

    SELL: Federated Investors (NYSE:FII)

    FII faces significant struggles in the future. Money market fund fee waivers will continue to weigh on earnings, and it appears short-term interest rates will remain low until next year. In the long-term, money fund reforms remains a growing concern. Investors should expect money fund outflows as investors increase their risk appetite. As well, given the small size of it's equity and fixed income departments, FII may have trouble retaining clients on its current path.

    Mid-Cap Banks

    Overview:

    Thus far, we have seen some surprises within this group. First Republic (NYSE:FRC) sold off more than 15% after an announcement of slower loan growth and higher expenses due to regulatory reforms. Fifth Third (NASDAQ:FITB) lost almost 6% due to lower than expected EPS and weaker loan growth. Furthermore, Fifth Third did not paint a good picture for the future as it did not tell investors any plans to fix the lackluster income lost from its loans business. It may seem that investors are unsure of the management of these companies, and will look to next week to get a better sense of where the industry is.

    Performance/Value:

    • -0.4% YTD
    • -1.4% past 3 months
    • Mid-Cap Banks are currently trading at a multiple of 15.1x compared to the historical multiple of 14.5x

    Equity Recommendations:

    BUY: New York Community Bancorp (NYSE:NYCB)

    NYCB is a strong play for the income investor, with an appetizing dividend yield of 6.40%. Furthermore, I believe this yield is sustainable as the company has had a 5-year average dividend yield of 6.80%. As well, NYCB has been posting strong loan growth which should drive net income higher and work to further support the dividends. Lastly, I believe that NYCB is prime for an acquisition, of which offers strong upside.

    SELL: Bank of Hawaii (NYSE:BOH)

    BOH is undoubtedly a profitable bank in the mid-cap banking industry. However, I do not see significant upside or growth to this stock. The company has seen poor revenue growth due to losses in its consumer and auto loan business. As well, the Hawaiian economy has seen a slowdown recently which could strongly weigh on the stock. I expect this stock to underperform the broader market.

    Large Cap Banks

    Overview:

    I expect Large Cap Banks to perform strongly in the future despite declining trading revenues and mortgage lending. These banks will be helped by a stronger dollar, improving credit quality, and stronger loan growth. As well, I believe these banks will continue to see strong growth in credit card revenues that will offset losses in other departments as consumer spending continues to increase. Lastly, these institutions look poised to tank advantage of a steep yield curve.

    Performance/Value:

    • 2.9% YTD
    • 3.6% past 3 months
    • Large Cap banks appear slightly overvalued with a current P/E of 12.3x, and a historical P/E of 11.9x

    Equity Recommendations:

    BUY: Citigroup (NYSE:C)

    There are many upsides to this stock: a reducing of losses in credit cards, strong international growth, and price appreciation. I believe this stock is undervalued in the industry and holds the potential to move much higher. Lastly, Citi Holdings, the storage spot for non-performing loans within the company, posted a surprising profit for Q3, which provides investors with further positive sentiment.

    SELL: Goldman Sachs (NYSE:GS)

    There are many headwinds that are creating a downside risks for GS. Those include: increased public scrutiny over government investigations, regulations like the Volcker Rule and Dodd-Frank weighing on segments like the derivatives business and prop trading desks, and lastly, I believe that Goldman is exhibiting poor risk management skills that have that have the potential to weigh on earnings further.

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

    Stocks: BLK, FII, FRC, FITB, NYCB, BOH, C, GS
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