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FIN824 The Stock Market Financials Sector

FIN824 The Stock Market Financials Sector. Kyle M. Ward-Dahl Marsel J. Tadger Ke Wang Adam J. Wilson. Index & SIM Weights. Growth in S&P 500’s financials sector Increasing underweighting of SIM. Size and Composition. Market Cap: 1.6 Trillion

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FIN824 The Stock Market Financials Sector

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  1. FIN824 The Stock MarketFinancials Sector Kyle M. Ward-Dahl Marsel J. Tadger Ke Wang Adam J. Wilson FIN824 The Stock Market

  2. Index & SIM Weights • Growth in S&P 500’s financials sector • Increasing underweighting of SIM FIN824 The Stock Market

  3. Size and Composition • Market Cap: 1.6 Trillion • 14.71% of S&P 500 • Industries • Banks • Consumer Finance • Diverse Financial Service • Insurance • Multi-sector Holdings • Real Estate Investment Trust • Largest Companies (Market Cap in Billions) • American Express (AXP) $44.8 • Bank of American (BAC) $150.8 • Berkshire Hathaway (BRK) $234.6 • Citigroup (C) $93.8 • Goldman Sachs (GS) $76.5 • Bank of NY Mellon (BK) $35 • JP Morgan Chase & Co (JPM) $153.4 • Morgan Stanley (MS) $36.4 • U.S. Bancorp (USB) $48 • Wells Fargo (WFC) $145.3 FIN824 The Stock Market

  4. Sector Performance • Revenue increased by 8% in latest Qtr • Earnings per share increased by 256% in latest Qtr and 644% in latest 12 months • A strong rebound in terms of earnings per share FIN824 The Stock Market

  5. Business Analysis • This sector is in the mature stage of its life cycle • Financials are cyclical • Influenced by economic conditions and conditions in financial markets • Regulations are also an important factor • Interest rate rise has negative impact FIN824 The Stock Market

  6. Financial Analysis • L-T Future Growth Rate for Earning per share is 8% • Sector Sales are still extremely down from pre-crises numbers possibly indicating upside • Compared with historic numbers, margins are still low in the sector FIN824 The Stock Market

  7. Valuation Analysis - P/B FIN824 The Stock Market

  8. Valuation Analysis - P/E P/Trailing E P/Forward E FIN824 The Stock Market

  9. Valuation Analysis - P/S & P/CF P/S P/CF FIN824 The Stock Market

  10. Valuation Summary • Current P/E and P/CF ratios are way higher than the median • Current P/B and P/S ratios are much lower than median • For financial institutions, P/B is important because most assets and liabilities are valued at market values. • From this perspective, the sector is cheaper than usual FIN824 The Stock Market

  11. GDP Forecast FIN824 The Stock Market

  12. Opportunities & Risks • Upside • GDP growth • Sales & earnings growth • Market rebound • Downside • Liability tax bill • Interest rate rise • Uncertainties such as other regulations FIN824 The Stock Market

  13. Recommendations • The conditions in financials sector has improved and sales & earnings are growing. The percentage of this sector in S&P500 also grew by about 0.4%. All these signals demonstrate the market rebound. • Future growth is also expected in the sector and the whole market as well, showing the increasing confidence of investors and analysts. • However, the uncertainties and risks are not negligible. • We recommend to buy 200 basis points to bring SIM weighting relative to S&P500 to 13.10%. As a result, SIM will be underweight in this sector by 1.61%. Thus, SIM can gain from the growth of financials sector and also avoid risks to certain extent. FIN824 The Stock Market

  14. Q&A FIN824 The Stock Market

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