Thursday, January 6, 2022

Financials Model Portfolio

 In light of yesterday's write-up about how the business model of banks is widely misunderstood, below is a model portfolio I put together with banks and other financial services providers at the end of 2021 (Disclaimer: not investment advice). This portfolio includes banks and other financials-related businesses that 1) provide critical financial services for real people and real companies and 2) are offered at a decent value. I'll provide some deeper dives on individual names in the future, but for now I will post it and update the performance each quarter. For performance-tracking purposes, assume that all dividends are reinvested in the shares.

The reason these are offered at a decent value is that capital has flowed away from traditional financial services and into "the future" of finance such as FinTech, cryptocurrencies, DeFi, web 3.0 projects, etc. My prediction is that financial innovations will inevitably accrue to the incumbents, because of their "franchise" relationship with the US government and global scale.

The portfolio is designed to include both blue-chip stalwarts as well as small-cap, growing business. The idea is that companies like JPM and BAC will likely generally track with the S&P 500, and their share repurchase programs puts a floor on their price. Smaller stocks like MGI, which I believe is severely undervalued, will hopefully enable the portfolio to generate returns in excess of the market averages.

As of the end of 2021, the TTM P/E ratio for the S&P 500 was about 25x. The average TTM P/E ratio of this portfolio is 11.6x, slightly under half of the S&P.

Without further ado, here is the portfolio (figures as of 12/31/21):

Bank of America Corp (BAC) - 13.7x TTM P/E ratio, largest US bank by deposits

JPMorgan Chase & Co (JPM) - 10.1x TTM P/E ratio, second largest US bank by deposits

Goldman Sachs Group Inc (GS) - 6.2x TTM P/E, premier institutional financial service provider with growing consumer franchise

Bank of New York Mellon Corp (BK) - 14.8x TTM P/E, largest institutional assets custodian in US, only commercial bank that offers tri-party Repo services

State Street Corp (STT) - 13.2x TTM P/E, second largest institutional assets custodian in US, third largest ETF franchise

BlackRock Inc (BLK) - 23.7x TTM P/E, dominant ETF business, spinoff of Aladdin software subsidiary would be accretive

H&R Block Inc (HRB) - 13.7x TTM P/E, second biggest tax preparer in US by volumes, growing financial services

MoneyGram International Inc (MGI) - 1.0x EV/Sales (no GAAP earnings on TTM basis), second largest global remittance servicer with dominant cash remittance business and growing digital business, trading below replacement value, refinanced expensive debt in 2021 which cut interest costs in half, expect substantial margin expansion and cash generation in 2022, recently launched share repurchase program

Western Union Co (WU) - 8.8x TTM P/E, largest global remittance servicer with growing digital business

Virtu Financial (VIRT) - 7.4x TTM P/E, high frequency trading duopoly, competes with Citadel Securities, EBITDA margins consistently north of 50% historically, Citadel is the engine that made Ken Griffin one of the richest people in the world, these guys are their biggest competitor and it trades at a single-digit multiple of earnings?! Also, like their CEO, passionate about his business

Berkshire Hathaway (BRK/B) - 7.8x TTM P/E, Buffett = GOAT, diverse mix of fantastic businesses, including insurance and banking, Buffett is the best bank analyst in the world, Berkshire is the largest company in the US by assets, trading at single-digit multiple of trailing earnings, buying back tons of stock

Discover Financial Services (DFS) - 7.0x TTM P/E, digital banking and payments giant

American Express Co (AXP) - 17.2x TTM P/E, dominant banking and payments franchise, millennials starting families and purchasing homes is a tailwind for credit card business

Synchrony Financial (SYF) - 7.1x TTM P/E, dominant consumer finance franchise

Didn't make the cut (too expensive as multiple of earnings) included the following:

Euronet Worldwide Inc (EEFT) - 43.9x TTM P/E, fast growing remittance servicer

Square Inc (SQ) - 125.8x TTM P/E, fast growing digital payments

Intuit Inc (INTU) - 85.9x TTM P/E, Largest tax preparer in US by volume, dominant financial services software franchise

Fair Isaac Corp (FICO) - 40.0x TTM P/E, Consumer credit score monopoly, CEO recently purchased large chunk of stock

Mastercard Inc (MA) - 43.8x TTM P/E, Payments juggernaut

Visa Inc (V) - 46.0x TTM P/E, Payments juggernaut

PayPal Holdings Inc (PYPL) - 45.1x TTM P/E, Digital money transfers juggernaut


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