Transcript S&P 500 - Financial Sector (S5FINL) •Stock Market FIN 824 •Rebecca Dunn •Christina Durrough •Nicholas Ferrugia •May 26, 2009

S&P 500 - Financial Sector (S5FINL)
•Stock Market FIN 824
•Rebecca Dunn
•Christina Durrough
•Nicholas Ferrugia
•May 26, 2009
FINANCIAL SECTOR
RECAP
•S&P 500 - Financial Sector
2
Business Cycle

Financial Sector is cyclical

Currently in the mature phase of life cycle

High barriers to entry

High level of competition
•S&P 500 - Financial Sector
3
Financial Sector Weighting

Current Financial sector weight is below average

Weight is trending up

Weight increased during the housing boom
Top Ten Stocks
•S&P 500 - Financial Sector
4
Sector Performance

Financial Sector has seen the greatest negative returns YTD

Financial Sector has seen the most positive returns QTD

Over the past 20 years, the S&P 500 has outperformed the financial sector
Sector
S&P 500
Companies
in Sector
Market Cap
MTD
QTD
YTD
500
7,585,482
9.39%
9.39%
-3.37%
Energy
39
948,939
4.81%
4.81%
-7.85%
Materials
28
255,334
15.09%
15.09%
11.85%
Industrials
58
792,036
17.72%
17.72%
-7.91%
Consumer Discretionary
81
721,919
18.54%
18.54%
8.33%
Consumer Staples
41
913,657
3.03%
3.03%
-8.62%
Health Care
54
1,049,425
-0.89%
-0.89%
-9.34%
Financials
80
924,373
22.17%
22.17%
-13.86%
Information Technology
75
1,395,938
12.04%
12.04%
16.48%
9
281,800
2.23%
2.23%
-6.43%
35
302,059
0.42%
0.42%
-11.49%
Telecommunications Services
Utilities
•S&P 500 - Financial Sector
•Data as of 4/30/2009
5
SIM Market Capitalization

Financial Sector Market Capitalization

SIM is underweight (4.05%) relative to the S&P 500
Telecommunications
2%
SIM PORTFOLIO
Materials
4%
Materials
3%
4%
Energy
12%
Industrials
10%
Consumer
Discretionary
10%
Health Care
20%
Financials
8%
Consumer Staples
12%
Information
Technology
18%
Industrials
10%
Consumer Staple
13%
Information
Technology
21%
S&P 500
Telecommunications
Services
4%
Utilities
Consumer
Utilities Discretionary
3%
7%
Energy
13%
Health Care
14%
•S&P 500 - Financial Sector
Financials
12%
6
Regression Analysis

Fama and French Style Factors

S&P 500
-
HML and UMD monthly change are both “statistically significant” and negatively
correlated to the S&P 500 monthly returns
— These Style factors explain 15% of the variance in the S&P 500 monthly
returns

Financial Sector
-

Momentum (+) showed to be “statistically significant” to predict future return in
Sector
Financial Sector – Forecast using Macroeconomic Factors

Next Month Return: Rf (-), CPI (+), and Unemployment (-) are statistically significant
Macro factors that explain 11% of the variance

These Macro factors explain 34% of the variance in the monthly return of the S&P 500
that occur in 3 months (statistically significant)
-
Rf (+)
-
Unemployment (-)
-
CPI (-)
-
Aaa Corporate Rate Spread (-)
-
Consumer Credit Outstanding (+)
•S&P 500 - Financial Sector
7
Sector Summary and Recommendations

Summary


Current portfolio is underweight relative to the S&P
-
S&P weight is currently below historical levels
-
Weight will increase as the market increases
Based on the data, the SIM portfolio is in a good position
-

P/B ratio and ROE show that the sector is undervalued

Valuation ratios reflect the expectation of positive returns for financial
sector

There is currently much momentum in the market relative to the financial
sector
Recommendations

Expect positive returns relative to the market

Expect housing starts and investments in major assets to be a positive for the sector
as the recession comes to an end
-

Expect hedge funds to continue to struggle
-

Overweight diversified industries
Underweight REITs and Specialized Industries
Recommendation: Continue to underweight relative to the market
-
Result – keep current weighting as of 04/30/2009
•S&P 500 - Financial Sector
8
STOCK ANALYSIS
•S&P 500 - Financial Sector
9
Potential Stocks



Goldman Sachs & Company – GS

Bank holding company and global investment banking, securities and investment
management firm

Provides services worldwide to corporations, financial institutions, governments and
high-net-worth individuals
JPMorgan Chase & Company – JPM

JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2T
and operates in more than 60 countries.

JPMorgan Chase & Co. provides a wide range of financial services worldwide.

The company operates through six lines of business: Investment Bank, Retail Financial
Services, Card Services, Commercial Banking, Treasury and Securities Services, and
Asset Management.

Rank 2009: Second largest U.S. bank and third in the U.S. in deposits
Northern Trust Corporation – NTRS

Financial holding company that provides investment management, asset and fund
administration, fiduciary, and banking solutions

Clients include corporations, institutions, and affluent individuals
•S&P 500 - Financial Sector
10
SIM – Financial Sector – Current Stocks


Current Composition

Berkshire Hathaway: 46.38%

Hudson City Bancorp:28.61%

Wells Fargo: 25.01%
•SIM Portfolio
Hudson City Bancorp has had
the best performance - up 8%
since purchase
Company
Total Value
% of Total
% Change
Since
Purchase
Berkshire Hathaway Inc. - CL A
$564,000.00
46.38%
-14.12%
Hudson City Bancorp
$347,912.00
28.61%
8.00%
Wells Fargo
$304,152.00
25.01%
-36.19%
Grand Total
$1,216,064.00
•S&P 500 - Financial Sector
-42.31%
11
Goldman Sachs
Group, Inc.
 Industry: Investment
Banks and Brokerage
 Performing better than
other comparable stocks in
the market
 Performing better than the
financial sector
 8/21 analysts recommend
buy or overperform
 20/21 recommend buy,
overperform, or hold
•S&P 500 - Financial Sector
12
JPMorgan Chase &
Company
 Industry: Diversified
Financial Services
 Outperforming the sector
and many other stocks
 10/15 recommend buy or
overperform
 15/15 recommend buy,
overperform, or hold
•S&P 500 - Financial Sector
13
Northern Trust
Corporation
 Industry: Asset
Management
 Performing better than
other comparable stocks in
the market
 7/14 analysts recommend
buy or overperform
 14/14 recommend buy,
overperform, or hold
•S&P 500 - Financial Sector
14
GS vs. JPM vs. NTRS – Past 5 Years
 GS has performed best over a 5-year period
 Up approximately 50%
 JPM has performed worst
 Slightly down over this period
•S&P 500 - Financial Sector
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GS vs. JPM vs. NTRS – Past 2 Years
 NTRS has performed best over the past 2 years
 Down approximately 20% (compared to 30-40% for JPM and GS)
•S&P 500 - Financial Sector
16
GS vs. JPM vs. NTRS – Past Year
 Over the past year, JPM has slightly outperformed GS
 NTRS is the worst performer of the three
•S&P 500 - Financial Sector
17
GS vs. JPM vs. NTRS – Past 6 Months
 Nearly identical to the 1-year results
 JPM slightly better than GS (~-20%)
•S&P 500 - Financial Sector
18
GS vs. JPM vs. NTRS – Past 3 Months
 JPM has clearly performed the best over the past 3 months
 Up 60%
 GS up approximately 50%
•S&P 500 - Financial Sector
19
Stock Comparison
P/E
Forward P/E
Ticker 4 Qtrs 2009
BANK OF
AMERICA
BAC
CITI GROUP
C
GOLDMAN
SACHS GROUP GS
JPMORGAN
CHASE & CO
NORTHERN
TRUST
WELLS FARGO
P/E
2010
77.4 26.6
NM
NM
Earnings
Estimate
2009
9.9
NM
Earnings Earnings
Price
P/S
P/S
# Shares
Estimate Estimate Price/Share Momentum Latest 4 Current Outstanding
2010
2011
05/22/09
Value
Qtrs.
Yr.
('000)
0.42
1.12
-3.82
-1.04 -
2.66
11.07
5
0.93
0.71
7651388
3.15
1
0.63
0.76
388770
12.7 12.7
11.0
10.77
12.37
16.52
136.35
54
2.94
2.05
502434
JPM
21.9 23.1
12.6
1.49
2.73
5.12
34.41
65
1.72
1.28
3757923
NTRS
15.4 16.8
13.5
3.10
3.86
4.64
52.00
67
3.03
3.12
238461
WFC
16.9 16.9
13.5
1.44
1.80
3.44
24.31
76
2.64
1.37
4578777
TICKER
BAC
C
BANK OF AMERICA
CITI GROUP
GOLDMAN SACHS
GROUP
GS
JPMORGAN CHASE
& CO
JPM
NORTHERN TRUST NTRS
WELLS FARGO
WFC
P/B 10
P/CF 10
ROE 10 Yr.
ROA 10 Yr. Net Profit
P/B Yr Avg. P/CF
Yr. Avg
ROE
Avg.
Pretax ROA
Avg
Margin
0.4
1.9
7.4
10.4 0.0510
0.1640
0.0040
0.0200
0.0850
0.3
2.3
1.0
NM
NM
0.1810
NM
0.0190
NM
1.5
2.2
15.8
11.8 0.0560
0.1950
0.0020
0.0120
0.1040
0.9
2.3
1.5
1.5
2.3
2.8
18.2
9.6
9.9
9.5 0.0220
20.0 0.2200
10.3 0.1540
0.0800
0.1720
0.1540
0.0010
0.0230
0.0120
0.0100
0.0170
0.0210
0.0390
0.2640
0.2110
*ROA 5 Yr average for WFC, data not meaningful for 10 yr.
•S&P 500 - Financial Sector
20
Regression Analysis

Summary




Macro Factor regression analysis provided minimal insight to predict
future changes in earning
-
Statistically significant macro factors were identified for all 3
companies; however, R2 never reached above 12%
-
15 macro factors were reviewed in initial regression analysis
-
Different time periods and staggering of data were used to
identify relationships to predict future changes in earning
GS

Current Month: Aaa Corporate Rate Spread (-)

2 Month: Retail Sales (+)

3 Month: Retail Sales (+)
JPM

Current Month: Consumer Confidence (+)

2 Month: Rf (+), Aaa Corporate Rate Spread (-), Unemployment (-)

3 Month: Retail Sales (+), Balance of Trade (+)
Macro Factors
rf
Consumer Confidence
Business Confidence
Unemployment Rate
CPI
Real Federal Funds Rate
Aaa Corporate Rate Spread
Case Shiller Home Price (20-Metro)
Brent Crude Oil Spot Price
Consumer Credit Outstanding
Real Consumer Spending
Personal Saving Rate
Retail Sales
Balance of Trade
Housing Starts
NTRS

Current Month: rf (+), Real Consumer Spending (-)

2 Month: Unemployment Rate (-), Real Consumer Spending (+)
•S&P 500 - Financial Sector
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JPMorgan Chase vs. Others

JPM appears to be accurately valued, with strong upside potential

JPM has outperformed GS over the past year, six months, and three months

JPM expects a higher percentage increase in earnings
Changes in Earnings Per Share
Ticker
GOLDMAN SACHS GROUP
GS
JPMORGAN CHASE & CO
NORTHERN TRUST
•S&P 500 - Financial Sector
Change in
Change in
Earnings 2010 Earnings 2011
15%
34%
JPM
83%
88%
NTRS
25%
20%
22
JPMorgan Chase Performance

Summary

Over the past 5 years JPM has recorded a better compounded rate of return compared to
the S&P 500, Financial sector and the Div. Fin’l Services industry.

Frequency of JPM beating the returns of the S&P 500, Financial sector or Div. Fin’l Svs
has only been statistically significant in the last 12 months against Div. Fin’l Svs
Data as of 4/30/09
•S&P 500 - Financial Sector
23
Technical Analysis

JPM analysis indicates continued steady future growth

Upper and Lower bound have been established indicating a tested upward sloping
channel
-

Today lower bound was tested and stock rebound with positive growth
Government regulation and legislation can quickly deteriorate channel
•S&P 500 - Financial Sector
24
Initiation of Coverage

JPMorgan Chase & Company

BUY rating

Although, the JPM will challenged by the weaken credit market it has proved to be able
achieve future sustainability, growth and profitability
-
Fortress brand, strong capital reserve levels relative to peers, diversified revenue,
proactive risk management, reduced exposure to heritage assets, consistent
investment in growth and dedication to building long-term customer relationships
Initiation of Coverage
Ticker: NYSE
Rating
Current Price – 05/26/09
Price Target - 12 Month
% Change
$(Millions)
Net Revenue
Growth Rate
Avg. Estimate
No. of Analysts
Low Estimate
High Estimate
Year Ago Sales
JPM
BUY
$36.28
$44.09
21.53%
FY
2011E
112,240
9%
•S&P 500 - Financial Sector
FY
2010E
102,890
6%
104.6B
14.0
96.9B
120.2B
99.4B
FY
FY
FY
2009E
2008
2007
96,714 67,252 71,372
44%
-6%
15%
99.4B
14.0
86.4B
111.0B
67.3B
Diluted earnings per share
Net income
Average Estimate
Number of Analysts
Low Estimate
High Estimate
Year Ago EPS
2011E
$4.64
2010E
$ 2.65
$2.66
17
$1.00
$3.50
$1.46
2009E
$ 1.44
$1.45
18
$0.95
$1.82
$1.37
25
Summary
 Many stocks in the sector have performed well in
the past 3 months
 Goldman Sachs, JPMorgan Chase, and Northern
Trust have performed better than average in the
sector
 JPMorgan Chase appears to have the best potential
performance in the Financial Sector
•S&P 500 - Financial Sector
26
Recommendations
 Purchase JPMorgan Chase
 Re-weight Financial Sector SIM holdings

BRKB: 46.38%

HCBK:
28.61%

WFC:
25.01%
 Suggested weighting

BRKB:
35%

JPM:
25%

HCBK:
20%

WFC:
20%
•S&P 500 - Financial Sector
27
Questions?
•S&P 500 - Financial Sector
28