- The Street Sheet
- Posts
- 🥱 Not Sexy, Still Hot
🥱 Not Sexy, Still Hot
Plus, the next concern for regional and small banks.
Happy Sunday to everyone on The Street.
ChatGPT this, ChatGPT that. Pandora's box has been opened and there's no turning back. That's a slant rhyme, in case you're curious, and no I didn't ask a robot to write it for me.
The impact this technology is going to have on our world is going to be wild, to say the least. I can't tell if it's going to make us smarter or dumber.
According to a report by Bloomberg's Saritha Rai, millions of Indian programmers are feeling the heat due to the rapid development of tools like ChatGPT. Entry-level coding jobs could be eliminated within five years, and India, with over 5 million coders, will be hit the hardest.
I think at this point we all need to adopt the "if you can't beat 'em, join 'em" mindset. Meaning, embrace the change, learn as much as you can about these tools, and apply them to what you do to make your life more efficient. That's just me, let me know what you think by replying to this email. We've got a great edition for you today, we'll see you down below.
— Brooks
Review
US stocks finished higher Friday to close out a relatively tepid week of first-quarter earnings results.
Procter & Gamble beat analyst expectations with revenue of $20.07 billion and earnings per share of $1.37. While the company’s volume fell 3%, higher prices helped to offset lower demand, with a 10% year-over-year increase across its portfolio of products. Procter also raised its sales growth forecast for 2023 to 6%, projecting relatively stable demand for its consumer staples.
On a related note, as of Friday morning, 76% of S&P 500 companies reporting earnings have beaten analyst expectations. However, reduced expectations in anticipation of the effects of rate hikes and cooling demand led to a relatively muted week for the major indices.
On the economic front, The S&P Global US Manufacturing PMI increased to 50.4 compared to estimates of 49, pointing to the first expansion of factory activity in six months. Its services counterpart also handily beat projections at 53.7, signaling the fastest increase since April 2022.
In company-specific news, Walmart is offloading its third digital clothing brand this year. After selling Bonobos and Moosejaw earlier this year, the company is now looking to sell its plus-size clothing brand Eloquii, which it bought for $100 million back in 2018.
Meanwhile, Amazon-owned Whole Foods is cutting several hundred corporate jobs as part of its broader reorganization and cost-curbing efforts. Included in these changes, Whole Foods will shift from operating in nine different regions to just six, though no store closures will result from this action.
In total for the week, the Dow Jones Industrial Average finished 0.23% lower, while the S&P 500 lost 0.10%. The Nasdaq Composite was down 0.42%.
Preview
Tuesday will feature plenty of housing updates, with the release of new home sales data as well as the Case Shiller index. This home price metric rose 2.5% year-over-year in January, the smallest increase seen since 2019. Meanwhile, new home sales in February increased 1.1% month-over-month to 640,000.
On Wednesday, reports for durable goods orders and the goods trade balance will be released. Notably, the US trade deficit widened to $91.6 billion in February due to a rising cost of living and higher borrowing costs. Investors will also get an update on the 30-year fixed-mortgage rate, which currently sits at 6.43%.
On Thursday, the growth rate for America’s GDP will be released for Q1 of this year. During the last quarter of 2022, the economy expanded 2.6%. Investors will also get updates for initial jobless claims and pending home sales.
On Friday, information on personal income and spending for March will be released. These metrics rose 0.3% and 0.2% month-over-month in February, respectively.
Earnings Spotlight
Tomorrow, Coca-Cola (KO) will lead off the busy week of earnings. It is the first of many companies in the blue-chip Dow to report earnings.
Tuesday is the busiest day of the week, with reports expected from — deep breath — Alphabet (GOOGL), 3M (MMM), Chipotle (CMG), Microsoft (MSFT), McDonald’s (MCD), Raytheon (RTX), UPS (UPS), and Spotify (SPOT). Investor’s eyes will be trained on Microsoft and Google in particular for updates related to ChatGPT, Bard, and the future of artificial intelligence.
On Wednesday, Meta Platforms (META), Boeing (BA), and Roku (ROKU) will offer updates on their businesses. The last will likely discuss its recent rollout of Roku TVs.
On Thursday, two more Dow Jones companies, Caterpillar (CAT) and Honeywell (HON), will report. Plus, Amazon (AMZN) CEO Andy Jassy will expand on his plan to cut costs, which may include more layoffs, in addition to the 27,000 workers that Amazon has already let go of this year.
On Friday, the massive consumer goods company Colgate-Palmolive (CL) will round out the week, along with oil goliaths Exxon Mobil (XOM) and Chevron (CVX). Oil companies had a record year in 2022, so investors will be eager to see if this momentum has continued into 2023.
Invest in These Vacation Rentals In A Few Clicks☝
With Wander.com, you can unlock access to vacation rental investing without the hassle and headache of doing it yourself.
Wander REIT is the first and only institutional-grade vacation rental investment product. That means investors get all the tax-advantaged benefits of a REIT in a new asset category: vacation home rentals. Instead of the traditional apartment or office-building REITs, Wander REIT invests in the best of the best of vacation rentals.
Enjoy targeted 8% dividends and a 14% targeted total return with appreciation from hand-picked, stunning vacation homes – starting with a $2,500 minimum – without having to buy a property, change light bulbs or deal with guests. And for a limited time, new REIT investors may get an opportunity to invest in Wander’s next round of funding.
Ferguson May Not Be Sexy, But It's Still Hot
S&P 500 Inclusion Potentially on the Horizon
Sure, some people think electric vehicles or AI-powered chatbots are sexy, but as the hustle influencers on TikTok already know, boring businesses pay off.
One boring company that fits the bill is Ferguson (FERG), which hails from the UK but is the leading plumbing and HVAC distributor in the US. It also does brisk business selling to DIYers through build.com. Prior to 2021 when it sold its European businesses the company was known as Wolseley. Now it’s managed out of Newport, Virginia, trades on the New York Stock Exchange, and is solely focused on the U.S. and Canada.
While it isn’t a household name yet, it has over 33,000 employees and an established leadership position in North America. Plus, Baird analyst Dave Manthey thinks it could be added to the S&P 500. That would make the company a mandatory holding for many index funds that have yet to pay attention to the stock.
Ferguson is Growing
Beyond being added to the S&P 500, Ferguson has a lot going for it. Take its growth for starters. In the first half of Ferguson’s fiscal year, which ended Jan. 31, the company had sales of $14.76 billion, which is up from $13.3 billion in the year prior. EPS was $4.64 per share, up from $4.38.
When compared to its competition, Ferguson is a bargain. Trading under 14 times estimated calendar year 2023 earnings, it’s relatively “cheap”. Just look at W.W. Grainger (GWW) and Watsco (WSO) - trading at 20 and 22 times earnings, respectively.
With sales growing at about 7% annually and operating profits increasing about 14% over the past five years, it's clear that Ferguson has a scalable framework in place. And according to Baird analyst Dave Manthey, there's even more growth potential thanks to strategic bolt-on buys in the industry.
Could the Stock Hit $200?
Currently Manthey has an outperform rating and $160 price target on the stock. He thinks Ferguson could hit $200 in the future as it gets more name recognition and the economy improves.
Manthey isn’t alone. Patrick Baumann, an analyst at JPMorgan has an overweight rating and $150 price target assigned to Ferguson. “We have a positive view on the company and management team, and see relative valuation as reasonable,” wrote the analyst in a recent research report.
The analyst did say results could be choppy due to Ferguson’s exposure to the construction markets which are getting hit by rising interest rates. Nevertheless, roughly 60% of its business comes from repair, maintenance, and improvement which is less impacted by rising rates. Meanwhile, 10% of its sales come from municipalities which, most of the time, can weather economic cycles.
It's not a sexy stock by any means, but sometimes boring is beautiful.
Are you bullish or bearish on Ferguson over the next 12 months? |
Commercial Real Estate Loans Next Bank Concern?
Regional Banks More Exposed
Regional banks and their investors may have another thing to worry about: commercial real estate loans, especially those tied to offices. Thanks to rising interest rates, a slowing economy, and hybrid work arrangements, commercial real estate values are slumping. Problems that could be made worse if corporations break office leases to save money. Delinquencies remain low but there are fears they can tick up which will put pressure on the banks holding this debt.
Big banks aren't the primary concern. Office loans held at the nation’s largest financial service firms average less than 2% of total loans. Beyond the biggest names, however, CRE loan exposure comprises the largest segment for half of all banks.
CRE Sensitivity
According to Wall Street firm Janney, for a bank to be considered CRE-heavy by regulators, their construction and development loans have to be above 100% of risk-based capital. Or, have a CRE-to-risk-based capital ratio over 300% with three-year CRE growth of more than 50%. 50 banks fit the bill.
Additionally, Janney found that over half of the publicly traded banks exceed the CRE concentration threshold. Seventeen have ratios of 600% and above including New York Community Bank (NYCB), Dime Community Bank (DCOM), First Foundation Bank (FFWM), Homestreet Bank (HSMT) and Northeast Bank (NBN).
“Our data is meant to be a resource for investors when comparing banks,” wrote Janney analyst Brian Martin in the report, published in late March. “Importantly, we note CRE concentration guidelines are just that: guidelines, and that banks can operate above these thresholds so long as they have proper processes/procedures in place.”
This, along with upcoming earnings reports, can help investors determine which banks may be most sensitive to a looming CRE dip.
Not Just Banks
Beyond banks, REITs are also feeling the pressure in the current environment but could be poised for some upside. “While the next few quarters could be choppy, we believe that current valuations already reflect buy-side expectations for earnings to come in well below current sell-side consensus expectation, and we believe earnings could hold up better than feared,” William Blair analyst Stephen Sheldon wrote in a recent research note.
Then there are life insurers, which according to Moody’s hold 14.7% of the $4.5 trillion in outstanding CRE debt. That has pressured insurers most exposed including Equitable Holdings (EQH), Corebridge (CRBG) and MetLife (MET).
Still, bulls think the sell-off in these stocks over CRE concerns may not be warranted. According to Evercore ISI analyst Thomas Gallagher, the quality of maturing loans in 2023 is in good shape, with office loans having sub-50% loan-to-value on average. That means most life insurers should be able to refinance much of the maturities themselves or do automatic loan extensions, with very few foreclosures.
CRE loans are keeping bank, REIT, and insurance investors up at night. Whether it's warranted or not, the road ahead may be a bumpy one.
Are you concerned CRE loans tied to the office space is a looming bubble? |
Invest in These Vacation Rentals In A Few Clicks☝
With Wander.com, you can unlock access to vacation rental investing without the hassle and headache of doing it yourself.
Wander REIT is the first and only institutional-grade vacation rental investment product. That means investors get all the tax-advantaged benefits of a REIT in a new asset category: vacation home rentals. Instead of the traditional apartment or office-building REITs, Wander REIT invests in the best of the best of vacation rentals.
Enjoy targeted 8% dividends and a 14% targeted total return with appreciation from hand-picked, stunning vacation homes – starting with a $2,500 minimum – without having to buy a property, change light bulbs or deal with guests. And for a limited time, new REIT investors may get an opportunity to invest in Wander’s next round of funding.
The Bull Case: Life Insurance Stocks Aren't On Life Support
Stocks are Beaten and Bruised But Some See Potential
Life insurance stocks have gotten what some bulls think is unfair treatment as of late. Shares of some are down over 10% since March and sport low valuations. The average is 7.5 times projected 2023 earnings. Names including Brighthouse Financial (BHF) and Jackson Financial (JXN) are trading for under three times projected earnings for 2023.
As we mentioned above, investors do have reasons to be concerned, namely with life insurers that have exposure to commercial real estate. As it stands, life insurers hold hundreds of billions of dollars in commercial real estate loans and securities which represent roughly 14% of their average assets and 120% of equity. In the office market specifically, the exposure is over $80 billion. As mentioned, delinquencies aren’t picking up yet, but there are worries that could change, which would hurt life insurers’ finances.
What investors seem to be overlooking is these stocks have a good track record of managing CRE loans. They pay dividends and some analysts believe they are trading at discount prices. “The life-insurance industry is in a good place,” Andrew Kligerman, a Credit Suisse insurance analyst told Barron’s in a recent report. “The companies are sound from a liquidity and capital perspective. Since the financial crisis, the industry has improved its risk-management practices.”
Growth in the Cards?
Of the life insurance players, some are keeping their eyes on Equitable Holdings (EQH), Corebridge Financial (CRRBG), Globe Life (GL), Primerica (PRI), Reinsurance Group of America (RRGA), Unum Group (UNM) and Voya Financial (VOYA).
Dividend yields vary for the group from as small as 0.8% for Globe Life to as high as 5.7% for Corebridge. There are also the prospects for healthy growth out of Voya, Primerica, Globe Life, Unum, and Reinsurance Group, which isn’t a typical characteristic for insurance players.
Driving that growth is two factors. The first is higher interest rates, which enable them to reinvest proceeds from bond maturities at higher yields. The second is lower COVID mortality rates, with U.S. deaths from the virus falling by nearly half last year and continuing to decline in 2023.
Valuations are Low
Among the seemingly cheap life insurance stocks, Equitable Holdings stands out to some Wall Street analysts. The company is currently trading less than five times this year’s earnings, largely because of its exposure to commercial real estate and office properties.
However, it’s one of Kligerman’s top picks. The analyst rates it outperform and has a $47 price target on shares. Equitable “holds a higher-than-peer allowance for credit loss on these investments and continues to have a robust excess capital position that could absorb potential investment losses,” wrote Kligerman.
Globe Life is also attractive, according to Kligerman, because it sells life insurance to low-to-middle-income customers which is an underserved market, while Primerica is engaging in shareholder-friendly moves including a buyback of over 5% of its stock in 2023.
The Reinsurance Group of America is benefiting from lower COVID deaths and Unum, which offers disability life and supplemental health policies, is projected to have mid-single-digit premium growth. Voya Financial, American International Group (AIG), and Blackstone (BX) are also top picks of Kligerman.
Life insurance isn’t a high-growth market and there are reasons to be concerned. Nonetheless, some bulls think because of their low valuations they are worth considering.
Are you bullish or bearish on life insurance stocks over the next 12 months? |
Last Week's Poll Results
Are you bullish or bearish on Pinterest over the next 12 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish
Are you bullish or bearish on Jack Henry over the next 12 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish
Which stock will outperform over the next 12 months?
🟩🟩🟩🟩🟩🟩 Simon Property (SPG)
🟨🟨🟨🟨⬜️⬜️ Netflix (NFLX)
🟨🟨🟨🟨🟨⬜️ Palo Alto Networks (PANW)
Reply