financials
TRANSCRIPT
S&P 500 - Financial Sector (S5FINL)•Stock Market FIN 824
•Rebecca Dunn
•Christina Durrough
•Nicholas Ferrugia
•May 26, 2009
2•S&P 500 - Financial Sector
FINANCIAL SECTOR RECAP
3•S&P 500 - Financial Sector
Business Cycle
Financial Sector is cyclical
Currently in the mature phase of life cycle
High barriers to entry
High level of competition
4•S&P 500 - Financial Sector
Financial Sector Weighting
Current Financial sector weight is below average
Weight is trending up
Weight increased during the housing boom
Top Ten Stocks
5•S&P 500 - Financial Sector
Sector Performance
Financial Sector has seen the greatest negative returns YTD
Financial Sector has seen the most positive returns QTD
Over the past 20 years, the S&P 500 has outperformed the financial sector
SectorCompanies in Sector Market Cap MTD QTD YTD
S&P 500 500 7,585,482 9.39% 9.39% -3.37%
Energy 39 948,939 4.81% 4.81% -7.85%
Materials 28 255,334 15.09% 15.09% 11.85%
Industrials 58 792,036 17.72% 17.72% -7.91%
Consumer Discretionary 81 721,919 18.54% 18.54% 8.33%
Consumer Staples 41 913,657 3.03% 3.03% -8.62%
Health Care 54 1,049,425 -0.89% -0.89% -9.34%
Financials 80 924,373 22.17% 22.17% -13.86%
Information Technology 75 1,395,938 12.04% 12.04% 16.48%
Telecommunications Services 9 281,800 2.23% 2.23% -6.43%
Utilities 35 302,059 0.42% 0.42% -11.49%
•Data as of 4/30/2009
6•S&P 500 - Financial Sector
SIM Market Capitalization
Financial Sector Market Capitalization
SIM is underweight (4.05%) relative to the S&P 500
7•S&P 500 - Financial Sector
Regression Analysis
Fama and French Style Factors
S&P 500
HML and UMD monthly change are both “statistically significant” and negatively correlated to the S&P 500 monthly returns
— These Style factors explain 15% of the variance in the S&P 500 monthly returns
Financial Sector
Momentum (+) showed to be “statistically significant” to predict future return in Sector
Financial Sector – Forecast using Macroeconomic Factors
Next Month Return: Rf (-), CPI (+), and Unemployment (-) are statistically significant Macro factors that explain 11% of the variance
These Macro factors explain 34% of the variance in the monthly return of the S&P 500 that occur in 3 months (statistically significant)
Rf (+)
Unemployment (-)
CPI (-)
Aaa Corporate Rate Spread (-)
Consumer Credit Outstanding (+)
8•S&P 500 - Financial Sector
Sector Summary and Recommendations Summary
Current portfolio is underweight relative to the S&P S&P weight is currently below historical levels
Weight will increase as the market increases
Based on the data, the SIM portfolio is in a good position P/B ratio and ROE show that the sector is undervalued
Valuation ratios reflect the expectation of positive returns for financial sector
There is currently much momentum in the market relative to the financial sector
Recommendations
Expect positive returns relative to the market
Expect housing starts and investments in major assets to be a positive for the sector as the recession comes to an end
Overweight diversified industries
Expect hedge funds to continue to struggle
Underweight REITs and Specialized Industries
Recommendation: Continue to underweight relative to the market
Result – keep current weighting as of 04/30/2009
9•S&P 500 - Financial Sector
STOCK ANALYSIS
10•S&P 500 - Financial Sector
Potential Stocks
Goldman Sachs & Company – GS
Bank holding company and global investment banking, securities and investment management firm
Provides services worldwide to corporations, financial institutions, governments and high-net-worth individuals
JPMorgan Chase & Company – JPM
JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2T and operates in more than 60 countries.
JPMorgan Chase & Co. provides a wide range of financial services worldwide.
The company operates through six lines of business: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Securities Services, and Asset Management.
Rank 2009: Second largest U.S. bank and third in the U.S. in deposits
Northern Trust Corporation – NTRS
Financial holding company that provides investment management, asset and fund administration, fiduciary, and banking solutions
Clients include corporations, institutions, and affluent individuals
11•S&P 500 - Financial Sector
SIM – Financial Sector – Current Stocks
Current Composition
Berkshire Hathaway: 46.38%
Hudson City Bancorp:28.61%
Wells Fargo: 25.01%
Hudson City Bancorp has had the best performance - up 8% since purchase
•SIM Portfolio
Company Total Value % of Total
% Change Since
Purchase
Berkshire Hathaway Inc. - CL A $564,000.00 46.38% -14.12%
Hudson City Bancorp $347,912.00 28.61% 8.00%
Wells Fargo $304,152.00 25.01% -36.19%
Grand Total $1,216,064.00 -42.31%
12•S&P 500 - Financial Sector
Goldman Sachs Group, Inc.
Industry: Investment Banks and Brokerage
Performing better than other comparable stocks in the market
Performing better than the financial sector
8/21 analysts recommend buy or overperform
20/21 recommend buy, overperform, or hold
13•S&P 500 - Financial Sector
JPMorgan Chase & Company
Industry: Diversified Financial Services
Outperforming the sector and many other stocks
10/15 recommend buy or overperform
15/15 recommend buy, overperform, or hold
14•S&P 500 - Financial Sector
Northern Trust Corporation
Industry: Asset Management
Performing better than other comparable stocks in the market
7/14 analysts recommend buy or overperform
14/14 recommend buy, overperform, or hold
15•S&P 500 - Financial Sector
GS vs. JPM vs. NTRS – Past 5 Years
GS has performed best over a 5-year period Up approximately 50%
JPM has performed worst Slightly down over this period
16•S&P 500 - Financial Sector
GS vs. JPM vs. NTRS – Past 2 Years
NTRS has performed best over the past 2 years Down approximately 20% (compared to 30-40% for JPM and GS)
17•S&P 500 - Financial Sector
GS vs. JPM vs. NTRS – Past Year
Over the past year, JPM has slightly outperformed GS
NTRS is the worst performer of the three
18•S&P 500 - Financial Sector
GS vs. JPM vs. NTRS – Past 6 Months
Nearly identical to the 1-year results
JPM slightly better than GS (~-20%)
19•S&P 500 - Financial Sector
GS vs. JPM vs. NTRS – Past 3 Months
JPM has clearly performed the best over the past 3 months Up 60%
GS up approximately 50%
20•S&P 500 - Financial Sector
Stock Comparison
21•S&P 500 - Financial Sector
Regression Analysis
Summary
Macro Factor regression analysis provided minimal insight to predict future changes in earning
Statistically significant macro factors were identified for all 3 companies; however, R2 never reached above 12%
15 macro factors were reviewed in initial regression analysis
Different time periods and staggering of data were used to identify relationships to predict future changes in earning
GS
Current Month: Aaa Corporate Rate Spread (-)
2 Month: Retail Sales (+)
3 Month: Retail Sales (+)
JPM
Current Month: Consumer Confidence (+)
2 Month: Rf (+), Aaa Corporate Rate Spread (-), Unemployment (-)
3 Month: Retail Sales (+), Balance of Trade (+)
NTRS
Current Month: rf (+), Real Consumer Spending (-)
2 Month: Unemployment Rate (-), Real Consumer Spending (+)
Macro Factors
rfConsumer ConfidenceBusiness ConfidenceUnemployment RateCPIReal Federal Funds RateAaa Corporate Rate SpreadCase Shiller Home Price (20-Metro)Brent Crude Oil Spot PriceConsumer Credit OutstandingReal Consumer SpendingPersonal Saving RateRetail SalesBalance of TradeHousing Starts
22•S&P 500 - Financial Sector
JPMorgan Chase vs. Others
JPM appears to be accurately valued, with strong upside potential
JPM has outperformed GS over the past year, six months, and three months
JPM expects a higher percentage increase in earnings
Changes in Earnings Per Share
23•S&P 500 - Financial Sector
JPMorgan Chase Performance
Summary
Over the past 5 years JPM has recorded a better compounded rate of return compared to the S&P 500, Financial sector and the Div. Fin’l Services industry.
Frequency of JPM beating the returns of the S&P 500, Financial sector or Div. Fin’l Svs has only been statistically significant in the last 12 months against Div. Fin’l Svs
Data as of 4/30/09
24•S&P 500 - Financial Sector
Technical Analysis
JPM analysis indicates continued steady future growth
Upper and Lower bound have been established indicating a tested upward sloping channel
Today lower bound was tested and stock rebound with positive growth
Government regulation and legislation can quickly deteriorate channel
25•S&P 500 - Financial Sector
Initiation of Coverage
JPMorgan Chase & Company
BUY rating
Although, the JPM will challenged by the weaken credit market it has proved to be able achieve future sustainability, growth and profitability
Fortress brand, strong capital reserve levels relative to peers, diversified revenue, proactive risk management, reduced exposure to heritage assets, consistent investment in growth and dedication to building long-term customer relationships
FY FY FY FY FY$(Millions) 2011E 2010E 2009E 2008 2007Net Revenue 112,240 102,890 96,714 67,252 71,372 Growth Rate 9% 6% 44% -6% 15%Avg. Estimate 104.6B 99.4B No. of Analysts 14.0 14.0 Low Estimate 96.9B 86.4B High Estimate 120.2B 111.0B Year Ago Sales 99.4B 67.3B
Diluted earnings per share 2011E 2010E 2009E
Net income $4.64 $ 2.65 $ 1.44 Average Estimate $2.66 $1.45 Number of Analysts 17 18Low Estimate $1.00 $0.95 High Estimate $3.50 $1.82 Year Ago EPS $1.46 $1.37
Initiation of Coverage
Ticker: NYSE JPMRating BUYCurrent Price – 05/26/09 $36.28 Price Target - 12 Month $44.09 % Change 21.53%
26•S&P 500 - Financial Sector
Summary
Many stocks in the sector have performed well in the past 3 months
Goldman Sachs, JPMorgan Chase, and Northern Trust have performed better than average in the sector
JPMorgan Chase appears to have the best potential performance in the Financial Sector
27•S&P 500 - Financial Sector
Recommendations
Purchase JPMorgan Chase
Re-weight Financial Sector SIM holdings
BRKB: 46.38%
HCBK: 28.61%
WFC: 25.01%
Suggested weighting
BRKB: 35%
JPM: 25%
HCBK: 20%
WFC: 20%
28•S&P 500 - Financial Sector
Questions?