What do Interactive Brokers Group Inc., American Express Co. and First Citizens BancShares Inc. have in common?
They are all expected to increase their earnings more quickly than the S&P 500
and all trade at much lower valuations, relative to expected earnings.
Macrae Sykes manages the Gabelli Financial Services Opportunities ETF
which has performed well this year compared with its benchmark, the S&P Financials sector, which is tracked by the Financial Select SPDR ETF
During an interview, Sykes discussed how he expects the broad financial sector to be affected by changes following the current turmoil in the banking industry. He also named the three companies, above, as attractive stocks right now. First, let’s look at their expected earnings performance and forward price-to-earnings ratios, based on consensus estimates among analysts polled by FactSet:
Company or ETF
Estimated 2022 EPS
Estimated 2023 EPS
Estimated 2024 EPS
Two-year estimated EPS CAGR
Interactive Brokers Group Inc. Class A
American Express Co.
First Citizens BancShares Inc. Class A
Financial Select Sector SPDR Fund
SPDR S&P 500 ETF Trust
Click on the tickers for more about each company or ETF.
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The earnings-per-share figures for 2022 are labeled as estimates because some of the companies held by the ETFs have fiscal years that don’t match the calendar.
The Gabelli Financial Services Opportunity ETF was established in May of last year. It is actively managed and semitransparent. This means that unlike most ETFs it doesn’t disclose its holdings every day. The holdings are listed quarterly, although the fund’s net asset value (the value of its holdings divided by the number of shares) is disclosed daily.
The ETF is focused on capturing long-term growth tied to the continuing wealth transfer in the U.S. from the baby boomer generation to younger people and the growing need for asset management and payment processing services.
Sykes said the regulatory reaction to the current banking crisis might include new tests for liquidity, with questions over how far down new rules might go, regarding banks’ asset sizes.
Read: Elizabeth Warren proposes nixing 2018 rollback of banking rules: ‘We now have evidence of what happens when you ease up.’
He also expects the current problems to spur consolidation and a movement of even more deposits to the largest banks, because of the “franchise/safety premium.”
Sykes also said: “The financials universe is much bigger than just banks –– so there are other ways to find equity returns.”
He discussed three financial companies:
Interactive Brokers Group
was the fourth largest holding of GABF as of Dec. 31. Sykes said the company’s financial position is very strong, with $12 billion in capital and its own investments concentrated in short-duration U.S. Treasury securities. He expects IBKR to increase its revenue and earnings by 20% this year, with a 70% operating margin — a level he said was similar to those of software companies.
IBKR provides brokerage services to individuals, with full service for specialized clients, such as hedge funds.
Sykes touted the company’s “incredible” competitive advantage: “Schwab and Fidelity offer foreign trading and custody, but Interactive Brokers has a broader access to global exchange trading,” he said.
was GABF’s sixth largest investment as of Dec. 31. Some investors might not realize it is a bank holding company. It was included on this list of the 10 large U.S. banks with the best 15-year earnings performance, based on returns on average assets.
Sykes called American Express a good play on the generational wealth transition. “They are getting the biggest share of millennials,” he said, calling these newer customers “big spenders, loyal, with more velocity,” and likely to use their cards at “a lot more touch points” than older customers.
He also said 80% of the company’s fee revenue comes from charge fees. Those are mainly annual fees for charge cards, which are paid off in full at the end of each month. AXP is also growing its credit card lending business.
“A business able to do 20%+ return on equity on a consistent basis is extraordinary,” Sykes said, while pointing out that Berkshire Hathaway Inc.
has a 20% stake in the company’s common shares. According to FactSet, AXP’s returns on equity have averaged 26.6% over the past 10 years and 25.5% for 15 years. The company’s 2022 ROE was 31.8%, according to FactSet. These are very high figures compared with banks that have business models that rely more on interest income and less than fee revenue, which made up 77% of AXP’s total revenue in 2022.
First Citizens Bancshares Inc.
of Raleigh, N.C., was included on this recent list of banks trading at or below tangible book value. It has been widely reported that the bank has made a bid with the Federal Deposit Insurance Corp. for the failed Silicon Valley Bank, although First Citizens hasn’t commented about the matter publicly.
Shares of New York Community Bancorp
shot up after it purchased deposits, 40 branches and a heavily discounted loan portfolio from the failed Signature Bank of New York in a deal with the FDIC.
First Citizens wasn’t included in GABF’s Dec. 31 holdings list, but Sykes said the stock is now attractively priced just above tangible book value and that it is “is a very well run bank, with a history of integrating [acquisitions] over time.”
Sykes called the NYCB/FDIC deal “very clever,” and said that even if First Citizens isn’t successful in it FDIC bid, “with the depressed multiple and the opportunity to increase earnings, you may have a double benefit — multiple expansion and higher earnings.”
Top holdings of the Gabelli Financial Services Opportunities ETF
As of Dec, 31, the largest holding of GABF was Berkshire Hathaway. Sykes will host a panel discussion during the Gabelli Funds Annual Value Investing Conference in Omaha, Neb., on May 5 about the company, before Berkshire’s annual meeting on May 6. Here’s last year’s panel discussion:
Here are the ETF’s top 10 holdings (out of 38) as of Dec. 31:
% of portfolio net assets
Berkshire Hathaway Inc. Class B
FTAI Aviation Ltd.
Wells Fargo & Company
Interactive Brokers Group, Inc. Class A
American Express Company
Focus Financial Partners, Inc. Class A
Blue Owl Capital, Inc. Class A
Bank of America Corp
JPMorgan Chase & Co.