Introduction
I found more value in the Finance Sector than I did in any other sector that I screened. All in all, I identified 131 attractively valued companies out of the 1,888 companies in the Finance Sector. This is approximately 10 times as many as I found in any other sector. Stated succinctly, there is a lot of value in the Finance Sector but a lot of redundancy as well.
There are 14 subsectors that collectively make up the Finance Sector. Furthermore, there are several research candidates in each subsector that are very similar to each other relative to growth, dividend yields and valuation. Consequently, for diversification purposes, you might want to only select those specific candidates in each subsector that appeal to you most. Stated more directly, there are a lot of viable choices for attractive investments in each subsector within the Finance Sector. Therefore, you can pick your favorite, or diversify among several different candidates in each subsector.
For example, the investor can literally take their pick of most regional banks and expect similar long-term results. The same could be said about the major banks. However, the Canadian domiciled major banks have more consistent long-term historical records. This is simply attributed to the fact that they did not participate in the US financial debacle that led to the Great Recession of 2008.
A Sector By Sector Review
This is part 9 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc. In part 1 found here I covered the Consumer Services Sector. In part 2 found here I covered the Communication Sector. In part 3 found here I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here I covered Consumer Nondurables. In part 5 found here I covered companies in the Consumer Services Sector. In part 6 found here I covered the Distribution Services Sector. In part 7 found here I covered the Electronic Technology Sector. In part 8 found here I covered the Energy Minerals Sector.
In this part 9 I will be covering the Finance Sector.
In each article in this series, I will be providing a listing of screened research candidates from each of the following industry sectors, the sector I’m covering in this article is marked in green:
A Simple Valuation and Quality Screening Process
With this series of articles, I will be presenting a screening of companies that have become attractively valued primarily as a result of the bearish market activities experienced in 2018 from each of the above sectors. I will be applying a rather simple valuation and quality-oriented screen across each of the sectors. First, I have screened for investment-grade S&P credit ratings of BBB- or above. Next, I have screened for low valuations based on P/E ratios between 2 and 17. Finally, I have screened for long-term debt to capital no greater than 70%. (Note: since debt is primarily a banks product or inventory, it is not a relevant metric in this sector.)
By keeping my screen simple, and at the same time rather broad, I will be able to identify attractively valued research candidates that I might have overlooked through a more rigorous screening process. In other words, I’m looking for fresh ideas that I might have previously been overlooking. Furthermore, I want to be clear that I do not consider every candidate that I have discovered as suitable for every investor. However, I do consider them all to be attractively valued. Additionally, I also believe that every investor will be able to find companies to research that meet their own goals, objectives and risk tolerances as this series unfolds.
Finance
Major Banks
Regional Banks
Savings Banks
Finance/Rental/Leasing
Investment Banks/Brokers
Investment Managers
Financial Conglomerates
Property/Casualty Insurance
Multi-Line Insurance
Life/Health Insurance
Specialty Insurance
Insurance Brokers/Services
Real Estate Development
Real Estate Investment Trusts
Portfolio Review: Finance Sector: 131 Research Candidates
The following portfolio review lists the 131 research candidates that I referenced in the introduction. Obviously, there are too many companies in this sector to review in a single article. Furthermore, I do want it to be clear that initial screen such as this is not offered as recommendations to buy.
This initial screen is just identifying companies that meet the characteristics that were searched for. However, it would take a lot more research and due diligence before any of these pre-screened research candidates turned into buy recommendations. With that said, there are many highly recognized Financial Sector companies on the list, as well as several that many readers may not be familiar with.
FAST Graphs Screenshots of 14 Research Candidates One from Each Subsector
The following screenshots provide a quick look at each of the 16 candidates screened out of over 19,000 possibilities. However, there were 1888 companies categorized as Finance Sector, and these 14 were presented as one example from each subsector. The company descriptions are provided courtesy of the Wall Street Journal. In the FAST Graphs analyze out loud video that follows the screenshots, I will provide additional details and thoughts on the possible attractiveness as well as the potential negatives of each of these research candidates.
For brevity’s sake, I have hand selected and presented screenshots of one company from each subsector as follows:
Specialty Insurance
First American Financial Corp (FAF)
First American Financial Corp. operates as an insurance company. It provides title insurance and settlement services to the real estate and mortgage industries. The company operates its business through the following segments: Title Insurance & Services and Specialty Insurance.
The Title Insurance & Services segment provides title insurance, escrow, closing services and similar or related financial services domestically and internationally in connection with residential and commercial real estate transactions. It also maintains, manages and provides access to title plant records and images and provides banking, trust and investment advisory services.
The Specialty Insurance segment issues property & casualty insurance policies and sells home warranty products. It also provides title plant management services, which include title and other real property records and images, valuation products and services, home warranty products, property and casualty insurance and banking, trust and investment advisory services.
First American Financial was founded in January, 2008 and is headquartered in Santa Ana, CA.
Savings Banks
Synchrony Financial (SYF)
Synchrony Financial engages in the provision of consumer financial services. It operates through three sales platforms: Retail Card, Payment Solutions, and CareCredit. The Retail Card platform is a provider of private label credit cards, and also provides Dual Cards and small-and medium-sized business credit products.
The Payment Solutions platform is a provider of promotional financing for major consumer purchases, offering private label credit cards and instalment loans. The CareCredit platform is a provider of promotional financing to consumers for elective healthcare procedures or services, such as dental, veterinary, cosmetic, vision and audiology.
The company was founded on September 12, 2003 and is headquartered in Stamford, CT.
Regional Banks
State Street Corp (STT)
State Street Corp. operates as a financial holding company. It conducts business primarily through State Street Bank. The company operates through following business lines: Investment Servicing and Investment Management. The Investment Servicing business offers custody, product and participant-level accounting, daily pricing and administration, master trust and master custody, record-keeping, cash management, foreign exchange, brokerage and other trading services, securities finance, deposit and short-term investment facilities, loans and lease financing, investment manager and alternative investment manager operations outsourcing, and performance, risk and compliance analytics.
The Investment Management business provides services through State Street Global Advisors, which provides a broad array of investment management, investment research and investment advisory services to corporations, public funds and other sophisticated investors. It offers strategies for managing financial assets, including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both the U.S. and global equities and fixed-income securities.
The company was founded in 1969 and is headquartered in Boston, MA.
Real Estate Investment Trusts (REITs)
Weingarten Realty Investors (WRI)
Weingarten Realty Investors is a real estate investment trust which owns, manages and develops commercial real estate. Its business activities include the long-term ownership, management, acquisition, development and redevelopment of strategically located neighborhood and community shopping centers and select industrial properties. The company primary business is leasing space to tenants in the shopping and industrial centers which the company owns.
Weingarten Realty Investors was founded in 1948 and is headquartered in Houston, TX.
Real Estate Development
Jones Lang Lasalle Inc (JLL)
Jones Lang LaSalle, Inc. engages in the provision of professional services which specializes in real estate and investment management. It operates through the following geographic segments: Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; and LaSalle Investment Management (LaSalle). The Americas, EMEA, and Asia Pacific segments provide a range of leasing, capital markets, integrated property and facility management, project management, advisory, and transaction services. The LaSalle segment offers investment management services on a global basis to institutional investors and high-net-worth individuals.
The company was founded by Richard Winstanley in 1783 and is headquartered in Chicago, IL.
Property/Casualty Insurance
Allstate Corp (ALL)
The Allstate Corp. engages in the property and casualty insurance business and the sale of life and accident and health insurance products through its subsidiaries. It operates through following business segments: Allstate Protection, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, Discontinued Lines and Coverages, and Corporate and Other. The Allstate Protection segment sells private passenger auto and homeowners insurance through agencies and directly through call centers and the internet. These products are marketed under the Allstate, Encompass, and Esurance brand names.
The Service Businesses segment offers a range of products and services that expand and enhance customer value propositions including SquareTrade, Arity, Allstate Roadside, and Allstate Dealer Services. The Allstate Life segment provides traditional, interest-sensitive, and variable life insurance products through Allstate exclusive agencies and exclusive financial specialists.
The Allstate Benefits segment offers voluntary benefits products, including life, accident, critical illness, short-term disability and other health products sold through workplace enrolling independent agents and Allstate exclusive agencies. The Allstate Annuities segment consists of deferred fixed annuities and immediate fixed annuities. The Discontinued Lines and Coverages segment includes results from property and casualty insurance coverage that primarily relates to policies written during the 1960s through the mid-1980s. The Corporate and Other segment comprises of the company’s activities and certain non-insurance operations.
The company was founded on April 17, 1931 and is headquartered in Northbrook, IL.
Multi-line Insurance
Hartford Financial Services Group (HIG)
The Hartford Financial Services Group, Inc. is an insurance and financial services company. The company provides life insurance, group and employee benefits, automobile and homeowners insurance and business insurance, as well as investment products, annuities, mutual funds, and college savings plans. It operates through the following segments: Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution. The Commercial Lines segment provides workers compensation, property, automobile, liability and umbrella coverage under several different products, primarily throughout the U.S., within its standard commercial lines, which consists of The Hartford’s small commercial and middle market lines of business.
The Personal Lines segment includes automobile, homeowners and home-based business coverage to individuals across the U.S. The Property & Casualty Other Operations segment includes certain property and casualty operations, currently managed by the company, that have discontinued writing new business and substantially all of the company’s asbestos and environmental exposures. The Group Benefits segment offers group life, accident and disability coverage, group retiree health and voluntary benefits to individual members of employer groups, associations, affinity groups and financial institutions.
The Mutual Funds segment provides investment management, administration, distribution and related services. The Talcott Resolution segment is comprised of runoff business from the Company’s U.S. annuity, international annuity, and institutional and private placement life insurance businesses, as well as the retirement plans and individual life businesses.
The Hartford Financial Services Group was founded on May 10, 1810 and is headquartered in Hartford, CT.
Major Banks
Bank of Nova Scotia (BNS)
Bank of Nova Scotia engages in the provision of financial products and services, including personal, commercial, corporate, and investment banking. It operates through the following segments: Canadian Banking, International Banking, Global Banking and Markets, and Other. The Other segment includes group treasury, smaller operating segments, business line elimination items and other corporate items which are not allocated to a business line.
The company was founded on March 30, 1832 and is headquartered in Toronto, Canada.
Life/Health Insurance
Aflac Inc (AFL)
Aflac, Inc. is a holding company, which engages in the provision financial protection services. It operates through the Aflac Japan and Aflac United States (U.S.) segments. The Aflac Japan segment offers life insurance, death benefits, and cash surrender values. The Aflac U.S. segment sells voluntary supplemental insurance products for people who already have major medical or primary insurance coverage.
The company was founded by John Amos, Daniel Paul Amos, and William Amos on November 17, 1955 and is headquartered in Columbus, GA.
Investment Managers
BlackRock Inc (BLK)
BlackRock, Inc. engages in the provision of investment management, risk management, and advisory services for institutional and retail clients worldwide. Its products include single and multi-asset class portfolios investing in equities, fixed income, alternatives, and money market instruments.
The company was founded by Ralph L. Schlosstein, Susan L. Wagner, Robert Steven Kapito, and Laurence Douglas Fink in 1988 and is headquartered in New York, NY.
Investment Banks/Brokers
Ameriprise Financial Inc (AMP)
Ameriprise Financial, Inc. operates as a holding company. The company provides financial planning, asset management and insurance services to individuals, businesses and institutions. It operates through five segments: Advice & Wealth Management; Asset Management; Annuities; Protection; and Corporate & Other.
The Advice & Wealth Management segment provides financial planning and advice, as well as full service brokerage and banking services, primarily to retail clients through the company’s financial advisors. The Asset Management segment provides investment advice and investment products to retail and institutional clients. It also provides products and services on a global scale through two complementary asset management businesses: Columbia Management and Threadneedle.
The Columbia Management business primarily provides U.S. domestic products and services and Threadneedle primarily provides international investment products and services. Its international retail products are primarily provided through third-party financial institutions. The segments retail products include mutual funds and variable product funds underlying insurance and annuity separate accounts. The Annuities segment provides variable and fixed annuity products of RiverSource Life companies to retail clients. The Protection segment offers a variety of protection products to address the protection and risk management needs of the company’s retail clients, including life, DI, and property-casualty insurance. The Corporate & Other segment consists of net investment income on corporate level assets, including excess capital held in the company’s subsidiaries and other unallocated equity and other revenues from various investments as well as unallocated corporate expenses.
Ameriprise Financial was founded by John Tappan in 1983 and is headquartered in Minneapolis, MN.
Insurance Brokers/Services
Enstar Group (ESGR)
Enstar Group Ltd. is a holding company, which engages in the acquisition and management of insurance and reinsurance companies. It also provides management, consulting, and other services to the insurance and reinsurance industry. It operates through the following segments: Non-life Run-off, Atrium, StarStone, and Life and Annuities.
The Non-life Run-off segment operates through its subsidiaries that run off their property and casualty and other non-life lines of business. The Atrium segment consists of the active underwriting operations and financial results of Northshore, a holding company that owns Atrium and its subsidiaries and Arden.
The StarStone segment includes the active underwriting operations and financial results of StarStone Holdings, which offers a broad range of property, casualty, and specialty insurance products to both large multi-national and small and middle-market clients. The Life and Annuities segment manages closed-block of life and annuity business and life settlements business.
The company was founded by Paul James O’Shea, Nicholas A. Packer and Dominic Francis Michael Silvester in August 2001 and is headquartered in Hamilton, Bermuda.
Financial Conglomerates
American Express Co (AXP)
American Express Co. engages in the provision of charge and credit card products, and travel-related services. It operates through the following segments: Global Consumer Services Group, Global Commercial Services, Global Merchant and Network Services and Corporate & Other. The Global Consumer Services Group segment issues a wide range of proprietary consumer cards globally. The Global Commercial Services segment provides proprietary corporate and small business cards, payment and expense management services, and commercial financing products.
The Global Merchant and Network Services segment operates a global payments network that processes and settles card transactions, acquires merchants, and provides multi-channel marketing programs and capabilities, services, and data analytics. The Corporate & Other segment covers corporate functions and certain other businesses and operations.
The company was founded by Henry Wells, William G. Fargo and John Warren Butterfield on March 28, 1850 and is headquartered in New York, NY.
Finance/Rental/Leasing
Western Union Co (WU)
The Western Union Co. is a holding company, which engages in the provision of money transfer and payment services. It operates through the following segments: Consumer-to-Consumer; Business Solutions; and Other. The Consumer-to-Consumer segment facilitates money transfers between two consumers.
The Business Solutions segment offers payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The Other segment comprises electronic-based and cash-based bill payment services.
The company was founded in 1851 and is headquartered in Denver, CO.
F.A.S.T. Graphs Analyze Out Loud Video:
As I indicated previously, there is more value in the Finance Sector than any other sector that I have covered or will be covering. Although I have focused on 14 companies in this article, one from each subsector of Finance, I wanted to be clear that I am not suggesting these as buys or even my favorites. Instead, and consistent with this series, I am simply attempting to demonstrate that it is a market of stocks and as such, each stock is unique and different even within the same sector. To summarize, I believe that investors are overly market oriented and not focused enough on the specifics as they should be. It is clearly a market of stocks and not a stock market.
Summary and Conclusions
The Finance Sector is very large and important segment of the US economy. Moreover, there are many excellent companies that can be invested in with confidence and the opportunity for both increasing income and good total returns. On the other hand, there are certain subsectors that were egregious violators and perpetrators of the abuses that led to the Great Recession of 2008. Since that time, many of the worst offenders have been recovering nicely with good track records generated since 2010. Hopefully, companies like BankAmerica, AIG and Citigroup have learned from their past mistakes. Nevertheless, investors need to decide for themselves whether those companies should be forgiven for their past sins or not.
Additionally, as it relates to diversification, there are several companies within each sector (and the Finance Sector is no exception), where diversification opportunities can be found. On the other hand, I would never recommend overweighting any sector beyond what prudence would dictate. In the case of this sector, the Finance Sector, it could be quite tempting and far too easy to overload your portfolios with financial holdings.
Disclosure: Long AFL, AMP
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.