Are Some of The Best Blue Chip Stocks in the S&P 500 Financials Sector?

In light of our recent pieces, “Debt to EBITDA Ratios: The Spiral Higher Continues” and The Next US Financial Crisis: The Problem with Expensive Stocks and High Leverage,” KCR subscribers may find this research somewhat surprising. In those pieces, we presented a blistering series of charts suggesting that the debt of US public companies and loans to Private Equity had hit record highs despite negative real-yields and a dearth of covenants.

In this piece, we will advocate for investors to dig in on US Financials Stocks. Not to be confused with “Fin-Tech,” we believe the stalwarts of the US financial sector have rarely been as profitable, resilient, and of less interest to investors than they are today.

We believe that the “big picture” case for financials is fairly straightforward like our bullish view on Energy. One of the great challenges in an epic financial mania like the current one is ignoring the noise. Avoiding the screeching calls of get-rich-quick schemes can be challenging. Neighbors and friends suddenly seem to have achieved wealth without work.

At the same time, however, as manias hit levels of absurdity like the current one, the opportunity to buy blue-chip companies at reasonable prices tends to emerge. That is what happened in the internet mania, and we believe the same phenomenon is unfolding today. We are enjoying this period of highlighting pockets of unusual opportunity and believe, with the appropriate stock-level diligence, our contrarian thematic pieces may yield uncommon returns for investors focused on the long run. Figure 1 below shows:

  • The weight of Financials is ~11% today in the index
  • In the trough of the Great Financial Crisis, Financials were ~9%
  • We believe many “old-fashioned” Financials are as interesting as any time in our investing careers

We believe that Financials’ representation in the index, like our chart on Energy and our work on GARP stocks is a sign of the times. Enamored with the novel investments promising exponential returns, investors are ignoring Financials despite their healthy balance sheets and record profits.

Despite Record Profits Strong Liquidity Financials Representation has Rarely Been Lower

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

The prior chart showed that the weight of Financials in the S&P 500 is barely above the levels seen at the trough of the Great Financial Crisis.  The chart below shows financials’ profits as a percentage of the overall profits generated by the entire S&P 500. 

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

[1] “Total Addressable Market”

[2] Federal Reserve, Funding Risk, pages 37-45

[3] Please check out the Appendix for a review of the degree to which financials are benefitting from abnormal earnings

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

December 15, 2021 |

Categories: White Papers

December 15, 2021

Categories: White Papers

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