The US election is over and the fiscal cliff is now on every investor’s mind as 2013 approaches. The past month has not treated the financial stocks well, given the reelection of President Obama, concerns over the tax increases, and worries the fiscal cliff that may crimp economic growth.
Over the past month, I have retrenched and made some changes to the portfolio. In November, the Financial Services portfolio sold its position in Morgan Stanley (MS) and First Niagara Financial Group (FNFG).
The primary reason for the sale was better return opportunities in regional bank stocks after the market selloff. I took the opportunity to add to some high yielding regional banks: Republic Bancorp (RBCAA), Renasant (RNST), and People’s United Financial (PBCT).
RBCAA is trading at a larger discount to tangible book based on historical trading averages. The stock is undervalued in my opinion, and recently announced a special dividend of $1.10 per share prior to end of year. The balance sheet looks well-structured and reserves are adequate.
RNST has been discussed previously and is a favorite of mine over the past few years as management has continued to execute its plan and show stable positive growth into new markets. The stock sports a current effective yield above 4%.
Lastly, PBCT is a regional bank based in Boston and was added to the Financial Services Portfolio in April 2011. In my opinion, the stock has growth potential over the next five years. It doesn’t hurt that the effective yield is over 5%.
Overall, I think the financial sector as a whole has its challenges with impeding margin compression as rates stay low and expense reduction is limited. I have tried to build a portfolio that leans towards opportunistic financial institutions, insurance firms, REITS, and financial service businesses that are in a position of strength to capitalize on other’s weaknesses or provide special situation opportunities where the business is undervalued at existing market prices.
Furthermore, the residential real estate sector is strengthening. I see it in the Twin Cities Metro Area where inventory levels are down to levels not seen since 2002. With rental asking prices increasing, low vacancy rates, and historically low mortgage rates, the residential real estate market market will continue to see improvement.
The investments discussed are held in client accounts as of November 19. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
