Bryce Rowe discusses banking in Texas. Mr. Rowe says the entire sector participated in the year-end rally, and the primary driver for that was lower corporate tax rates, with secondary catalysts being around the interest rate environment and regulatory scrutiny. Mr. Rowe is most focused on credit trends at the moment. He is also focused on net interest margin changes and what happens to loan and deposit pricing and competition given the Fed’s tightening cycle. He is concerned about the late-stage nature of the credit cycle relative to where valuations are.
Full interview available here.
Jacquelynne Chimera Bohlen discusses the environment of Pacific Northwest banking. She says the two main economies there, Portland and Seattle, have done very well over the past year. That’s enabled banks to have solid loan growth, clean credit metrics and good profitability metrics. Ms. Bohlen says a surprise to her has been the huge run-up in valuations toward the end of the year. She says the current operating environment means that valuations will hold and perhaps increase further from here.
Full interview available here.
Pacific and Southwest banks saw a rally at the end of 2016 following the presidential election. Analysts say investors anticipated the new administration to favor lower corporate tax rates and decreased regulation. Interest rates were also expected to rise, which analysts say attracted investors to financials as they say earnings estimates would be on the rise.
Analysts say tax cuts are important in the short term, but they say that for the intermediate term, many of the anticipated changes would already be priced into stocks, so for a bank to outperform the group it would have to have better loan growth than expected, among other things. Another factor to watch is mortgage banking, as the gain on sale margins could be under pressure through the year. And on the commercial real estate side, analysts expect the segment to be less of a growth driver in 2017, as banks seem to be focusing away from CRE.
One of the biggest beneficiaries of reduced regulation would be small banks, analysts say, as these are the ones that spend the most on compliance as a percentage of their total revenue.
Analysts say the increased valuations levels could hold if the operating environment turns out as positive as investors seem to expect. Higher interest rates are likely, which are expected to result in higher earnings estimates, and lower taxes are possible, which could result in higher earnings estimates as well. Another factor analysts discuss is the flow toward financials from other sectors, which analysts are keeping an eye on. Overall, analysts think current valuations are reasonable.
Analysts say the economy in the United States continues to show gradual growth with more jobs being created. The quality of jobs is not the best, they say, but the unemployment rate continues to drift lower, which is beginning to translate into higher wages.
Analysts are keeping an eye on credit trends, since it has been a while since the last credit cycle decline. Any uptick in credit issues and credit weakness would put pressure on earnings, which is expected to result in weaker stock prices.
Banks in the Texas have seen their fortunes tied to the price of oil. Their stock prices have been strongly correlated to crude prices, analysts say, though they don’t expect this correlation to wreak havoc in 2017, with analysts estimates for the price of oil ranging between $50 and $60. But as oil has shown in the past, the price could change drastically and unexpectedly, and analysts say a drop below $40 would be negative for Texas bank stocks.
The West Coast economy, especially Portland and Seattle, has done well over the past year, analysts say. Analysts say this has enabled banks to have for the most part fairly solid loan growth, clean credit metrics and good profitability metrics in general. Analysts say the region has a diversified lending base, and banks have been lending to mostly small and medium businesses. In California, analysts say the region could be affected if strong tariffs are imposed, as this could hurt import and export operations, as well as port activity.
Full report available here.
Sandeep Bhatia discusses Silvant Capital Management LLC. While Mr. Bhatia does monitor macro trends, he is a bottom-up manager who is more focused on a company’s fundamentals and competitive positioning. He also looks at a company’s business opportunities and the record of its management team. When trying to assess the future earnings potential of a company, each business is measured according to a unique set of a key metrics for its sector. Then, in choosing holdings, those results are used to compare each company against the full set of investment opportunities.
Full interview available here.
Mark Foster says his firm has two main strategies, an all-cap equity and a small-cap equity. The firm’s philosophy is a value approach with also an event-driven special situations approach. Mr. Foster says the common theme is change. He tries to find inefficiencies in the market, as spending time in less-efficient areas can provide some advantages. He says the inefficiencies today are more prevalent in the small-cap space, so it’s a good place to be looking.
Full interview available here.
George S. Farra’s his firm invests in dividend-paying stocks, and has seen strong and consistent performance since the firm’s inception. Mr. Farra talks in-depth about the banking, industrial and energy sectors. He says that rather than trying to predict what’s going to happen in 2017, he is focusing on trends currently in place in businesses as well as the stock market. He says a current trend is higher stock demand, which means investors want to buy. He believes that for the near term the market is on good footing.
Full interview available here.
Mark A. Boyar discusses Boyar Value Group. When identifying investments, Mr. Boyar reconstructs companies’ balance sheets according to economic reality rather than generally accepted accounting principles. This allows him to determine what a company’s underlying assets are worth and buy stocks at a value. Rather than attempting to mimic an index, Mr. Boyar structures portfolios on a best-idea basis. He believes investing in high-quality, out-of-favor businesses will lead to superior long-term capital appreciation with less permanent capital risk. Mr. Boyar views patience as one of the most important tenets of successful investing.
Full interview available here.
Founder and Chairman Mark Boyar of Boyar Value Group says Bank of America Corp (NYSE:BAC) could see a number of catalysts that would positively increase the share price up to 50%, even after the post-election run-up of banking stocks.
Even though these stocks have run up spectacularly subsequent to the Trump election, we think that, over the next couple of years, they can be among the best-performing groups. Because they have run up so much, I would advocate perhaps taking an initial position and buy more as these stocks perhaps retrace some of the gains that they’ve made over the last month or two.
Take a stock like Bank of America, which is a stock we’ve liked for a number of years. The stock has run from $16 to $22 in a relatively short period of time. But it traded at $13 to $16 for at least a couple of years. So although it had its run — and the run came very, very fast — it sort of made up for lost time.
If we’re right — and we believed this prior to Trump being elected that Bank of America had 2.25 to 2.50 in earnings power. However, as a result of the widening of the yield curve, and possibly a significant decline in their cost of business, their earnings power could be higher than the 2.50, and if that occurs, there is no reason why their stock can’t appreciate 50% or more over the next two to three years.
Full interview available here.
Greg Estes discusses managing his firm’s value fund, which is an unconstrained equity fund with all-cap investing. Mr. Estes says his firm would rather participate in an up market and protect capital in down markets, which means he focuses on absolute value investing. Mr. Estes goes by the old value-investor mantra “buy low, sell high.” He shares his current top picks in today’s environment.
Full interview available here.
Johnson Controls International plc
Co-Portfolio Manager Jennifer Chang of Schafer Cullen Capital Management says Johnson Controls International plc Ordinary Share (NYSE:JCI) has a strong recurring revenue stream with its building control systems. Additionally, she says the company should profit from its fuel-efficient battery business.
Johnson Controls runs building control systems, the HVAC systems — heating, ventilation and AC — for many commercial and industrial companies. They recently bought Tyco, which added a strong fire and safety business to their operations, a natural adjacency.
Their model is quite attractive; they sell upfront equipment at high margins and then sign long-term maintenance agreements with customers, a strong recurring revenue stream. We talked to people in the industry about whether that combination makes sense, and it appears that aggregating a lot of these products and functions, and housing it in one company is where the industry is heading. There are a lot of cost-cutting and cross-selling opportunities as well.
The other part of the company that we like is their battery business. They have a 70% market share in the hybrid start-stop battery market. That specific battery is about 5% to 10% more fuel-efficient than a traditional lead-acid battery but also twice as profitable for Johnson Controls. If you think about the rolling federal fuel-mileage standards that are taking place over the next couple of decades, these batteries help auto OEMs improve their fuel-mileage efficiency and meet those standards. We expect accelerating adoption, and recently, Ford (NYSE:F) and GM (NYSE:GM) have said that by 2020, they want 100% of their vehicles using hybrid start-stop batteries.
Full interview available here.
