| Thesis on regional banks (KRE) Posted: 07 Dec 2018 03:43 PM PST - Starting to like value proposition on regional banks at these levels; there is probably room for optimizing with specific picks, here are some ideas to get exposure through an ETF
- Groups is trading @ ~1.1 book on ROE of 10%, implied return of ~9.1% assuming returns on capital persist next year, you get a 2.7% dividend yield (could be higher if share buybacks accelerate given lower valuations)
- You pay a lower multiple of 10.7x relative to the 15.3x on the SP for higher growth rate next year of 9.2% in EPS and 7.2% in revenues — note these multiples are lower than the lows of Feb 2016
- You can arbitrage shorting 10yr treasury @ 2.9% (now that short squeeze have been cleared out) / long the regional banks for a total cost of ~15bps
- The 10 year yield will come under pressure as fiscal deficit increases (1.2 trillion in 2019 plus fed shrinking balance sheet by 500-600bn a year); crowing out effects from fiscal spending, Chineses no longer buying as much treasury
- Obvious concerns / risks here are the flattening yield curve, and slowing decelerating economy from 3.5% to 2.5% in '19 but public companies earnings are still projected to increase by 8%, loan books should expand accordingly with increasing profits while rates remain very low and attractive to corporates to underwrite projects with very low cost of capital
- Potential pockets of upside for the sector are: high yield issuance, which has been slow in recent quarters, spreads have expanded somewhat this quarter; residential housing decelerating but sector is overall healthy and prices still increasing; mortgage rates are trending up nicely, a positive for banks; lending standards are still somewhat tight with room for lending without meaningfully hurting underwriting standards
As always, welcome your feedback...thanks for reading! submitted by /u/vicvv3 [link] [comments] |
| Northstar Realty Europe: CLNY Out, Reviewing Strategic Alternatives Posted: 07 Dec 2018 06:21 PM PST |
| Interview with Matthew McLennan Posted: 07 Dec 2018 06:22 PM PST |
| Asymmetric relative equity exposure Posted: 07 Dec 2018 02:03 PM PST - Long the DOW relative to the Nasdaq as risk-off become more prominent late in the cycle
- DOW more attractive than the NASDAQ on value and quality; you pay nearly 25% less (14.9 vs. 18.6) for the same 2019 EPS growth (~8.8%); you get twice the dividend yield (2.5% vs. 1.2)
- Share re-purchases could accelerate at lower valuation given strong projected growth in FCF of 23% to 1.48 trillion in CY18 and another 17% in CY19 to 1.68 trillion
- Index made of larger, safer higher quality players (top players in their sectors); healthy sector allocation to solid themes like enterprise cloud software (MSFT), electronics (AAPL), big pharma (MRK, PFE), consumer (NKE), financials (JPM), industrial (CAT and BA)
- As a whole the multiple on the index at the long-term average while 17 of the 30 members trade below the benchmark median multiple; key theme here is scale and quality, and focus on Free Cash Flow generation
- In terms of catalysts, index is much better exposed to benefit from a resolution from a trade conflict (Trump very likely to push for a quick resolution similar to Nafta, given shift to re-election in early 2019 and pressure from ongoing investigations)
- To get get exposure with market neutral or limited downside consider using 1M ATM calls for ~1.6% of notional (capped downside if wrong timing), to remove equity exposure I would short same notional for Russell 2000
- In terms of reward to risk, if right your are looking at a 4:1 payoff for a return of ~8% in 12 months
https://i.redd.it/2li6oj5ahx221.png What are your thoughts? submitted by /u/vicvv3 [link] [comments] |
| Underwriting risky bets Posted: 07 Dec 2018 04:17 PM PST During fundraising a common discussion topics has been how do you think about underwriting risk? A fair question indeed, there are many ways to think about managing risk in a portfolio but we tend to follow a simply probabilistic framework, see table below. We aim to prioritize positions in terms of reward / risk proposition. The higher the payoff per investment relative to a max defined loss the greater the probability weighted attribution to annual portfolio, the higher the likelihood we would hit our annual return target. Finding opportunities that meet this minimum payoff profile is hard so when we do finding them we want to bet with conviction. In our view it is better to invest with conviction than follow a lottery approach. The small frequent and small betting approach is harder because even if you are right, small positions don't move the overall portfolio return needle. To partially mitigate synchronization we aim to beat of areas with little cross-correlation. Ultimately the bulk of the returns will come from a few good ideas with outsized returns so avoiding large losers that eat into the cumulative year to date returns is by far the best wining strategy. An additional challenge is to manage timing, given we could be right at the wrong time which in investment manage is not different than being totally wrong. Given a probability of success, we will manage our an accumulation strategy over time to avoid hitting our max loss too soon. We do this by ensuring we get the widest margin of safety using conservative valuation assumptions, measuring sentiment and capping realized losses using derivatives when the cost is reasonable. Thanks for reading, welcome your thoughts and feedback.. submitted by /u/vicvv3 [link] [comments] |
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