Valuentum Exclusive Analysis for the Discerning Investor

Symbol Keyword

Banks & Money Centers Industry Report
We’ll talk about how banks make money, and the three most important costs of running a bank. The Great Financial Crisis revealed the tremendous risks of banking equities, and we’ll walk through these in depth. We’ll discuss how to conceptualize where we are in the banking cycle, and how that helps inform our valuation process for banks, which is different than traditional operating entities. The stress tests have helped many of the big banks from pursuing hazardous endeavors during the past decade, and we’ll go into how to think about the yield curve in the context of banks. Investors should expect ongoing digitalization of banks and increased M&A as the competitive environment only intensifies. Three of our favorite banks are JPMorgan Chase, Bank of America, and US Bancorp, and we’ll be looking to consider adding any of these to the Best Ideas Newsletter portfolio or Dividend Growth Newsletter portfolio at the right price. Banks and Money Centers: AXP, BAC, BK, BBT, C, DFS, FITB, GS, HBC, JPM, KEY, MS, NTRS, PNC, RF, STI, TCB, USB, WFC.

Morgan Stanley Puts up a Tremendous Quarter
Image Shown: Morgan Stanley’s 2Q2020 Results Broken Down by Segment. Image Source: Morgan Stanley’s 2Q2020 Earnings Supplement. Morgan Stanley truly shined during this quarter of extreme volatility. While credit provisioning was higher year over year, Morgan Stanley simply does not have many of the credit exposures that are leading to huge multi-billion-dollar credit provisions at some of its money-center banking peers. Though its wealth management business' net income (applicable to Morgan Stanley) was down 10% year over year, and Investment Management was up only 20%, it was the Institutional Securities stunning 95% advance in net income that made this quarter a (temporary) gem of notable brilliance.

Walgreens Targets Cost Cuts and In-Store Doctors’ Offices
Image Source: Walgreens Boots Alliance Inc – Third Quarter Fiscal 2020 IR Earnings Presentation. On July 9, Walgreens Boots Alliance reported its third-quarter fiscal 2020 earnings (period ended May 31, 2020) and raised its dividend by ~2% on a sequential basis. Walgreens has increased its annual dividend over the past 45 consecutive years, earning it Dividend Aristocrat status, though we caution its net debt load weighs negatively on its forward-looking dividend coverage. Shares of WBA yield ~4.6% as of this writing.

Bank of America is Working Through a Difficult Time
Image Shown: Summary of Bank of America’s 2Q2020 results. Image Source: Bank of America 2Q2020 Earnings Presentation. When putting all the puzzle pieces together, we see Bank of America facing the headwinds of low rates and sizable credit provisioning with relative ease thanks to its substantial pre-tax, pre-provision earnings power. As long as the economy doesn’t get drastically worse from here, long term investors will benefit from normalized valuations on more normalized earnings in the not-too-distant future.

Citigroup Navigating the Banking Downturn Fairly Well
Image Shown: Summary of Citigroup’s 2Q2020 Results. Image Source: Citigroup 2Q2020 Earnings Presentation. On July 14, Citigroup posted a difficult second-quarter set of results, though the firm did manage to beat analyst consensus estimates on both the top and bottom lines. Outsize revenue gains in investment banking and FICC (fixed income, currencies, and commodities) markets (trading) helped on one hand, while sizable provisions for upcoming credit losses dented the bottom line on the other hand. As shown in the upcoming graphic down below, revenues advanced 5% compared to last year, while net income fell 73%.

JPMorgan Reports Second Quarter, Notes Peculiar Times
Image Shown: Overview of JPMorgan’s 2Q2020 earnings. Image Source: JPMorgan 2Q2020 Earnings Presentation. There was a fair amount of discussion on JPMorgan’s conference call about how the company (and the rest of the banking industry) are taking large provisions now for charge offs that they expect to come in the future. The future and the timing and magnitude of the eventual write-offs are quite murky indeed, which helps explain the volatility of banking shares in general, and especially for those institutions that might fall over in an “adverse scenario.” JPMorgan is not one of those banks that is at risk. It stands on high ground in the industry thanks to its scale, diversification (a huge benefit this quarter), high quality management, and outsize earnings power as compared to many of its peers.

Wells Fargo Has Become An “Epic Disappointment”
Image Shown: Wells Fargo net interest income is under pressure due to lower rates and a flat yield curve. Image Source: Wells Fargo 2Q2020 Earnings Supplement. Wells Fargo is so far out of line with its large US banking peers that it is truly competing with one arm tied behind its back. Or perhaps both arms. While some might try to be heroic and bet on a huge turnaround, we think it is more prudent to watch from the sidelines. What an epic disappointment this bank has become, so far a fall from grace as compared to when it used to be regarded as one of the best in class of the biggest US banks. What a shame!

July Dividend Growth Newsletter
"The COVID-19 pandemic has all but shown it's not the economy, or next quarter's earnings, or last year's book-to-market ratio or last year's P/E ratio that drives market prices and returns; it's enterprise valuation. Read about the duration of value composition in Value Trap." -- Brian Nelson, CFA

Update on Valuentum's Research -- No PPP for Us
Image Shown: The NASDAQ 100 (NDX) remains resilient, and we remain bullish on the equity markets for the long run. Trust you are doing well. First of all, I wanted to let you know that our small publishing firm is not taking any of the Payment Protection Program (PPP) money. We're not interested in any bailouts, and we want our customers to know that if we're going to be highlighting investment ideas on our website, that we know how to run a business and to anticipate the downside. Many an RIA has taken out PPP money, and frankly, it just doesn't sit well with me. Financial advisors should have been prepared, just like they prepare for their clients' financial future. It's just another one of those things in this business (like large fees on index funds) that just doesn't add up. In any case, we're not looking back, and we thank you for your support.

Nike Doubles Down on Its Digital Strategy
Image Shown: Shares of Nike sold off moderately on June 26 after reporting its full-year earnings for fiscal 2020 (period ended May 31, 2020), though please note shares of NKE have rebounded sharply from their March 2020 lows. Over the past year shares of Nike are still up ~15% as of this writing, outpacing the 4% gain seen at the S&P 500 (SPY) before taking dividend considerations into account. Nike is performing well operationally as its digital strategy has helped mitigate some of the headwinds created by the ongoing pandemic. The retailer’s strong balance sheet provides ample support to ride out the storm while being able to maintain its current dividend policy. Shares of NKE yield ~1.1% as of this writing, and we give Nike an “EXCELLENT” Dividend Safety rating due to its rock-solid Dividend Cushion ratio of 3.4. Please note these forward-looking indicators factor in double-digit per share payout growth over the coming fiscal years. We give Nike an “EXCELLENT” Dividend Growth rating as well.