Author: Andy Schornack
Covestor model: Financial Services
Disclosure: Long JPM, KKR, FMER, GS, ABBC
The performance of the portfolio for June was again disappointing, as it trailed both its benchmarks, SPSY (S&P Financials Index) and the S&P 500 Index. The trend in the marketplace and in the financial sector specifically has not been positive as of late; however, I remain opportunistic and have made several moves over the last 45 days.
For this month’s Investment Report, I am going to touch on some of the new buys and sells as well as overview the largest three positions in the portfolio. This is a slight change in the regular formatting and I hope will provide more clarity on my overview of my investments in the model portfolio.
As of June 30, 2011, the largest position in the portfolio is JPMorgan Chase & Co. (NYSE: JPM). The investment is a best of breed investment and is run by arguably the best management in the financial industry. The company has received approval to increase its dividend to $0.25/share in the spring 2011 and with the stock at $40.94 as of close of trading on June 30, 2011, yields 2.44%. Furthermore, JPM has authorized a new $15 billion multi-year common stock repurchase program, of which up to $8.0 billion of common stock repurchases is approved for 2011. JPM trades at less than book value/share of $43.34 as reported on for Q1 2011 with calculated tangible book value/share of $30.88. Earnings projections for the upcoming 12 months at consensus are $4.89 which puts the stock at roughly 8.34x estimates for the upcoming year.
The second largest position in the portfolio is KKR & Co. L.P. (NYSE: KKR). Similarly to JPM, my viewpoint is that KKR is one of the best managed private equity firms in the world. This drives the brand awareness that allows it to take advantage of opportunities others do not have and creates the ability to build their business as they mature as a public company. The position was added in August 2010 and has seen a positive increase since then, along with some nice dividend payments. As companies in general continue to deleverage, reposition their balance sheets, and look for growth capital and exit opportunities, KKR has the ability to move up and down the capital stack and across industries to drive value for its investors through asset management fees and carried interest, among other revenue sources. This is intended to be a long-term position as it provides in my opinion significant earnings growth potential as well as a respectable dividend.
The third largest position in the portfolio is FirstMerit Corporation (NASDAQ: FMER). The position was first added in February 2011 and I increased it in June 2011. My thesis for this investment remains intact, as mentioned in the March 2011 InvestmentReport. A conservative underwriting process and managed approach to growth has treated this bank well through the last few years, and will position it well as it grows into the Chicago marketplace which has seen its fair share of disruption. It trades at a fair multiple of book value and price to earnings ratio. The company also presents an attractive dividend yield and capital appreciation potential due to its new market entry and capital position, which should allow it to take advantage of future bank failures as acquisition opportunities.
During the month, I also sold positions in CommonWealth REIT PRFD ‘D’ (NYSE: CWH-D) and Investors Real Estate Trust (NASDAQ: IRET). CWH-D was sold purely to redeploy the funds into other investment opportunities providing larger capital growth opportunity in my opinion. I still consider CWH-D a good, stable dividend investment. IRET was sold due to the recent earnings release and dividend cut that provided for a marginal outlook over the upcoming 24 months in comparison to other opportunities in the marketplace.
Positions added included Goldman Sachs Group, Inc. (NYSE: GS) and Abington Bancorp, Inc. (NASDAQ: ABBC). GS is an investment in a premier investment bank trading at a relatively low multiples of book value and an attractive price to earnings. As the clouds clear, I saw a buying opportunity in GS.
ABBC is an investment in a bank that pays an attractive yield and is under a purchase agreement with Susquehanna Bancshares, Inc. (NASDAQ: SUSQ). I have followed SUSQ and ABBC for some time and thought the investment through ABBC provides for an attractive entry to a bank positioned well for the long-term.
The target portfolio yield is 3% and currently the portfolio provides for a monthly dividend stream. This is driven by the composition and historical timing of dividends from the different stocks in the portfolio and could change at any time.
Sources:
JP Morgan 10-Q. http://files.shareholder.com/downloads/ONE/1320963738x0xS950123-11-45948/19617/filing.pdf
Earnings estimates from Yahoo Finance: https://finance.yahoo.com/quote/JPM/analysis?ltr=1
Andy Schornack May Commentary, Covestor. https://investing.interactiveadvisors.com/2011/03/why-i-added-this-regional-bank-to-the-portfolio-a-schornack-fmer-twgp-lxp
ABBC Press Release, 1/26. http://www1.snl.com/irweblinkx/file.aspx?IID=100457&FID=10650065
