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S&P 500 - Financial Sector (S5FINL) Stock Market FIN 824 Rebecca Dunn Christina Durrough Nicholas Ferrugia May 26, 2009.

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Presentation on theme: "S&P 500 - Financial Sector (S5FINL) Stock Market FIN 824 Rebecca Dunn Christina Durrough Nicholas Ferrugia May 26, 2009."— Presentation transcript:

1 S&P Financial Sector (S5FINL) Stock Market FIN 824 Rebecca Dunn Christina Durrough Nicholas Ferrugia May 26, 2009

2 2 S&P Financial Sector FINANCIAL SECTOR RECAP

3 3 S&P Financial Sector Business Cycle Financial Sector is cyclical Currently in the mature phase of life cycle High barriers to entry High level of competition

4 4 S&P Financial Sector Financial Sector Weighting Current Financial sector weight is below average Weight is trending up Weight increased during the housing boom Top Ten Stocks

5 5 S&P Financial Sector Sector Performance Financial Sector has seen the greatest negative returns YTD Financial Sector has seen the most positive returns QTD Over the past 20 years, the S&P 500 has outperformed the financial sector Sector Companies in SectorMarket CapMTDQTDYTD S&P ,585, % -3.37% Energy , % -7.85% Materials , % 11.85% Industrials , % -7.91% Consumer Discretionary , % 8.33% Consumer Staples , % -8.62% Health Care 54 1,049, % -9.34% Financials , % % Information Technology 75 1,395, % 16.48% Telecommunications Services 9 281, % -6.43% Utilities , % % Data as of 4/30/2009

6 6 S&P Financial Sector SIM Market Capitalization Financial Sector Market Capitalization SIM is underweight (4.05%) relative to the S&P 500

7 7 S&P Financial Sector Regression Analysis Fama and French Style Factors S&P 500 ­ HML and UMD monthly change are both “statistically significant” and negatively correlated to the S&P 500 monthly returns —These Style factors explain 15% of the variance in the S&P 500 monthly returns Financial Sector ­ Momentum (+) showed to be “statistically significant” to predict future return in Sector Financial Sector – Forecast using Macroeconomic Factors Next Month Return: Rf (-), CPI (+), and Unemployment (-) are statistically significant Macro factors that explain 11% of the variance These Macro factors explain 34% of the variance in the monthly return of the S&P 500 that occur in 3 months (statistically significant) ­ R f (+) ­ Unemployment (-) ­ CPI (-) ­ Aaa Corporate Rate Spread (-) ­ Consumer Credit Outstanding (+)

8 8 S&P Financial Sector Sector Summary and Recommendations Summary Current portfolio is underweight relative to the S&P ­ S&P weight is currently below historical levels ­ Weight will increase as the market increases Based on the data, the SIM portfolio is in a good position ­ P/B ratio and ROE show that the sector is undervalued Valuation ratios reflect the expectation of positive returns for financial sector There is currently much momentum in the market relative to the financial sector Recommendations Expect positive returns relative to the market Expect housing starts and investments in major assets to be a positive for the sector as the recession comes to an end ­ Overweight diversified industries Expect hedge funds to continue to struggle ­ Underweight REITs and Specialized Industries Recommendation: Continue to underweight relative to the market ­ Result – keep current weighting as of 04/30/2009

9 9 S&P Financial Sector STOCK ANALYSIS

10 10 S&P Financial Sector Potential Stocks Goldman Sachs & Company – GS Bank holding company and global investment banking, securities and investment management firm Provides services worldwide to corporations, financial institutions, governments and high-net-worth individuals JPMorgan Chase & Company – JPM JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2T and operates in more than 60 countries. JPMorgan Chase & Co. provides a wide range of financial services worldwide. The company operates through six lines of business: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Securities Services, and Asset Management. Rank 2009: Second largest U.S. bank and third in the U.S. in deposits Northern Trust Corporation – NTRS Financial holding company that provides investment management, asset and fund administration, fiduciary, and banking solutions Clients include corporations, institutions, and affluent individuals

11 11 S&P Financial Sector SIM – Financial Sector – Current Stocks Current Composition Berkshire Hathaway: 46.38% Hudson City Bancorp:28.61% Wells Fargo: 25.01% Hudson City Bancorp has had the best performance - up 8% since purchase SIM Portfolio CompanyTotal Value% of Total % Change Since Purchase Berkshire Hathaway Inc. - CL A$564, %-14.12% Hudson City Bancorp$347, %8.00% Wells Fargo$304, %-36.19% Grand Total$1,216, %

12 12 S&P Financial Sector Goldman Sachs Group, Inc.  Industry: Investment Banks and Brokerage  Performing better than other comparable stocks in the market  Performing better than the financial sector  8/21 analysts recommend buy or overperform  20/21 recommend buy, overperform, or hold

13 13 S&P Financial Sector JPMorgan Chase & Company  Industry: Diversified Financial Services  Outperforming the sector and many other stocks  10/15 recommend buy or overperform  15/15 recommend buy, overperform, or hold

14 14 S&P Financial Sector Northern Trust Corporation  Industry: Asset Management  Performing better than other comparable stocks in the market  7/14 analysts recommend buy or overperform  14/14 recommend buy, overperform, or hold

15 15 S&P Financial Sector GS vs. JPM vs. NTRS – Past 5 Years  GS has performed best over a 5-year period  Up approximately 50%  JPM has performed worst  Slightly down over this period

16 16 S&P Financial Sector GS vs. JPM vs. NTRS – Past 2 Years  NTRS has performed best over the past 2 years  Down approximately 20% (compared to 30-40% for JPM and GS)

17 17 S&P Financial Sector GS vs. JPM vs. NTRS – Past Year  Over the past year, JPM has slightly outperformed GS  NTRS is the worst performer of the three

18 18 S&P Financial Sector GS vs. JPM vs. NTRS – Past 6 Months  Nearly identical to the 1-year results  JPM slightly better than GS (~-20%)

19 19 S&P Financial Sector GS vs. JPM vs. NTRS – Past 3 Months  JPM has clearly performed the best over the past 3 months  Up 60%  GS up approximately 50%

20 20 S&P Financial Sector Stock Comparison

21 21 S&P Financial Sector Regression Analysis Summary Macro Factor regression analysis provided minimal insight to predict future changes in earning ­ Statistically significant macro factors were identified for all 3 companies; however, R 2 never reached above 12% ­ 15 macro factors were reviewed in initial regression analysis ­ Different time periods and staggering of data were used to identify relationships to predict future changes in earning GS Current Month: Aaa Corporate Rate Spread (-) 2 Month: Retail Sales (+) 3 Month: Retail Sales (+) JPM Current Month: Consumer Confidence (+) 2 Month: Rf (+), Aaa Corporate Rate Spread (-), Unemployment (-) 3 Month: Retail Sales (+), Balance of Trade (+) NTRS Current Month: rf (+), Real Consumer Spending (-) 2 Month: Unemployment Rate (-), Real Consumer Spending (+) Macro Factors rf Consumer Confidence Business Confidence Unemployment Rate CPI Real Federal Funds Rate Aaa Corporate Rate Spread Case Shiller Home Price (20-Metro) Brent Crude Oil Spot Price Consumer Credit Outstanding Real Consumer Spending Personal Saving Rate Retail Sales Balance of Trade Housing Starts

22 22 S&P Financial Sector JPMorgan Chase vs. Others JPM appears to be accurately valued, with strong upside potential JPM has outperformed GS over the past year, six months, and three months JPM expects a higher percentage increase in earnings Changes in Earnings Per Share

23 23 S&P Financial Sector JPMorgan Chase Performance Summary Over the past 5 years JPM has recorded a better compounded rate of return compared to the S&P 500, Financial sector and the Div. Fin’l Services industry. Frequency of JPM beating the returns of the S&P 500, Financial sector or Div. Fin’l Svs has only been statistically significant in the last 12 months against Div. Fin’l Svs Data as of 4/30/09

24 24 S&P Financial Sector Technical Analysis JPM analysis indicates continued steady future growth Upper and Lower bound have been established indicating a tested upward sloping channel ­ Today lower bound was tested and stock rebound with positive growth Government regulation and legislation can quickly deteriorate channel

25 25 S&P Financial Sector Initiation of Coverage JPMorgan Chase & Company BUY rating Although, the JPM will challenged by the weaken credit market it has proved to be able achieve future sustainability, growth and profitability ­ Fortress brand, strong capital reserve levels relative to peers, diversified revenue, proactive risk management, reduced exposure to heritage assets, consistent investment in growth and dedication to building long-term customer relationships FY $(Millions)2011E2010E2009E Net Revenue 112, ,890 96,714 67,252 71,372 Growth Rate9%6%44%-6%15% Avg. Estimate 104.6B 99.4B No. of Analysts 14.0 Low Estimate 96.9B 86.4B High Estimate 120.2B 111.0B Year Ago Sales 99.4B 67.3B Diluted earnings per share2011E2010E2009E Net income $4.64 $ 2.65 $ 1.44 Average Estimate $2.66$1.45 Number of Analysts 1718 Low Estimate $1.00$0.95 High Estimate $3.50$1.82 Year Ago EPS $1.46$1.37 Initiation of Coverage Ticker: NYSEJPM RatingBUY Current Price – 05/26/09$36.28 Price Target - 12 Month$44.09 % Change21.53%

26 26 S&P Financial Sector Summary Many stocks in the sector have performed well in the past 3 months Goldman Sachs, JPMorgan Chase, and Northern Trust have performed better than average in the sector JPMorgan Chase appears to have the best potential performance in the Financial Sector

27 27 S&P Financial Sector Recommendations Purchase JPMorgan Chase Re-weight Financial Sector SIM holdings BRKB: 46.38% HCBK: 28.61% WFC: 25.01% Suggested weighting BRKB: 35% JPM: 25% HCBK: 20% WFC: 20%

28 28 S&P Financial Sector Questions?


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