EWU

1Q 2023 Earnings Coming in Better Than Feared Thus Far

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By Brian Nelson, CFA We’ve been receiving questions about the companies that we are looking to add to the Best Ideas Newsletter to replace the ones we recently removed, and I can say that we’re strongly considering adding Booking Holding (BKNG) and adding to the existing “position” in Chipotle (CMG) following their first-quarter 2023 results. We recently raised our fair value estimate for Booking Holding significantly (now $3,091; was $2,147 per share), and we expect a huge fair value increase at Chipotle in the coming weeks. Booking Holding will report its first-quarter 2023 earnings in early May, while Chipotle will report first-quarter 2023 results on April 25. We have several other ideas in mind to add to the Best Ideas … Read more

Lloyds Banking Group Is Struggling Against the Tide

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Lloyds Banking Group’s business model focused on being a “digitized, simple low risk, customer focused, U.K. financial services provider” sounds good on the surface, but uncertainty surrounding the U.K’s recovery makes this bank much more risky than some of its U.S. counterparts, in our view. Investors should take note the inherent leverage and riskiness of any banking business model, and Lloyds is no exception. By Matthew Warren and Brian Nelson, CFA On July 30, Lloyds Banking Group (LYG) reported a dismal set of results for the first half of 2020. Net income was down 16% and statutory profit after tax was only GBP 19 million. Revenues came under pressure due to lower rates and lesser customer activity, while the provision … Read more

BNP Paribas’ Shares Could Have Upside Potential

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BNP Paribas’ shares are trading at a fraction of tangible book. If the bank can contain its cost of risk through this cycle and produce double-digit returns on tangible equity on the other side of this crisis, shareholders would do quite well in such a scenario. That said, we point out that Europe is overtraded when it comes to banking, which pressures earnings power at even the stronger banks like BNP Paribas. We’re paying close attention to the key banking players in Europe to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19. By Matthew Warren BNP Paribas SA (BNPQF, BNPZY) reported relatively better results than many large global bank peers, … Read more

Lloyds Banking Group Navigates Competitive Markets

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Image Source: Lloyds. The UK banking market is highly competitive with too many players, and we think this is the cause for the low returns on capital across the cycle. We’re paying close attention to the key banking players in Europe, including Lloyds Banking Group, to assess the likelihood of a global financial contagion that may accompany the global pandemic that has become COVID-19. By Matthew Warren Lloyd’s Banking Group (LYG) posted a very difficult first quarter, results released April 30, with net income (IFRS equivalent of GAAP revenue) down 11% to GBP 4.0 billion and statutory profit before tax down 95% to GBP 74 million. One can see many of the highlights (or more realistically lowlights) in the graphic … Read more

Oil Markets Get Decimated

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Image Shown: Oil prices have been decimated year-to-date. By Callum Turcan We are following up on our ‘Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?’ note (link here) published Sunday, March 8, to provide additional commentary on what’s going on in the shale patch right now. As of this writing, oil prices (BNO, USO) continue to get hammered. Here’s what we had to say in that recent note: The independent upstream producer space (XOP) is careening off a cliff, and that was before the OPEC+ cartel was unable to reach an agreement during their joint meeting (OPEC and non-OPEC members) on March 6. Due to the inability for the oil cartel to reach a deal, largely because Russia … Read more

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?

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Image Source: Value Trap: Theory of Universal Valuation From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as … Read more

A ~0.1% Probability Since 1896

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Image Source: Wikipedia Commons   By Brian Nelson, CFA It was mid-June 2015, and our team released our case on why the midstream MLP space would collapse. To us, it just made sense. We’ve been practicing enterprise valuation for a long time, and to this day, we’ve updated over 20,000+ discounted cash flow models. I used to head up the methodology and valuation infrastructure of a department of over 100 analysts across several continents and all sectors when I used to work at Morningstar. Baptism by fire as they say. This was about 10 years ago now. Since our call in mid-June 2015 through March 2, 2020, on a price basis, the S&P 500 (SPY) has advanced 46%, while the Alerian MLP … Read more

Covering Oil Markets Ahead of the Upcoming OPEC/OPEC+ Meetings

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Image Source: Exxon Mobil Corporation – 2019 IR Presentation  By Callum Turcan On March 5, the Organization of Petroleum Exporting Countries (‘OPEC’) is holding an “extraordinary” meeting in Vienna, Austria (EWO), which will be followed up by a ministerial meeting between OPEC and non-OPEC members the next day. The group had already agreed to cut oil (USO, BNO) supplies by an additional 0.5 million barrels of per day (‘bpd’) back in December 2019 through an agreement that would last through March 2020 (that was on top of an existing deal to keep 1.2 million bpd off of the market which runs through the end of March 2020 as well). As part of that deal, Saudi Arabia (KSA) offered to “voluntarily” … Read more

Fed Cuts 50 Basis Points, Expect More Market Volatility Ahead

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Image Source: FOMC  The emergency 50-basis point Fed rate cut announced March 3 was largely expected by the marketplace in light of growing economic concerns due to COVID-19, but it does nothing to immunize against COVID-19 and little to stabilize the situation. We continue to monitor the situation closely, and we expect ongoing volatility in the coming days and months as the situation with COVID-19 remains fluid. Having moved to defensive positions in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in January and having capitalized on the “crash protection” put, we are preparing for our next move. For now, we’re watching and waiting, and we encourage readers that have not yet picked up their copy of … Read more

COVID-19 Crisis Intensifies

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Image Source: CDC. Coronavirus Disease 2019 (COVID-19).  Our dearest members: — The world is being challenged today by what some including Bill Gates believe might be a “once-in-a-century pathogen.” We do not know the eventual outcome, whether the impact of this illness ends up being as profound as the Spanish Influenza of 1918-1919 (which inflicted a death toll in the tens of millions), but we maintain our view the markets have yet to come to grips with the impact of COVID-19 on economic activity and potential ramifications on the global economy and the banking system.  — What is currently a “biological” crisis may turn into an all-out global financial crisis, one that could end up worse than the 2008/2009 mortgage meltdown. Instead … Read more