{"id":8079,"date":"2018-09-03T22:47:19","date_gmt":"2018-09-03T22:47:19","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=8079"},"modified":"2018-09-03T22:47:19","modified_gmt":"2018-09-03T22:47:19","slug":"financials-trading-like-its-1994-again","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=8079","title":{"rendered":"Financials &#8211; Trading like It&#8217;s 1994 (Again)"},"content":{"rendered":"<p>One of the classic years we saw &#8220;PE compression&#8221; was 1994, when Alan Greenspan really caught the Street and the investment community off guard, and raised the fed funds rate 6 times that year, after a surprisingly-strong Q4 &#8217;93 GDP report resulted in an emergency meeting for the FOMC in the last days of January &#8217;94.<\/p>\n<p>SP 500 EPS grew 20% and the SP 500 returned 1% in the calendar year, not helped either by the peso devaluation in November &#8217;94 and the Orange County Comptroller nearly sinking the County after investing in PO&#8217;s (principal-only mortgage strips, if memory serves) that lost a lot of value over the 12 months.<\/p>\n<p>So what&#8217;s the point of the history lesson ?<\/p>\n<p>Financial&#8217;s are acting in 2018 just like they did in 1994. Maybe not all of the downside we saw that year after a steep yield curve from 1991 to 1993 really juiced the Financial stocks, but dead money this year is the only way to describe the Financial sector.<\/p>\n<p>Year-to-date returns of major Financials stocks and ETF&#8217;s:<\/p>\n<ul>\n<li><em><strong>XLF:<\/strong><\/em> +2.31%<\/li>\n<li><strong><em>KRE:<\/em><\/strong> +8.06%<\/li>\n<li><strong><em>JPM:<\/em><\/strong> +8.72%<\/li>\n<li><strong><em>SCHW:<\/em><\/strong> -0.49%<\/li>\n<li><strong><em>CME<\/em><em>:<\/em> <\/strong>+20.60%<\/li>\n<\/ul>\n<p>Client&#8217;s are long every one of those names, and all are in the &#8220;top 10&#8221; client positions on a firm level. By percentage weight, Schwab is #1, JPM is #2, CME is #3, KRE is #4 and XLF is #5 ranked in order by Financial sector only.<\/p>\n<p>Readers will be updated with our Top 10 holdings on October 1, but Microsoft remains client&#8217;s #1 position and has been for the last 6 years (when ValueAct took the 1% position in April, 2013.)<\/p>\n<p>Here is how the numbers (expected EPS growth for the Financial sector by quarter) look for the Financial sector per Thomson Reuters IBES estimates:<\/p>\n<ul>\n<li><em><strong>Q2 &#8217;19:<\/strong><\/em> +8.6%<\/li>\n<li><em><strong>Q1 &#8217;19:<\/strong><\/em> +8.1%<\/li>\n<li><em><strong>Q4 &#8217;18:<\/strong><\/em> +28.3%<\/li>\n<li><em><strong>Q3 &#8217;18:<\/strong><\/em> +45.5% expected EPS growth, +3.3% revenue growth<\/li>\n<li><em><strong>Q2 &#8217;18:<\/strong><\/em> +27.2%, +8.1% revenue growth (these numbers are won&#8217;t change since all Financial components of the SP 500 have reported Q2 &#8217;18 earnings)<\/li>\n<\/ul>\n<p>What&#8217;s most interesting is that on July 1 &#8217;18, Financial sector revenue was expected to grow at 4.5%, it actually grew at 8.1%.<\/p>\n<p>That&#8217;s a good sign.<\/p>\n<p>So what&#8217;s holding back the sector and the stocks ?<\/p>\n<p>Well, the Fd is raising rates and shrinking the balance sheet. Loan growth looked good in Q2 &#8217;18, credit reserves continued to be released, in fact credit looks great, net interest margin&#8217;s (NIM&#8217;s) are expanding, and yet the stocks and sector remain moribund.<\/p>\n<p>Here is the <em><strong>historical EPS and revenue growth numbers for Financial&#8217;s:<\/strong><\/em><\/p>\n<ul>\n<li><em><strong>Q2 &#8217;18:\u00a0<\/strong><\/em> EPS +27.2%, revenue +8.1%<\/li>\n<li><em><strong>Q1 &#8217;18:<\/strong><\/em>\u00a0 EPS +30.7%, revenue +2.2%<\/li>\n<li><em><strong>Q4 &#8217;17:<\/strong><\/em>\u00a0 EPS +14.6%, revenue +4.4%<\/li>\n<li><em><strong>Q3 &#8217;17:<\/strong><\/em>\u00a0 EPS -7.3%, revenue +2.2%<\/li>\n<li><em><strong>Q2 &#8217;17:<\/strong><\/em>\u00a0 EPS +12.2%. revenue +4.1%<\/li>\n<li><em><strong>Q1 &#8217;17:<\/strong><\/em>\u00a0 EPS +19.9%, revenue +4.8%<\/li>\n<li><em><strong>Q4 &#8217;16<\/strong><\/em>:\u00a0 EPS +11.6%, revenue+4.0%<\/li>\n<li><em><strong>Q3 &#8217;16:<\/strong><\/em> EPS +8.5%,\u00a0 revenue +6.9%<\/li>\n<li><em><strong>Q2 &#8217;16:<\/strong><\/em> EPS -4.0%, revenue +0.9%<\/li>\n<li><em><strong>Q1 &#8217;16:<\/strong><\/em> -10.4%, revenue -1.2%<\/li>\n<\/ul>\n<p>(Source: Thomson Reuters IBES historical earnings data)<\/p>\n<p>Q2 &#8217;18&#8217;s revenue growth of 8.8% was the strongest quarter of revenue growth for the Financial sector since Q4 &#8217;12, and I dont know what happened in Q4 &#8217;12 to produce a 20% revenue growth rate for the sector. Certainly 2013 was a great year for Financial stocks.<\/p>\n<p>So (again) what&#8217;s the point ?<\/p>\n<p>Note the trend in Financial sector revenue the last 8 &#8211; 9 quarters &#8211; at some point PE&#8217;s should expand for banks, brokers, insurance companies et al.<\/p>\n<p>Treat the dormant Financial sector in 2018 &#8211; and this is just one opinion &#8211; as a reason to accumulate the sector, however you wish to do it. I&#8217;m still partial to banks, and the old discount brokers like Schwab. Goldman and Morgan Stanley are the last bull market&#8217;s brokerage model. The stocks trade like drek.<\/p>\n<p>Be patient with Financials &#8211; they will pay off, maybe not like 1995 when the SP 500 rallied 37.58%, but the sector should generate some alpha on the back of stronger GDP and strong sector fundamentals.<\/p>\n<p>Thanks for reading.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the classic years we saw &#8220;PE compression&#8221; was 1994, when Alan Greenspan really caught the Street and the&hellip;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[67,84,53,27,36,206],"tags":[],"class_list":["post-8079","post","type-post","status-publish","format-standard","hentry","category-cme","category-financial-sector","category-financials","category-jpm","category-schw","category-xlf"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8079","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=8079"}],"version-history":[{"count":6,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8079\/revisions"}],"predecessor-version":[{"id":8085,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/8079\/revisions\/8085"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=8079"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=8079"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=8079"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}