S&P 500 Financial Sector
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Skinner, Sureka, Yan 1
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S&P500 Sector Weighting
• Information Technology Largest Sector : 18.6%• Telecommunication Services Smallest Sector: 3.0%• Financials Second largest sector 15.1%
Source: S&P Source: Seeking AlphaSkinner, Sureka, Yan 2
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Sector Weighting
Financials are underweighted by 610 BPsSkinner, Sureka, Yan 3
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Various Industries in SectorBanksConsumer FinanceDiversified Financial ServicesInsurance-BrokersInsurance-Life/HealthInsurance-Multi–LineInsurance-Property/CasualtyMulti-sector HldgsReal Estate Investment Trusts
Skinner, Sureka, Yan 4
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Largest Companies by Market Cap American Express Bank of America Citigroup Goldman Sachs JP Morgan Chase Metlife Travelers Wells Fargo
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Current Holdings in Financials Berkshire Hathaway Inc. (BRK/A) Goldman Sachs Group Inc. (GS) Hudson City Bancorp Inc. (HCBK) JP Morgan Chase & Co. (JPM) Visa Inc. (V)
Skinner, Sureka, Yan 6
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Financial Sector Layout
Financial are in the mature phase. Cyclical in Nature
Skinner, Sureka, Yan 7
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Sector Performance
Financial Sector
Year to Date - 20.30% Quarter to Date - .93%
S&P 500
Year to Date – 19.52% Quarter to Date – 2.13
Skinner, Sureka, Yan 8
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Demand
GDP Interest Rates Business Profitability Investor Confidence Investible Assets
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Supply
Market Saturation Consolidation in industry since 1990s Government forced consolidation during
financial crisis Consumer and commercial credit losses Future Government regulations Strict lending standards
Skinner, Sureka, Yan 10
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Sector Attractiveness
High barriers to entry Well established brands Economies of scale Economies of scope Relationships Customer Loyalty
Skinner, Sureka, Yan 11
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Unattractiveness
Intense Rivalry Substitute products Government Regulations on capital
requirements and wages Lack of consumer confidence Highly cyclical
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Regression Analysis
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Skinner, Sureka, Yan 14
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Skinner, Sureka, Yan 15
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Skinner, Sureka, Yan 16
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Skinner, Sureka, Yan 17
Absolute Basis High Low Median Current
P/Trailing E 136.5 10.5 14.6 136.5
P/Forward E 21.6 10.6 12.7 20.8
P/B 3.4 .5 2.1 1.1
P/S 3.7 .6 2.5 1.4
P/CF 47.1 7.2 10.3 24.8
EntValue/EBITDA n/a n/a n/a n/a
Relative to SP500 High Low Median Current
P/Trailing E 7.8 .51 .75 7.6
P/Forward E 1.4 .53 .75 1.3
P/B .9 .3 .7 .5
P/S 1.9 .9 1.6 1.2
P/CF 4.2 .6 .9 2.4
EntValue/EBITDA n/a n/a n/a n/a
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Sector P/E
P/E close to High end Relatively expensive but may vary by
industry
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Ratios Across Sector Cheap: Regional Banks Expensive: Diversified financial services Insurance-life/health
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Market value lower than book value Regional banks drop the most Insurance is almost even
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P/S looks good so far Not the whole story
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Sector EBITDA
Worse than S&P 500 No sign for a break
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Industries reflect the Big picture
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Recommendation Increase SIM Holdings by 400BPs But, still keep it underweight relative to
S&P500 We are bullish for long run and bearish
for short run Real Estate-Avoid; Regional Banks-
trading at attractive multiples Regional Banks will benefit from long
term growth
Skinner, Sureka, Yan 24