Morningstar most undervalued sectors (real estate anyone?)
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raylopez99
Dec 15, 2007, 1:57:46 PM12/15/07
to Small Microcap Value
Sorry for the line breaks but you can figure it out. Of most interest
was this table (generally all the financial services companies).
REITs are actually fairly valued, but real estate per se (what is
that?) is not.
Financial Services Valuations by Industry
Segment Current Median Price/Fair Value Three Months Prior Change
(%)
Finance 0.88 0.97 36
Insurance (Gen) 0.93 0.90 22
Insurance (Life) 1.00 0.98 19
Insurance (Prop) 0.94 0.93 36
Insurance (Title) 0.56 0.65 3
International Banks 0.94 1.11 43
Money Mngt 1.10 1.08 19
Real Estate 0.65 0.98 7
Regional Banks 0.83 0.95 51
Reinsurance 0.89 0.87 15
REITs 1.02 1.05 70
Savings and Loans 0.84 1.04 12
Securities 0.96 0.96 26
Super Regional Banks 0.71 0.87 9
* Data as of 11-15-2007
RL
http://news.morningstar.com/articlenet/article.aspx?id=214982
Our Outlook for the Financials SectorFinancials are on sale.
By Jaime Peters, CFA, CPA | 12-12-07 | 06:00 AM | E-mail Article |
Print Article | Permissions/Reprints | Jaime's Monthly Newsletter
<< Return to Main Market Outlook Page
It is an exciting time in the normally boring world of the financial
sector. Unfortunately, it is exciting because, to some, the world is
about to come to an end--or at least that is how the financial sector
is trading recently. For a while, it looked like the major credit
crunch of August was going to ease. The Fed cut rates in late
September, headlines died down somewhat, and pressure on the stock
market eased. But October brought the headlines back and billions of
dollars of charges along with it.
Banks, some REITs, and insurance companies--anything remotely related
to the housing sector--have gotten pounded in the market. And we
haven't even gotten to the worst part of this credit cycle. Currently
most of the headlines surrounding these problems relate to anticipated
future losses or mark-to-market losses rather than actual cash losses,
which are likely to show up in 2008 and beyond. We believe it will be
more than 18 months before the markets work through this turmoil.
It is exactly at these times, when headlines have driven down the
market, that being a long-term investor is most rewarding. We at
Morningstar are looking 10 years out. Without any signs of permanent
disruption (people still need to live somewhere and will still need to
finance home purchases), we believe the financial markets will show
their resilience. While cheap money is likely to be a thing of the
past (at least in the near term), we believe most companies will
eventually return to normal operating procedures. So, our challenge
(and yours) is to sort the long-term winners from the ones that cannot
survive a two-year hiccup in the markets.
Valuations by Industry
The recent stock market declines are evident in our valuations--while
most of the sector was within 5% of fair value last quarter, fourth-
quarter valuations have plummeted. The median price/fair value data
below indicate the sector is trading at just 92% of fair value, with
some segments (super regional banks and title insurance) trading at
significant discounts.
Financial Services Valuations by Industry
Segment Current Median Price/Fair Value Three Months Prior Change
(%)
Finance 0.88 0.97 36
Insurance (Gen) 0.93 0.90 22
Insurance (Life) 1.00 0.98 19
Insurance (Prop) 0.94 0.93 36
Insurance (Title) 0.56 0.65 3
International Banks 0.94 1.11 43
Money Mngt 1.10 1.08 19
Real Estate 0.65 0.98 7
Regional Banks 0.83 0.95 51
Reinsurance 0.89 0.87 15
REITs 1.02 1.05 70
Savings and Loans 0.84 1.04 12
Securities 0.96 0.96 26
Super Regional Banks 0.71 0.87 9
* Data as of 11-15-2007
Below, we'll take a look at the various industry groups in more depth
and highlight our best values in each.
Banking
Across the board, banks have taken a beating. For the first time in
years, banks are seeing loan losses increase, rather than decline, and
the larger banks are having problems with their subprime mortgage
paper and collateralized debt obligations. With some estimates of the
potential cost of subprime mortgage fallout reaching hundreds of
billions of dollars, the market is running scared.
Actual losses on mortgages are still near historical lows at most
banks. However, late payments and delinquencies are up, while housing
prices are falling in parts of the country--this is a recipe for
higher loan losses ahead. Our banking analysts realized some time ago
that the record low loan loss rates were only temporary. Now the
question is, "How bad will it get?" In general, we have increased our
commercial-based loan losses (which have yet to show signs of
deterioration) back to historical averages and increased our consumer
loan losses to reflect the unprecedented pain the housing market is
likely to feel. In 2006 and the beginning of 2007, underwriting
standards were deplorable, and banks are going to have to pay for
that. But not everyone was eager to jump on the easy-credit bandwagon,
and many of those who did will be able to weather this storm.
In late November, 42 bank and thrift stocks were rated 5 stars. With
such a bounty of bargains, investors must decide which bargain is the
best. US Bancorp (USB
Sponsored by:
SNV) are two companies that have largely avoided the headline
problems. Each company has a strong capital position and is well-
reserved for elevated losses. While neither will completely avoid the
problems (US Bancorp has operations in Las Vegas, and Synovus has
operations in hard-hit parts of Florida), both are easily able to
absorb the losses. We believe another long-term winner will be
Capital One (COF
COF). It exited its subprime mortgage business in August, and through
acquisition, it has diversified away from its credit card
concentration. Trading at just 43% of our fair value estimate, Capital
One is definitely one bargain-basement purchase.
Insurance
With similar problems as the banks, several types of insurance
(mortgage, title, and financial guarantors) are having problems
because of the weakening mortgage market. With housing prices dropping
a record 4.5% in the third quarter of 2007 compared with the third
quarter of 2006 (according to S&P), those in first loss positions,
like the mortgage insurers, are suffering. Losses have already spiked
and are expected to continue to escalate. Consequently, the market has
driven down the price of every player in the group. PMI (PMI
MTG) are all deep in 5-star territory. With some questioning the
survival of these firms, we take comfort in PMI's substantial capital
resources and would recommend it to the more risk-tolerant investor.
But our top recommendation would be 5-star Old Republic (ORI
Sponsored by:
ORI), which offers a mix of property and casualty (P&C), mortgage
insurance, and title insurance. This deeply conservative company's
underwriting abilities clearly underscore its narrow moat. With a
crack management team, this is a rare opportunity to buy a quality
insurer for a marked-down price. The management of each of these
companies is taking the chance to buy fistloads of the stocks, and we
would not be averse to joining them.
There are some bargains among P&C insurers as well. With the pricing
environment continuing to erode, we believe P&C insurers are likely to
see profitability deteriorate. The two stocks we highlighted last
quarter, wide-moat Progressive (PGR
Sponsored by:
MMC), continue to trade in 5-star territory. Progressive's strong
underwriting and ability to break down risk allow it to provide low-
cost insurance to lower-risk drivers. Meanwhile, Marsh & McLennan's
ability to find innovative ways to manage risk has created a global
insurance brokerage powerhouse able to meet all of its clients' needs.
Capital Markets
Capital markets have continued to deteriorate over the past quarter.
Liquidity for some supposed "AAA" securities has disappeared causing a
chain reaction of mark-to-market write-downs at a series of investment
banks. While some of the investment banks have fared better than
others, all are under pressure. Merrill Lynch (MER
Sponsored by:
MER) had to revise its losses upward from $5.5 billion in mid-October
to $7.9 billion in late October. On the flip side, Goldman Sachs
(GS
Sponsored by:
GS) was short subprime mortgages and reported strong earnings. While
we think the disruption in the complex CDO and residential-mortgage-
backed securities markets are likely to continue into 2008, we believe
the major investment banks will survive these problems and are ripe
for risk-tolerant bargain-hunters.
With the credit crunch spawning fears of a broader slowdown, other
market-sensitive firms have also been waylaid recently. Asset
managers, whose fortunes typically hinge on the trajectory of the
market, have taken it on the chin amid stocks' pullback. That has
pushed some names even further into bargain territory, with Legg
Mason (LM
Sponsored by:
LM)--which has been pummeled due to lingering concerns over the
performance of some of its most-prominent strategies--topping our buy
list. Although we believe asset managers will continue to be under
pressure in the near term, the market seems to be discounting these
temporary woes into perpetuity.
REITs
Shares of real estate investment trusts (REITs) finished flat for the
third quarter, although they have since resumed their downward spiral.
Since the beginning of 2007, REITs have fallen on a number of wide-
ranging concerns. The blowup in the credit markets stifled leveraged
buyout activity, prompting investors to take profits from sectors such
as office and apartment that saw companies taken out at large
premiums. Talk of a recession also weighed heavily on REITs, which
depend on job growth to fuel demand for new space. Finally, the higher
cost of debt led market participants to conclude that investment
returns and property prices would both come down.
Owing to REITs' business models, we think these worries are largely
overblown. Even if building values drop, few REITs are active sellers
of properties and prefer to hold assets for long periods of time.
REITs with cash on hand can use the pullback to make opportunistic
acquisitions. We also believe that demand for commercial real estate
remains strong, with the economy showing robust job growth and
billions of institutional capital earmarked for real estate. As a
result, we expect net operating income to tick higher as fundamentals
hold tight.
Across our coverage universe, we believe REITs are fairly valued given
their outsized returns since 2000, but we continue to see value in
select names. Corporate Office (OFC
Sponsored by:
OFC) is a midsize office REIT that owns properties in the greater
Washington, D.C., area--one of the top markets in the nation. Vornado
(VNO
Sponsored by:
VNO) is also another high-quality REIT with one of the top management
teams in the industry. Chairman and CEO Steven Roth has amassed an
impressive track record for buying out-of-favor assets and
repositioning them for higher rents.
Financials Stocks for Your Radar
Stocks to Watch--Financials
Company Star Rating Fair Value Estimate Economic
Moat Risk P/FV
First American Corp $59 Narrow Average 0.62
Legg Mason $116 Wide Average 0.65
MGIC Investment Corp $57 Narrow Above Avg 0.47
Synovus Financial $35 Wide Average 0.73
Vornado Realty Trust $119 Narrow Below Avg 0.78
Data as of 12-07-07.
If you'd like to track and analyze the stocks mentioned above, click
here to create a watch list. Then simply click "continue," name your
watch list, and click "done." (If this link does not work, please
register with Morningstar.com--registration is free--or sign in if
you're already a member, and try again.) This will allow you to save
and monitor these holdings within our Portfolio Manager.
was this table (generally all the financial services companies).
REITs are actually fairly valued, but real estate per se (what is
that?) is not.
Financial Services Valuations by Industry
Segment Current Median Price/Fair Value Three Months Prior Change
(%)
Finance 0.88 0.97 36
Insurance (Gen) 0.93 0.90 22
Insurance (Life) 1.00 0.98 19
Insurance (Prop) 0.94 0.93 36
Insurance (Title) 0.56 0.65 3
International Banks 0.94 1.11 43
Money Mngt 1.10 1.08 19
Real Estate 0.65 0.98 7
Regional Banks 0.83 0.95 51
Reinsurance 0.89 0.87 15
REITs 1.02 1.05 70
Savings and Loans 0.84 1.04 12
Securities 0.96 0.96 26
Super Regional Banks 0.71 0.87 9
* Data as of 11-15-2007
RL
http://news.morningstar.com/articlenet/article.aspx?id=214982
Our Outlook for the Financials SectorFinancials are on sale.
By Jaime Peters, CFA, CPA | 12-12-07 | 06:00 AM | E-mail Article |
Print Article | Permissions/Reprints | Jaime's Monthly Newsletter
<< Return to Main Market Outlook Page
It is an exciting time in the normally boring world of the financial
sector. Unfortunately, it is exciting because, to some, the world is
about to come to an end--or at least that is how the financial sector
is trading recently. For a while, it looked like the major credit
crunch of August was going to ease. The Fed cut rates in late
September, headlines died down somewhat, and pressure on the stock
market eased. But October brought the headlines back and billions of
dollars of charges along with it.
Banks, some REITs, and insurance companies--anything remotely related
to the housing sector--have gotten pounded in the market. And we
haven't even gotten to the worst part of this credit cycle. Currently
most of the headlines surrounding these problems relate to anticipated
future losses or mark-to-market losses rather than actual cash losses,
which are likely to show up in 2008 and beyond. We believe it will be
more than 18 months before the markets work through this turmoil.
It is exactly at these times, when headlines have driven down the
market, that being a long-term investor is most rewarding. We at
Morningstar are looking 10 years out. Without any signs of permanent
disruption (people still need to live somewhere and will still need to
finance home purchases), we believe the financial markets will show
their resilience. While cheap money is likely to be a thing of the
past (at least in the near term), we believe most companies will
eventually return to normal operating procedures. So, our challenge
(and yours) is to sort the long-term winners from the ones that cannot
survive a two-year hiccup in the markets.
Valuations by Industry
The recent stock market declines are evident in our valuations--while
most of the sector was within 5% of fair value last quarter, fourth-
quarter valuations have plummeted. The median price/fair value data
below indicate the sector is trading at just 92% of fair value, with
some segments (super regional banks and title insurance) trading at
significant discounts.
Financial Services Valuations by Industry
Segment Current Median Price/Fair Value Three Months Prior Change
(%)
Finance 0.88 0.97 36
Insurance (Gen) 0.93 0.90 22
Insurance (Life) 1.00 0.98 19
Insurance (Prop) 0.94 0.93 36
Insurance (Title) 0.56 0.65 3
International Banks 0.94 1.11 43
Money Mngt 1.10 1.08 19
Real Estate 0.65 0.98 7
Regional Banks 0.83 0.95 51
Reinsurance 0.89 0.87 15
REITs 1.02 1.05 70
Savings and Loans 0.84 1.04 12
Securities 0.96 0.96 26
Super Regional Banks 0.71 0.87 9
* Data as of 11-15-2007
Below, we'll take a look at the various industry groups in more depth
and highlight our best values in each.
Banking
Across the board, banks have taken a beating. For the first time in
years, banks are seeing loan losses increase, rather than decline, and
the larger banks are having problems with their subprime mortgage
paper and collateralized debt obligations. With some estimates of the
potential cost of subprime mortgage fallout reaching hundreds of
billions of dollars, the market is running scared.
Actual losses on mortgages are still near historical lows at most
banks. However, late payments and delinquencies are up, while housing
prices are falling in parts of the country--this is a recipe for
higher loan losses ahead. Our banking analysts realized some time ago
that the record low loan loss rates were only temporary. Now the
question is, "How bad will it get?" In general, we have increased our
commercial-based loan losses (which have yet to show signs of
deterioration) back to historical averages and increased our consumer
loan losses to reflect the unprecedented pain the housing market is
likely to feel. In 2006 and the beginning of 2007, underwriting
standards were deplorable, and banks are going to have to pay for
that. But not everyone was eager to jump on the easy-credit bandwagon,
and many of those who did will be able to weather this storm.
In late November, 42 bank and thrift stocks were rated 5 stars. With
such a bounty of bargains, investors must decide which bargain is the
best. US Bancorp (USB
Sponsored by:
SNV) are two companies that have largely avoided the headline
problems. Each company has a strong capital position and is well-
reserved for elevated losses. While neither will completely avoid the
problems (US Bancorp has operations in Las Vegas, and Synovus has
operations in hard-hit parts of Florida), both are easily able to
absorb the losses. We believe another long-term winner will be
Capital One (COF
COF). It exited its subprime mortgage business in August, and through
acquisition, it has diversified away from its credit card
concentration. Trading at just 43% of our fair value estimate, Capital
One is definitely one bargain-basement purchase.
Insurance
With similar problems as the banks, several types of insurance
(mortgage, title, and financial guarantors) are having problems
because of the weakening mortgage market. With housing prices dropping
a record 4.5% in the third quarter of 2007 compared with the third
quarter of 2006 (according to S&P), those in first loss positions,
like the mortgage insurers, are suffering. Losses have already spiked
and are expected to continue to escalate. Consequently, the market has
driven down the price of every player in the group. PMI (PMI
MTG) are all deep in 5-star territory. With some questioning the
survival of these firms, we take comfort in PMI's substantial capital
resources and would recommend it to the more risk-tolerant investor.
But our top recommendation would be 5-star Old Republic (ORI
Sponsored by:
ORI), which offers a mix of property and casualty (P&C), mortgage
insurance, and title insurance. This deeply conservative company's
underwriting abilities clearly underscore its narrow moat. With a
crack management team, this is a rare opportunity to buy a quality
insurer for a marked-down price. The management of each of these
companies is taking the chance to buy fistloads of the stocks, and we
would not be averse to joining them.
There are some bargains among P&C insurers as well. With the pricing
environment continuing to erode, we believe P&C insurers are likely to
see profitability deteriorate. The two stocks we highlighted last
quarter, wide-moat Progressive (PGR
Sponsored by:
MMC), continue to trade in 5-star territory. Progressive's strong
underwriting and ability to break down risk allow it to provide low-
cost insurance to lower-risk drivers. Meanwhile, Marsh & McLennan's
ability to find innovative ways to manage risk has created a global
insurance brokerage powerhouse able to meet all of its clients' needs.
Capital Markets
Capital markets have continued to deteriorate over the past quarter.
Liquidity for some supposed "AAA" securities has disappeared causing a
chain reaction of mark-to-market write-downs at a series of investment
banks. While some of the investment banks have fared better than
others, all are under pressure. Merrill Lynch (MER
Sponsored by:
MER) had to revise its losses upward from $5.5 billion in mid-October
to $7.9 billion in late October. On the flip side, Goldman Sachs
(GS
Sponsored by:
GS) was short subprime mortgages and reported strong earnings. While
we think the disruption in the complex CDO and residential-mortgage-
backed securities markets are likely to continue into 2008, we believe
the major investment banks will survive these problems and are ripe
for risk-tolerant bargain-hunters.
With the credit crunch spawning fears of a broader slowdown, other
market-sensitive firms have also been waylaid recently. Asset
managers, whose fortunes typically hinge on the trajectory of the
market, have taken it on the chin amid stocks' pullback. That has
pushed some names even further into bargain territory, with Legg
Mason (LM
Sponsored by:
LM)--which has been pummeled due to lingering concerns over the
performance of some of its most-prominent strategies--topping our buy
list. Although we believe asset managers will continue to be under
pressure in the near term, the market seems to be discounting these
temporary woes into perpetuity.
REITs
Shares of real estate investment trusts (REITs) finished flat for the
third quarter, although they have since resumed their downward spiral.
Since the beginning of 2007, REITs have fallen on a number of wide-
ranging concerns. The blowup in the credit markets stifled leveraged
buyout activity, prompting investors to take profits from sectors such
as office and apartment that saw companies taken out at large
premiums. Talk of a recession also weighed heavily on REITs, which
depend on job growth to fuel demand for new space. Finally, the higher
cost of debt led market participants to conclude that investment
returns and property prices would both come down.
Owing to REITs' business models, we think these worries are largely
overblown. Even if building values drop, few REITs are active sellers
of properties and prefer to hold assets for long periods of time.
REITs with cash on hand can use the pullback to make opportunistic
acquisitions. We also believe that demand for commercial real estate
remains strong, with the economy showing robust job growth and
billions of institutional capital earmarked for real estate. As a
result, we expect net operating income to tick higher as fundamentals
hold tight.
Across our coverage universe, we believe REITs are fairly valued given
their outsized returns since 2000, but we continue to see value in
select names. Corporate Office (OFC
Sponsored by:
OFC) is a midsize office REIT that owns properties in the greater
Washington, D.C., area--one of the top markets in the nation. Vornado
(VNO
Sponsored by:
VNO) is also another high-quality REIT with one of the top management
teams in the industry. Chairman and CEO Steven Roth has amassed an
impressive track record for buying out-of-favor assets and
repositioning them for higher rents.
Financials Stocks for Your Radar
Stocks to Watch--Financials
Company Star Rating Fair Value Estimate Economic
Moat Risk P/FV
First American Corp $59 Narrow Average 0.62
Legg Mason $116 Wide Average 0.65
MGIC Investment Corp $57 Narrow Above Avg 0.47
Synovus Financial $35 Wide Average 0.73
Vornado Realty Trust $119 Narrow Below Avg 0.78
Data as of 12-07-07.
If you'd like to track and analyze the stocks mentioned above, click
here to create a watch list. Then simply click "continue," name your
watch list, and click "done." (If this link does not work, please
register with Morningstar.com--registration is free--or sign in if
you're already a member, and try again.) This will allow you to save
and monitor these holdings within our Portfolio Manager.
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