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Stock Presentation Financial Sector. Roger Chan Chris Curtin Jack Lu. Sector Analysis. Our Recommendation : Maintain weighting (approximately 1.67% above S&P) Class Decision : Reduce weighting to S&P (approximately 2% reduction)
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Stock Presentation Financial Sector Roger Chan Chris Curtin Jack Lu
Sector Analysis • Our Recommendation: Maintain weighting (approximately 1.67% above S&P) • Class Decision: Reduce weighting to S&P (approximately 2% reduction) • Reasoning: Fear of a sub-prime meltdown, an impending economic downturn, and over-exposure in the SIM portfolio
Current Sector Weighting • Financial Sector as a part of the . . . SIM 21.52 % S&P 500 19.64 % Overweight 1.88 % as of 8/3/07
Current Holdings • Berkshire Hathaway (BRK.A) 6.00 % • Property and casualty insurance • Bank of America (BAC) 5.50 % • Money center bank • JP Morgan Chase (JPM) 4.73 % • Money center bank • Goldman Sachs (GS) 3.54 % • Investment brokerage • Citigroup (C) 1.75 % • Money center bank 21.52 %
Recommendations • Sell all JPM ~ 4.75 % • Weakest of the three money center banks • Sell some BAC ~ 2.00 % • Fairly valued, but more potential sub-prime risk • Buy more C ~ 1.75 % • Fairly valued, well positioned, strong stock in sector • Buy some SFI ~ 2.00 % • Not a MCB, undervalued, low sub-prime risk exposure • Keep all Brk-A & GS ~ 9.9 %
General Strategy • Reduce Sector Weight by 2 % • As determined last presentation • Reduce Money Center Bank Exposure • Three similar MCB’s, constituting 12 % of the SIM • Concentrate on Favorite MCB(s) • At least one of the three has to be weaker • Diversify within the Sector • Too much domestic MCB, little foreign banking, no REIT • Avoid Risks from Sub-Prime Crisis • Don’t sell just to buy back into the crisis
Current Holdings • Property and casualty insurance 6.00 % • Berkshire Hathaway (BRK.A) • Money center banks 12.00 % • Bank of America (BAC) • JP Morgan Chase (JPM) • Citigroup (C) • Investment brokerage 3.50 % • Goldman Sachs (GS) 21.50 %
1. Reduce Money Center Bank Exposure • Bank of America (BAC) 5.50 % • Pros: size (#1 credit cards, #1 on-line banking) • Cons: sub-prime, expansion to date via M&A • JP Morgan Chase (JPM) 4.73 % • Pros: credit cards, broad customer base • Cons: sub-prime, inefficiency of M&A • Citigroup (C) 1.75 % • Pros: size, diversity, foreign exposure • Cons: sub-prime, economy (investment banking)
1. Reduce Money Center Bank Exposure So . . . Reduce MCB’s from 12% to 7% . . . OldActionNew C 1.75% + 1.75% = 3.5 % BAC 5.50% - 2.00% = 3.5 % JPM 4.75% - 4.75% = 0 % Total 12.0 % 7.0 %
General Strategy • Reduce Sector Weight by 2 % • As determined last presentation • Reduce Money Center Bank Exposure • Three similar MCB’s facing, constituting 12 % of the SIM • Concentrate on Favorite MCB(s) • At least one of the three has to be weaker • Diversify within the Sector • Too much domestic MCB, little foreign banking, no REIT • Avoid Risks from Sub-Prime Crisis • Don’t sell just to buy back into the crisis
2. Concentrate on Favorite MCB(s) • Eliminate more JPM than necessary to reduce 2.0% and allow room to diversify • Add to C, as the favored MCB • Reduce BAC, to put in line with C
General Strategy • Reduce Sector Weight by 2 % • As determined last presentation • Reduce Money Center Bank Exposure • Three similar MCB’s facing, constituting 12 % of the SIM • Concentrate on Favorite MCB(s) • At least one of the three has to be weaker • Diversify within the Sector • Too much domestic MCB, little foreign banking, no REIT • Avoid Risks from Sub-Prime Crisis • Don’t sell just to buy back into the crisis
3. Diversify within the Sector Add 2.0% = iStar Financial, Inc. (SFI) • Primary business is lending and corporate tenant leasing • Web-site: http://www.istarfinancial.com/home.html • Part REIT and part financial services • Business is high-end commercial real estate financing • But, it pays dividends like a REIT (i.e., taxed like a REIT) • Market Cap: $4.45 B (mid-cap; $1 - $10 B) • Shares outstanding: 128.2 M • Average volume: 1.2 M/day • Beaten down by the sub-prime crisis, even though its not a sub-prime player and has little sub-prime exposure
SFI’s Story Market Psychology: • Price has been falling in concert with sub-prime residential lenders, due to the overall sub-prime risk. • Fell further when REIT sector was downgraded in June, on fears of a slowing economy, increasing interest rates, lack of investor confidence, and prospect of decreasing dividend yields.
SFI’s Story Market Psychology: • Price has been falling in concert with sub-prime residential lenders, due to the overall sub-prime risk. • Fell further when REIT sector was downgraded in June, on fears of 1. a slowing economy, 2. increasing interest rates, 3. lack of investor confidence, and 4. prospect of decreasing dividend yields.
SFI’s Story • “iStar Financial is one of those guilt-by-association companies.” • “[T]he company has very different risk exposures from those of subprime residential lenders such as Countrywide and American Home Mortgage.” -- Emil Lee, TheMotleyFool.com (July 31, 2007)
SFI’s Story • More conservative lender, and uses less leverage D/E • iStar (SFI) 2.93 • Countywide (CFC) 5.40 • American Home Mort. (AHM) 8.96 • Annaly Capital Management (NLY) 11.24 • Redwood Trust Inc. (RWT) 12.91 • Has not increased reserve for potential loan losses this year (still anticipating 6%)
SFI’s Story • May 22, 2007 Acquired Fremont General’s commercial real estate division for $1.9 B (immediately changed compensation structure from volume-based to profitability-based) • July 2, 2007 Announced an increased dividend = 5% increase on dividend 5 years in a row • July 31, 2007 increased 2007 earnings expectations from $2.74 to $2.90 per share • August 1, 2007 Reactivated stock repurchase program, up to 2.7 M shares (open market) • Current Price $18.31 (35%) off 52-week high
General Strategy • Reduce Sector Weight by 2 % • As determined last presentation • Reduce Money Center Bank Exposure • Three similar MCB’s facing, constituting 12 % of the SIM • Concentrate on Favorite MCB(s) • At least one of the three has to be weaker • Diversify within the Sector • Too much domestic MCB, little foreign banking, no REIT • Avoid Risks from Sub-Prime Crisis • Don’t sell just to buy back into the crisis
Recommendations • Sell all JPM ~ 4.75 % • Weakest of the three money center banks • Sell some BAC ~ 2.00 % • Fairly valued, but more potential sub-prime risk • Buy more C ~ 1.75 % • Fairly valued, well positioned, strong stock in sector • Buy some SFI ~ 2.00 % • Not a MCB, undervalued, low sub-prime risk exposure
Proposed Holdings OldNew • Berkshire Hathaway (BRK.A) 6.00% 6.00% • Property and casualty insurance • Bank of America (BAC) 5.50% 3.50% • Money center bank • JP Morgan Chase (JPM) 4.75 % 0% • Money center bank • Goldman Sachs (GS) 3.50 % 3.50% • Investment brokerage • Citigroup (C) 1.75 % 3.50% • Money center bank • iStar Financial, Inc. (SFI) 0 %2.00% • Credit services 21.50 % 19.50%