Financials

So, first I should clear up what I spent of the fake fund's money. I spent 20k on XOM and 10k on CEO,SSL,CVX. I also added a bit (4k and 2k) of VE and NUE as they had fallen a bit underweight, and I figured it was a good time to scoop up some more. I'm starting to wonder if SSL and CEO spent too hard expanding while oil was high, but we'll see.

So, after RBS dropped hugely in share price and dragged the rest of the financial down, I decided it would be a great time to grab some bank stocks. However, I was slow and wanted to actually do some research- in retrospect it would have been great if I had just picked up some JPM and then sold it again, but this isn't a day trading fund. And it isn't for a reason: I tried a bit of day trading in another fake account, and I always seem to jump the gun and get soaked before things recover (Ex: I bought WFC & AIB! in my fake trade account a few days back to watch it drop 15%-50% oops? :( ). Anyhow, I'll try not to do that with this account.

Now they are right back down again anyhow, silly dead cat bounce. I hope I'm not jumping into a storm of falling knives with this. Heck, my finance Prof. told me I should stay away from banks for now, but hey, if I'm going to add a financial portion anyhow it might as well be when the market is beaten down... right? Maybe I'm just reassuring myself, we'll see. I probably wouldn't do this with real money. Maybe I should make a rule to only do things I would do with real money....

Okay, so financial companies. They all look scary :(. I limited myself to companies with a long term dividend growth history, and some of the companies still look a bit scary, especially with recent quarter results.

So, what companies to consider?

AFL (AFLAC) 2.8 ***** fast growth
PE 13.4 PB 2.85 Beta .8 ANALYST RATINGS: 2.55
CINF (Cincinnati Financial Corp.)6.1***** slow/mod growth
PE 9.35 PB .89 Beta .64 ANALYST RATINGS: 2.6
STT (State Street Corp.) ***** 2.64 slowish growth
PE 8.33 PB 2.36 Beta 1.12 ANALYST RATINGS: 3
CBSH (Cash America International, Inc)***** 2.55 slowish growth
PE 15.04 PB 1.94 Beta .29 ANALYST RATINGS: 3
UCBH (United Commercial Bank Holdings, Inc.)4.2% *** growth
PE 18.36 PB .62 Beta 1.51 ANALYST RATINGS: 2.73
CB (Chubb Corp.)***** 3 decent growth
PE 8.05 PB 1.19 Beta .44 ANALYST RATINGS: 2.53
TCB (TCF Financial Corp.) **** 10%slow growth
PE 7.99 PB 1.43 Beta .48 ANALYST RATINGS: 2.72
BBT (BB&T Corp.) ***** 9% slow growth
PE 7.06 PB 1.77 Beta .47 ANALYST RATINGS: 2.96
DB (Deutsche Bank AG)*** 22%? growth
PE 5.31 PB .45 Beta 2.22 ANALYST RATINGS: 3.5
USB (U.S. Bancorp) 9.28% ***** growth
PE 9.19 PB 3.03 Beta .82 ANALYST RATINGS: 2.58
AXP (American Express Co.) *** 4% good growth
PE 5.79 PB 1.58 Beta 1.37 ANALYST RATINGS: 3.35
WFC (Wells Fargo & Co.) ***** 7.28 slow growth
PE 9.21 PB 4.49 Beta .53 ANALYST RATINGS: 2.47

and what the heck, I'll add JPM even though it's not a dividend achiever. And some Canadian Corporations just to get some distance from the U.S. financial system for comparison. However, they don't actually look as stable as I had hoped judging by the betas...

JPM (JPMorgan Chase & Co.) 6.7% slow dividend growth- was held at .34 cents/quarter for 3+ yrs and rose to .38 in 2007.
PE 23.01 PB .82 Beta .87 ANALYST RATINGS: 2.29
RY Royal Bank of Canada 5.88 fast growth for 5yrs+ (changing divs but growing yearly)
PE 11.24 PB 2.31 Beta 2.31 ANALYST RATINGS: 2.62
SLF Canadian insurer 5.42 recent small cut 5yr growth
PE 11.44 PB 1.54 Beta 1.54 ANALYST RATINGS: 2.5
BNS Bank of Nova Scotia, formerly tree stars but recent (slight) dividend cut 6.8% and previous fast dividend growth
PE 9.36 PB 1.49 Beta .54 ANALYST RATINGS: 2.79

Note: I added Beta (from Reuters) to give me some idea of volatility in addition to PE and PB, as some tings that look cheap from PB will also be crazy volatile and maybe I shouldn't try to call the bottom on a falling bank stock.

Judging from the betas, CBSH, CB, TCB, BBT, BNS, and WFC should be significantly less volatile than the market.... right. I assume that this will not hold true in the most recent of months, but maybe they will be more stable than the other corporations. I am just going to pull up a chart quick and see which of these stocks has fallen and can't get up, and which are at least trying to recover.

Crap, there are too many names to fit onto one Yahoo graph at a time. I guess I'll have to think up some way to split them but I hate not being able to visually compare everything to everything else! How about I split it into Beta >1 and Beta <1 as hopefully that will break it into very crashed and not so crashed, at least in theory.

So, first chart, B>1, should be ugly.

STT, UCBH, DB, AXP, RY, SLF

First thing that jumps out at me: STT has had a great day. +20%, while the others have gone down with the market. I wonder what the news is there?

Second thing I notice is: STT crashed hugely 2 days ago (-50%). That is what set up this rise. More news I should look into. I wonder if those ratio's I pulled up a few days back are even correct anymore :(.

Okay, 6 month chart: UCBH outperforms... why? Because it was beaten down a lot six months ago, says the 1 yr chart. RY stays close to the market on the 6 month chart, and SLF stays close on the 3 month chart. Otherwise, its just a sad, sad picture. RY actually outperformed for a tiny short while on the one year chart.

On the 5 yr chart: RY, SLF, and DB outperformed, and STT was up there for almost a year. However, DB was hit hard by the crisis as the 1 yr chart shows, and whatever recently hit STT sent it right down with DB at almost -80% for the year.

I feel that maybe I should be salivating at these marked down prices, but I'm not. I think I'll just move on, and maybe consider RY and SLF after seeing what the other companies look like.

Now, Beta<1

AFL,CINF,CBSH,TCB,BBT,USB,WFC,JPM, BNS

Today: AFL took a huge hit. Apparently, it had hybrid security exposure to European banks like RBS which just had the pants beat out of them. It's too bad, because Aflac has been a very solid outperformer- I probably would have bought in if I looked at it last week. I will keep my eye on it- maybe the market has punished them enough with the huge -36% hit, and maybe their portfolio isn't at as much risk as is claimed.

5day:2 days ago most everything opened lower, JPM and WFC especially. CINF seemed oddly immune.

1month: BNS leads the pack here- I note that RY and SLF the other Canadian financials in the Beta>1 group held up well here too.

3month: CINF leads the pack, AFL also beats the market, and CBSH is close.

6month:BBT and TCB were preforming better than the market in the October crash, but have since lost their luster as CBSH and CINF regained their losses. TCB made a bit of a recovery as well to outperform. BNS drags at the bottom.

1yr: Again, CBSH and CINF shine at the end. However, CINF was at the very bottom of the heap most of the year. WFC looked like it was doing well, until recently.

5yr: AFL was the only major outperforming stock of any mention during the period. Then it fell like a house of cards. Wheeee. On this time scale, DB,RY, and SLF looked better.

I think I am going to take a look at CBSH against RY and SLF.

CBSH has one thing going for it: it is imperturbable. The bottom falls off the market, and it doesn't really move. However, it hasn't really gone up at all either. Not exactly a huge reason to invest in something that under preforms, but with style. Case in point: on the 1 month chart, it is right back to under performing. Just because it didn't go down, doesn't really indicate it will go up. Also, they seem to do regular reverse splits 105:100, effectively eschewing a 5% growth of price from thin air. It would stink to get your dividend on 100 shares that lets you buy 1 or 2 more shares, only to lose 5 shares to a reverse split: yes,yes the share price goes up 5% so you don't really lose anything from the split, but that 5-10% dividend growth rate suddenly doesn't look so appealing when you also have 5% less shares to get dividends on each year, and the nonperformance of the stocks share price is just that much worse when you consider the reverse splits made it look as good as it does. I thought I had stumbled upon something good when I saw how solid the share price was in the recent markets, but apparently not.

Oh well, moving on. I don't really feel like buying much of this stuff. Maybe some RY and SLF. If it weren't for the recent drop in bank shares, I probably wouldn't be adding financial quite yet :(. And looking at the charts, I don't really see any strong reason to want to buy WFC and JPM, which seem to be the analyst favorites. Then again, maybe I am putting too much bias on past returns: looking at the 1yr chart again, WFC and JPM don't look atrocious, and SLF doesn't look as great.

Okay, so after looking at the one year chart I have changed my mind a bit. I think that RY, BNS and SLF had their run a while ago, and perhaps now JMP and WFC are the ones set to rise. Or, they will all continue their plunge, but whatever. I will keep RY in my list of options though, as it preformed the best of the three over the last year and five years.

I guess it's that time again: Financial Statements!

RY: Liabilities and assets are frighteningly close numbers. Picked up 2B Canadian dollars in debt this year. On the up side, it didn't pick up much debt last year, and it has previously picked up 2B debt in a year (2004) and wasn't that much the worse for it as far as I can tell. Cash on hand is up as well. There's probably a lot more I would only get out of a more in depth delving. Note that RY is not a small company: 32B market cap- so that 2B is nothing compared to what you will find on the next two statements from companies about 2-3x as big...

JPM: Big spending on loan loss prevention.... go figure. Makes net income drop stupendously. Nice huge 55B of debt and 20B of stock on the books for just the first 3 quarters...on top of 87B last year. Again with liabilities close to assets, but that actually seems normalish for banks, judging by the history.

WFC: Again, a big jump in loan loss prevention. Like 40B of debt in the first three quarters... on top of 50B picked up last year... yuck.

Hmm, well now what. I guess I should check if JPM and WFC have TARP money, wouldn't do to invest in something that the gov makes cut dividends.

Yep, they did. So there goes that idea, their dividends aren't even safe.

Conclusion: I'm going to run to Canada and add a small RY position (10k). I am SURE that most of these companies I ran through today will recover eventually, and I WANT to get in and catch some of the upside. However, at the moment I don't trust myself enough to pick a good entry point and the right companies. I will reevaluate these companies after we see what the TARP does to dividends... and I will probably miss a large chunk of upside. The charts looked hopeful to me, but the balance sheets didn't, as far as JPM and WFC went. Oh well. Maybe I should have picked up some AFLAC- but then again, as I said, this is not a day trade fund, even if it does bounce I shouldn't kick myself. AFLAC in the past has been a very solid outperformer, so I will keep my eye on what becomes of this concern over its Hybrid Securities investments: if it turns out that AFLAC is mostly unscathed, I will buy in, hopefully before all of the upside is gone.

I think companies like with solid histories of outperformance for on the decades charts and the recent 5 yr charts should be looked at again, such as:SLF,AFL, and BNS. However, I have no confidence at the moment, especially in ALF with its recent issues. I will look at financials again, and maybe a few that aren't dividend achievers (gasp!).

Usual disclaimer: I don't know jack about the markets and I don't own any stock- so don't take this stuff as any kind of reason to invest your own money.

Next time: probably a summary of how much money the fund has lost so far (groan) and maybe, I dunno, shipping companies. Might as well call bottom on the bulk rates as well as the financial markets, eh?

Oil Time

Well, Oil didn't fall to 10$ a barrel, so I suppose now would be a good time to load up the truck and pile some in. Let's start by throwing out some stocks that have been paying out dividends for quite a while, as there are lots and lots of potential companies to choose from so we might as well look at those that have been paying out for a while.

BP *** Yield:6.85% 5yr growth rate: 12% ANALYSTS: 2.81 hold
PE 6 PS .44 PB 1.7

SSL *** Yield:5.81% 5yr growth rate: 23.68 ANALYSTS: 1.0 Strong Buy
PE 7.7 PS 1.34 PB 2.33

CEO *** Yield:4.91% 5yr growth rate: 40%!! ANALYSTS: 1.75 Buy
PE 6.2 PS 2.2 PB 1.7

STO *** Yield:4.64% 5yr growth rate: 7.69% ANALYSTS: 2.29 Outperform/hold
PE 7.42 PS .59 PB 2.77

REP *** Yield:6.68% 5yr growth rate:20.7% ANALYSTS: 2.5 Outperform/Hold
PB 1.2

XOM ***** Yield:2.02% 5yr growth rate:8.29 ANALYSTS: 1.64 moderate buy (MSN)
PE 8.67 PS .8 PB 3.26

BPL **** Yield:9.63% 5yr growth rate:6.03 ANALYSTS: 2.34 hold (MSN)
PE 11.94 PB 1.87 PS 1.18

CVX *** Yield:3.5% 5yr growth rate:10.05 ANALYSTS 2.31 outperform
PE 6.7 PB 1.91 PS .54

Note: some of these ratios may be wrong, they are not all current, some are a week old or so.

So, we have here companies with good dividend payout histories and good growth rates on their dividends, as well as some quite attractive yields. I would like to add a rather large position in companies such as these, so it is tempting to just shotgun them rather than analyze them, however I feel that if I want to outperform the market I need to go more in depth on the companies (sigh, work).

The Price/Book ratio look tempting for many of the companies, especially REP and XOM.

CVX, BP, CEO, SSL, and STO all have PE ratios in the 6/7 range, which also seems tempting. I should probably note that the sector PE is 18... so all of these companies have low ratios.

So, next I'll pull up a chart.

First, I'll look at the six month chart to get a feel for how they dealt with the recent crash, as that seems an acid test for market confidence.

The companies seem to break into two groups, one that underperformed and one that slightly outperformed the market.

BPL, XOM, CVX, and BP, the 'big name blue chips' outperformed by a bit. (XOM and BPL by ~20%!)

The others underperformed by about 10%, and STO underperformed by almost 20%.

The two year chart tells a different story. On it, I see CEO, SSL and STO with very impressive performances. CVX and XOM also consistently preformed well, and the sector as a whole outperformed (probably having to do with high oil prices).

CVX and XOM, as blue chips with good track records, seem quite tempting based on past performance. However, looking forward a recovery by CEO and SSL seems not impossible. BP and BPL don't look that tempting based on past performance.

I noted earlier that CEO, SSL, and CVX all had low PE ratios, so these probably merit further investigation.

XOM seems like it is probably in, with the good PB & PE ratios, and historical performance, although the dividend yield and growth is kind of a yawn. I'll look into it a bit more too.

So now, time to look at financial statements... bleh. Oh well, if I want to outperform the market, I have to do at least a little thinking (or be very lucky).

Starting with CVX:
Slowing increase in revenue, but growth none the less. Nothing jumped out at me, there was debt on the balance sheet but I don't really know how much to expect- it seems to have a lower debt/equity ratio than the industry.

XOM:
Again a lower debt to equity ratio. Again, income growth over the last few years, however I don't know how much to chalk up to high oil prices. Unlike CVX, it issued rather than retired debt the last two years, which is a change from previous years of retirement. Still, nothing jumps out at me.

CEO:
Lower yet debt to equity. Did pick up some more debt the last two years, but I am lead to expect companies to use a bit of leverage in order to make profits, so I can't say I'm shocked.

SSL:
Much higher debt to equity- but this is technically a chemical/basic materials company not an oil/energy company, so the industry has a bit higher debt as a whole. Fast income growth of late, and the balance sheet shows a debt number that doesn't scare the pants off me, although perhaps it should, as the company has been picking up debt the last few years (with the exception of 2006).

Eh, what the heck, I will allocate some fake $$ to all four. I will watch CEO and SSL closely though, as they may not be able to repeat their earlier performance with today's oil situation. I have a good deal of faith in Chevron and XOM however, and I feel they help balance out the others. I would add an oil hedge, except I expect oil to return to at least 60-80$ a barrel in the long term (call it 2yrs). Maybe I should hedge short term... but I'll consider that another day.