Author: Andy Schornack
Covestor model: Financial Services
My Financial Services model during the month of October outperformed both the SPSY (S&P Financials Index) and the S&P 500 Index.
The month of October saw strong performance from Morgan Stanley (MS), KKR & Co, LP (KKR), Medallion Financial (TAXI), and First Merit (FMER). All four companies rose over 20% during the month, led by a broader market rally after European sovereign debt plans were displayed to the public. The market continues to question the viability of the plan and until the plan and the ability to execute on the plan are demonstrated to the markets, the markets will continue to remain volatile and challenging from day to day. As a long-term value based investor, it is imperative to not to get caught up in the daily swings but rather focus on the underlying thesis of the investments and direction of the portfolio.
From a macro level, I think we are in a near-term bottoming process for the financial sector driven by fear and the unknown unknowns of the European crisis. Meanwhile, on a micro-level/company level we are seeing improving asset quality across the sector. Earnings for companies in this portfolio performed well in Q3, with several surpassing my expectations and some such as TAXI increasing dividends on strong performance to $0.19/share from $0.15/share the previous quarter.
Since my last investment report, there were no changes to the portfolio. I am very comfortable with my positions, although I am always reviewing positions and comparing them to alternative opportunities in the marketplace.
The portfolio is structured to provide dividend income with a target minimum yield of 3%. This provides a stable return of capital during the market volatility that can be redeployed into new opportunities or to add to existing positions.
Here is a quote that resonates, given the discounts I am seeing and the long-term value I have estimated for the financial sector:
An argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.- Warren Buffett, Berkshire Hathaway, 1979
