What do Interactive Brokers Group Inc., American Express Co. and First Citizens BancShares Inc. have in common?
They are all expected to increase their earnings more quickly than the S&P 500 SPX,
Macrae Sykes manages the Gabelli Financial Services Opportunities ETF GABF,
During an interview, Sykes discussed how he expects the broad financial sector to be affected by changes following the current turmoil in the banking industry. He also named the three companies, above, as attractive stocks right now. First, let’s look at their expected earnings performance and forward price-to-earnings ratios, based on consensus estimates among analysts polled by FactSet:
|Company or ETF||Ticker||Estimated 2022 EPS||Estimated 2023 EPS||Estimated 2024 EPS||Two-year estimated EPS CAGR||Forward P/E|
|Interactive Brokers Group Inc. Class A|| IBKR,
|American Express Co.|| AXP,
|First Citizens BancShares Inc. Class A|| FCNCA,
|Financial Select Sector SPDR Fund|| XLF,
|SPDR S&P 500 ETF Trust|| SPY,
Click on the tickers for more about each company or ETF.
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The earnings-per-share figures for 2022 are labeled as estimates because some of the companies held by the ETFs have fiscal years that don’t match the calendar.
The Gabelli Financial Services Opportunity ETF was established in May of last year. It is actively managed and semitransparent. This means that unlike most ETFs it doesn’t disclose its holdings every day. The holdings are listed quarterly, although the fund’s net asset value (the value of its holdings divided by the number of shares) is disclosed daily.
The ETF is focused on capturing long-term growth tied to the continuing wealth transfer in the U.S. from the baby boomer generation to younger people and the growing need for asset management and payment processing services.
Sykes said the regulatory reaction to the current banking crisis might include new tests for liquidity, with questions over how far down new rules might go, regarding banks’ asset sizes.
Read: Elizabeth Warren proposes nixing 2018 rollback of banking rules: ‘We now have evidence of what happens when you ease up.’
He also expects the current problems to spur consolidation and a movement of even more deposits to the largest banks, because of the “franchise/safety premium.”
Sykes also said: “The financials universe is much bigger than just banks –– so there are other ways to find equity returns.”
He discussed three financial companies:
Interactive Brokers Group IBKR,
IBKR provides brokerage services to individuals, with full service for specialized clients, such as hedge funds.
Sykes touted the company’s “incredible” competitive advantage: “Schwab and Fidelity offer foreign trading and custody, but Interactive Brokers has a broader access to global exchange trading,” he said.
American Express AXP,
Sykes called American Express a good play on the generational wealth transition. “They are getting the biggest share of millennials,” he said, calling these newer customers “big spenders, loyal, with more velocity,” and likely to use their cards at “a lot more touch points” than older customers.
He also said 80% of the company’s fee revenue comes from charge fees. Those are mainly annual fees for charge cards, which are paid off in full at the end of each month. AXP is also growing its credit card lending business.
“A business able to do 20%+ return on equity on a consistent basis is extraordinary,” Sykes said, while pointing out that Berkshire Hathaway Inc. BRK.B,
First Citizens Bancshares Inc. FCNCA,
Shares of New York Community Bancorp NYCB,
First Citizens wasn’t included in GABF’s Dec. 31 holdings list, but Sykes said the stock is now attractively priced just above tangible book value and that it is “is a very well run bank, with a history of integrating [acquisitions] over time.”
Sykes called the NYCB/FDIC deal “very clever,” and said that even if First Citizens isn’t successful in it FDIC bid, “with the depressed multiple and the opportunity to increase earnings, you may have a double benefit — multiple expansion and higher earnings.”
Top holdings of the Gabelli Financial Services Opportunities ETF
As of Dec, 31, the largest holding of GABF was Berkshire Hathaway. Sykes will host a panel discussion during the Gabelli Funds Annual Value Investing Conference in Omaha, Neb., on May 5 about the company, before Berkshire’s annual meeting on May 6. Here’s last year’s panel discussion:
Here are the ETF’s top 10 holdings (out of 38) as of Dec. 31:
|Company||Ticker||% of portfolio net assets|
|Berkshire Hathaway Inc. Class B|| BRK.B,
|FTAI Aviation Ltd.|| FTAI,
|Wells Fargo & Company|| WFC,
|Interactive Brokers Group, Inc. Class A|| IBKR,
|Blackstone Inc.|| BX,
|American Express Company|| AXP,
|Focus Financial Partners, Inc. Class A|| FOCS,
|Blue Owl Capital, Inc. Class A|| OWL,
|Bank of America Corp|| BAC,
|JPMorgan Chase & Co.|| JPM,