US Bank Stocks Are Cheap On Valuation

Ever since the Global Financial Crisis of 2008-09, some investors have avoided bank stocks. However that need not be the case as most banks have cleaned up their balance sheets and are in a much healthier shape now. In fact, on a global level US banks are stronger now than their developed world peers.

The S&P 500 is flat year-to-date. But the KBW Bank index is up by 3.5%. According to an article by Lisa Haakman of PSG Asset Management of South Africa, many of the global developed market banks are now unloved and also undervalued. She noted that US banks are trading at 70 year lows based on valuation relative to the S&P 500 as shown in the chart below:

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US Banks Valuation

Over the shorter period of 10 years, US and UK banks have significantly under-performed the MSCI Index.

US and UK Banks vs MSCI Index

Source: Angles & Perspectives, Q1 2015, PSG Asset Management

As the developed economies continue to grow, banks are bound to benefit.In the US, low unemployment rate is already helping lenders grow their  loan portfolios. All types of credit such as student loans, auto loans, mortgages, and credit card loans are growing as confident consumers increase their spending. In addition, banks have loosened the underwriting standards in order to make credit freely available to consumers. Similarly in Europe, once the current Greek debt drama settles down European financials will rebound sharply.

Ms.Lisa mentioned the following four global banks as attractive: HSBC(HBC), JPMC(JPM), Capital One(COF) and Wells Fargo(WFC). These banks have payout ratios of 65%, 65%, 80% and 35% dividend with estimated 37.5% stock buyback respectively. It should be noted that Capital One is primarily a credit card issuer and not a bank.

Since there are hundreds of publicly-traded banks in the US, investors can also other opportunities outside of the major banks. The following is a list of ten regional and community banks for further research:

1.Company: SunTrust Banks, Inc. (STI)
Current Dividend Yield: 2.19%

2.Company: Citizens Financial Group, Inc. (CFG)
Current Dividend Yield: 1.49%

3.Company:Webster Financial Corp. (WBS)
Current Dividend Yield: 2.32%

4.Company: Bank of the Ozarks, Inc. (OZRK)
Current Dividend Yield: 1.18%

5.Company: Glacier Bancorp, Inc. (GBCI)

Current Dividend Yield: 2.48%

6.Company: U.S. Bancorp (USB)

Current Dividend Yield: 2.35%

7.Company: Cullen/Frost Bankers, Inc. (CFR)
Current Dividend Yield: 2.70%

8.Company: Bank of Hawaii Corporation (BOH)
Current Dividend Yield: 2.71%

9.Company: Commerce Bancshares, Inc. (CBSH)
Current Dividend Yield:  1.93%

10.Company: Mercantile Bank Corp. (MBWM)
Current Dividend Yield: 2.63%

Note: Dividend yields noted above are as of June 30, 2015. Data is known to be accurate from sources used.Please use your own due  diligence before making any investment decisions.

Related ETF:

  • SPDR S&P Bank ETF (KBE)

Disclosure: Long GBCI and USB

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The Top 10 Coal Producers in the US

In an earlier post, I noted that coal is the major source of electricity generation in the U.S. In this post, let us take a look at the major coal producers in the country.

Before we get to the list, here are a few points on the US coal industry:

  • The US holds the world’s largest coal reserves. Over one-quarter of the world’s total are in the country with the recoverable reserves estimated to be at 233 giga tons at the end of 2013.
  • The reserves are enough to last for the next 200 years at the current consumption rate.
  • Just five states—Wyoming, West Virginia, Kentucky, Pennsylvania, and Illinois—account for 70% of total US production, with Wyoming alone accounting for 40%.
  • Most of the coal used in the U.S. since the start of the 19th century were mined in the Appalachian region. However today most the coal mining has moved to the Western region where production costs are lower.
  • Appalachia’s major coal producing states are West Virginia, Kentucky, and Pennsylvania.

The coal-producing regions in the US are shown in the below map:

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US Coal Producing Regions

 The Top 10 Coal Producers in the US are shown below:

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Top 10 US Coal Producers

Source: US Coal Exports:The Long Road to Asian Markets, The Oxford Institute for Energy Studies, University of Oxford

From The Oxford Institute for Energy Studies report:

Coal production is highly concentrated in the USA. The top 10 producers account for three-quarters of total production and half comes from just four producers: Peabody Energy, Arch Coal, Cloud Peak Energy, and Alpha Natural Resources. In order to remain profitable in a low-price market, US producers focus on cost reductions. This includes mine idling, the sale of non- core assets and mine closures. Subsequently, the number of US mines has been reduced drastically, from over 1,400 in 2010 to 1,229 in 2012 and 1,061 in 2013.

Recent years have seen 26 US coal companies go into bankruptcy (chiefly in Kentucky and West Virginia), including once major producers such as James River Coal and Patriot Coal Corporation. In line with decreasing production, US coal mining jobs dropped by 9,400 in 2013, representing more than 10 per cent of total coal employment, from 89,800 in 2012 to 80,400 in 2013. Coal company revenues and stock prices plummeted in 2014, forcing mining companies to further cut operations, especially in Appalachia where expenses are higher, and to lay off roughly 6 per cent of their employees during the first half of the year.

Investment options:

Peabody Energy Corporation (BTU) is the largest coal producer in terms of market capitalization.From a 52-week high of over $16 the stock currently trades at under $3. Nacco Industries Inc. (NC) trades at over $62 with a market cap of about $438 million. Some of the other firms from the above list include: Arch Coal Inc. (ACI), Cloud Peak Energy Inc. (CLD) and Alpha Natural Resources, Inc. (ANR).

Disclosure: No Positions

Primary Energy Consumption in BRICs 2014

The primary energy sources for the BRIC countries are shown in the chart below:

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Primary Energy Consumption in BRICs

Source: Gasoline and Diesel Pricing Reforms in the BRIC Countries: A Comparison of Policy and Outcomes, The Oxford Institute for Energy Studies, University of Oxford

In Russia, China and India oil is the second most important energy source. In Brazil it is the most important energy source. Though China has the highest primary energy consumption, in per capita terms Russia has the highest energy consumption since the population of Russia is small compared to China which has the highest population in the world.

Coal is the top source of energy consumption in India and China. Oil is only the second important energy source. Russia depends most on natural gas followed by oil.

Russia is a net exporter of oil while Brazil is self-sufficient as its production almost equals consumption.China and India are both net importers of oil. Hence the decline in oil prices in the past few months is most beneficial to these countries than Brazil or Russia.

US Electricity Production By Fuel Type

The U.S. depends on fossil fuels for much of the production of electricity. Coal and Natural Gas are the two major sources of power generation followed by Nuclear power.

Shale gas is slowly eroding the consumption of coal. For example, since 2007 the use of coal in power production has been declining. The U.S. is still the second largest coal market in the world and consumed 832 Mt (metric tons) in 2014. The decline in crude oil prices is also allowing companies to switch to natural gas thus further reducing the dependence of coal as a fuel source. The use of coal for electricity generation fell from 50% in 2008 to 38.7% in 2014 and is projected to dip further, according to the EIA.

The following chart the sources of electricity production in the U.S.:

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US Electricity Production by Fuel

 

Source: US Coal Exports:The Long Road to Asian Markets, The Oxford Institute for Energy Studies, University of Oxford

The Ten Largest Equity ETFs by Assets

The ETF industry has grown exponentially in the past few years with hundreds of funds trading the market today. A few of the funds that were unable to garner enough assets or liquidity have died. However every month new ones continue to be created.

ETFs are available for every type of investor need.Wall Street has sliced and diced all the equities into various types based on asset, sector, country, region, market cap, environmental/social, etc. It seems that at this rate companies may eventually run out of letter combinations and may end up going to numbers to accommodate yet more funds. It should be noted however that many of the funds do not become successful but still languish on the market with low asset sizes. Some of the funds tend to have assets in the billions while many barely have a few million or even less. For investors looking to enter the world of ETFs it can be a daunting task to sift thru all the funds available on the market.

In this post, let us review the ten largest equity ETFs  based on assets held. Though these funds have asset sizes in the billions, investors continue to pour more into them.

The Ten Largest Equity ETFs based on Assets are listed below:

S.No.Fund NameTickerAssets (in $ billions)Expense RatioLaunch Date
1SPDR S & P 500 ETFSPY178.000.09%1/22/1993
2iShares Core S & P 500 ETFIVV68.000.07%5/15/2000
3Vanguard FTSE Emerging Markets ETFVWO66.000.15%3/4/2005
4iShares MSCI EAFE ETFEFA62.000.33%8/14/2001
5Vanguard Total Stock Market ETFVTI57.000.05%5/24/2001
6PowerShares QQQ Nasdaq 100QQQ39.000.20%3/10/1999
7Vanguard S&P 500 ETF VOO32.000.05%9/7/2010
8iShares MSCI Emerging Markets Index FundEEM29.000.67%4/7/2003
9iShares Russell 1000 Growth ETFIWF29.000.20%5/22/2000
10Vanguard FTSE Developed Markets ETFVEA28.000.09%7/20/2007

Source: WSJ and respective providers

The largest fund is the SPDR S & P 500 ETF(SPY) which tracks the S&P 500 index. As the index is the barometer of the US equity market, it is not surprising to see that the fund tops the list with an asset base in excess of $178 billion. Funds targeting the broad emerging markets and developed markets are also in the list as investors try to gain exposure to these markets in a simple and easy way. The PowerShares QQQ Nasdaq 100(QQQ) has been a perennial favorite for years for investors focused on investing in tech stocks.

In terms of fees, most the of the above funds have very low expense ratios making them extremely attractive to investors.

Disclosure: No Positions