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>>> BlackRock, Inc. (NYSE:BLK) - Number of Hedge Fund Holders: 49
https://finance.yahoo.com/news/14-cheap-quarterly-dividend-stocks-161933738.html
Dividend Yield as of 3/29: 3.04%
BlackRock, Inc. (NYSE:BLK) is a leading asset manager with a 3.04% dividend yield as of 3/29. Given the decline in many financial stocks in recent months, BlackRock, Inc. (NYSE:BLK) is trading for a forward P/E of 16.47 despite its further AUM growth potential in the future. In the last five years, the company has had an aggregate of $1.8 trillion in net inflows, ranking among the top in the industry. Given its earnings growth over the years, BlackRock, Inc. (NYSE:BLK) has increased its annual dividend for 14 straight years.
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>>> Blackstone Inc. (NYSE:BX) - Number of Hedge Fund Holders: 51
https://finance.yahoo.com/news/14-cheap-quarterly-dividend-stocks-161933738.html
Dividend Yield as of 3/29: 5.17%
Blackstone Inc. (NYSE:BX) is the world's largest alternative asset management firm with attractive margins and substantial earnings power. Since the beginning of 2022, Blackstone Inc. (NYSE:BX) shares have declined due to higher interest rates which make buying companies harder with debt. With weakness among some regional banks in recent months, the commercial real estate market could face headwinds and the weakness could potentially negatively affect Blackstone Inc. (NYSE:BX) in the near term as well. While the near term is uncertain depending on how the economy and markets do, Blackstone Inc. (NYSE:BX) is attractive in the long term given its high quality business, a forward P/E ratio of 13.6, and a dividend yield of 5.17% as of 3/29.
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>>> S&P Global Inc. (NYSE:SPGI) - Number of Hedge Fund Holders: 97
https://www.insidermonkey.com/blog/5-stocks-about-to-pop-according-to-jim-cramer-in-retrospect-1137168/2/
6-Month Performance as of March 30 (Relative to SPY): -1.71%
Cramer also mentioned S&P Global Inc. (NYSE:SPGI) among his top stocks that were “about to pop”. He said that while IPOs are mute at the moment, it is not the “new normal” and investors should by S&P Global Inc. (NYSE:SPGI) on the dip. S&P Global Inc. (NYSE:SPGI) has underperformed the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) by 1.71% over the past 6 months, as of March 30.
97 hedge funds disclosed having stakes in S&P Global Inc. (NYSE:SPGI) at the end of Q4 2022. The total value of these stakes amounted to $7.88 billion, up from $6.24 billion in the previous quarter with 90 positions. The hedge fund sentiment for the stock is positive.
As of December 31, TCI Fund Management is the largest shareholder in S&P Global Inc. (NYSE:SPGI) and has a stake worth $3 billion.
Baron Funds made the following comment about S&P Global Inc. (NYSE:SPGI) in its Q4 2022 investor letter:
“Shares of rating agency and data provider S&P Global Inc. (NYSE:SPGI) increased 10.1% during the quarter as investors looked past weak debt issuance activity and anticipated a potential issuance rebound in 2023. Equity markets rose during the quarter, offering some reprieve to asset-based revenue headwinds. The company also hosted an Investor Day during which management provided medium-term financial guidance of 7% to 9% annual revenue growth and low to mid-teens annual EPS growth. We continue to own the stock due to the company’s durable growth characteristics that are underpinned by the secular trends of increasing bond issuance, growth in passive investing, and demand for data and analytics, while also benefiting from significant competitive advantages.”
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>>> Why does the US have so many banks? Thank Thomas Jefferson.
There are more than 4,000 banks in the U.S. The argument for having so many can be traced back to arguments as the nation was founded.
Yahoo Finance
by Dan Fitzpatrick and David Hollerith
April 8, 2023
https://finance.yahoo.com/news/why-does-the-us-have-so-many-banks-thank-thomas-jefferson-140029962.html
The U.S. has a lot of banks. So many, in fact, that when one fails or runs into trouble, there can be some confusion with other lenders in different parts of the country that share a similar name.
That’s what happened last month when regulators seized New York’s $110 billion Signature Bank. In the days following the third-largest bank failure in U.S. history, executives with three other Signature Banks in Illinois, Ohio and Georgia urged customers not to mix them up with the lender that went down.
"While there are other banks that carry Signature Bank in their names, there is only one Signature Bank of Georgia, and it is in no way associated with any others," stated a press release from Signature Bank (SBGB) in Sandy Springs, Ga. Two other Signature Banks based in Rosemont, Ill. and Toledo, OH also reminded clients they were not affiliated with New York’s Signature in any way.
There are currently more than 4,100 commercial banks in the U.S., according to the FDIC. That is a lot fewer than there used to be (more than 14,000 existed in the 1930s and 1980s), but it is still more than many other parts of the world. The number of banks in Canada was 81 as of 2021, according to the IMF, while Japan had 112, China had 187, Germany had 251, and the U.K. had 311.
Most U.S. banks are community and regional lenders that are considerably smaller than giants like JPMorgan Chase (JPM), Bank of America (BAC), or Citigroup (C).
Despite their stature, these smaller players collectively shoulder a lot of the borrowing that happens across the country. More than 80% of all commercial real estate loans are now held by banks with fewer than $250 billion in assets, according to a report by Goldman Sachs economists Manuel Abecasis and David Mericle.
The banking crisis that roiled the country in March introduced Americans to a number of these lesser-known names: Silicon Valley Bank (SIVB). Signature Bank (SBNY). Silvergate Bank (SI). First Republic (FRC). Zions (ZION). PacWest (PACW). Western Alliance (WAL).
The panic triggered by their challenges served as a reminder that many smaller institutions in the U.S. can create pockets of vulnerability that have the potential for systemic risk.
Jefferson vs. Hamilton
Why do we have so many banks? It starts in the early years of the newly-created United States with an argument between Thomas Jefferson, the first U.S. Secretary of State, and Alexander Hamilton, the first Treasury Secretary.
Hamilton wanted one dominant national bank, and Jefferson feared the influence of a juggernaut would put state-based banks out of business. George Washington sided with Hamilton and so the country got its first national bank in 1791 followed by a second national bank in 1816.
But both of those banks lost their charters due to Jeffersonian-type opposition, letting state banks proliferate for decades without national competition.
President Lincoln brought back national banks during the Civil War, and the U.S. banking system settled into a structure that was partly centralized (Hamilton) and partly decentralized (Jefferson). Laws limited how big individual banks could become, protecting the many lenders that operated within hyper-local boundaries.
"There was traditionally in the U.S. — and we still have an aspect of this today — a kind of populist concern about big banks, especially big-city banks," said Fordham University School of Law Professor Richard Squire.
The number of banks multiplied as the country expanded, reaching more than 10,000 in 1900 and peaking at more than 30,000 in 1921, according to figures compiled by the Federal Reserve Bank of St. Louis. The Great Depression wiped out many of them, but the U.S. still had more than 13,000 in the mid 1930s and stayed close to that level until the late 1980s and 1990s, when a series of banking crises, industry consolidation, and deregulation yanked the numbers down again.
One key protection for local lenders fell in the last decades of the 20th century when some states and then Congress allowed bigger banks to acquire rivals across state lines, a move that had been strictly prohibited for decades.
That, and the chaos of the 2008 financial crisis, paved the way for the establishment of a handful of coast-to-coast giants that dominate the business today. The number of U.S. banks has now dropped by more than 40% since 2008.
Too small to survive?
Some argue that many of the small and regional banks that still exist will eventually get swallowed up or go out of business as the giants continue to exert their power.
And that the regional banking crisis that rocked the industry in March could provide new momentum as smaller banks struggle to adapt to a period of higher interest rates without as many options as their larger "too-big-to-fail" rivals.
The number of banks is "going to keep going down," said Squire, the Fordham professor, "because too big to fail is a real phenomenon."
That new vulnerability could have larger consequences for the economy if local bankers decide to pull back on new lending, said Tomasz Piskorksi, a finance and real estate professor at Columbia Business School. And lending at smaller banks did in fact drop by $74 billion in the two weeks ending March 29, according to new Fed data.
"Banks don’t even have to fail," he said. "They just have to be unwilling to lend."
One regional bank, First Republic in San Francisco, got some support last month from some industry giants. Eleven institutions, including JPMorgan Chase and Bank of America, provided more than $30 billion in uninsured deposits with the hope that it would tamp down any concerns among First Republic’s customers.
But that also created problems for another regional lender on the other side of the country with a similar name. Some investors confused First Republic with Philadelphia-based Republic Bank, which watched as its stock fell as much as 28% on the same day First Republic received its $30 billion rescue.
To make things even more confusing, Republic Bank once called itself First Republic in the 1990s before changing its name. Its ticker is FRBK while First Republic uses FRC.
The confusion pushed Republic First CEO Thomas Geisel to say the perhaps not-so-obvious in a letter on his company's web site — "We are NOT First Republic Bank."
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>>> Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks
Bloomberg
Annie Massa and Edward Harrison
March 27, 2023
https://finance.yahoo.com/news/schwab-7-trillion-empire-built-183320482.html
(Bloomberg) -- On the surface, Charles Schwab Corp. being swept up in the worst US banking crisis since 2008 makes little sense.
The firm, a half-century mainstay in the brokerage industry, isn’t overexposed to crypto like Silvergate Capital and Signature Bank, nor to startups and venture capital, which felled Silicon Valley Bank. Fewer than 20% of Schwab’s depositors exceed the FDIC’s $250,000 insurance cap, compared with about 90% at SVB. And with 34 million accounts, a phalanx of financial advisers and more than $7 trillion of assets across all of its businesses, it towers over regional institutions.
Yet the questions around Schwab won’t go away.
Rather, as the crisis drags on, investors are starting to unearth risks that have been hiding in plain sight. Unrealized losses on the Westlake, Texas-based firm’s balance sheet, loaded with long-dated bonds, ballooned to more than $29 billion last year. At the same time, higher interest rates are encouraging customers to move their cash out of certain accounts that underpin Schwab’s business and bolster its bottom line.
It’s another indication that the Federal Reserve’s rapid policy tightening caught the financial world flat-footed after decades of declining rates. Schwab shares have lost more than a quarter of their value since March 8, with some Wall Street analysts expecting earnings to suffer.
“In hindsight, they arguably could have had more prudent investment choices,” said Morningstar analyst Michael Wong.
Chief Executive Officer Walt Bettinger and the brokerage’s founder and namesake, billionaire Charles Schwab, have said the firm is healthy and prepared to withstand the broader turmoil.
The business is “misunderstood,” and it’s “misleading” to focus on paper losses, which the company may never have to incur, they said last week in a statement.
“There would be a sufficient amount of liquidity right there to cover if 100% of our bank’s deposits ran off,” Bettinger told the Wall Street Journal in an interview published Thursday, adding that the firm could borrow from the Federal Home Loan Bank and issue certificates of deposit to address any funding shortfall.
Through a representative, Bettinger declined to comment for this story. A Schwab spokesperson declined to comment beyond the Thursday statement.
The broader crisis showed signs of easing on Monday, after First Citizens BancShares Inc. agreed to buy SVB, buoying shares of financial firms including Schwab, which was up 3.1% at 2:29 p.m. in New York. The stock is still down 42% from its peak in February 2022, a month before the Fed started raising interest rates.
Unusual Operation
Schwab is unusual among peers. It operates one of the largest US banks, grafted on to the biggest publicly traded brokerage. Both divisions are sensitive to interest-rate fluctuations.
Like SVB, Schwab gobbled up longer-dated bonds at low yields in 2020 and 2021. That meant paper losses mounted in a short period as the Fed began boosting rates to stamp out inflation.
Three years ago, Schwab’s main bank had no unrealized losses on long-term debt that it planned to hold until maturity. By last March, the firm had more than $5 billion of such paper losses — a figure that climbed to more than $13 billion at year-end.
It shifted $189 billion of agency mortgage-backed securities from “available-for-sale” to “held-to-maturity” on its balance sheet last year, a move that effectively shields those unrealized losses from impacting stockholder equity.
“They basically saw higher interest rates coming,” Stephen Ryan, an accounting professor at New York University’s Stern School of Business, said in a phone interview. “They didn’t know how long they would last or how big they would be, but they protected the equity by making the transfer.”
The rules governing such balance sheet moves are stringent. It means Schwab plans to hold more than $150 billion worth of debt to maturity with a weighted-average yield of 1.74%. The lion’s share of the securities — $114 billion at the end of 2022 — won’t mature for more than a decade.
The benchmark 10-year Treasury yield now: 3.5%.
Cash Business
Schwab’s other headache from higher interest rates stems from cash.
At the root of Schwab’s income is idle client money. The firm “sweeps” cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products. The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank.
Net interest income accounted for 51% of Schwab’s total net revenue last year.
“Schwab’s counting on inertia,” said Allan Roth, founder of Wealth Logic, a financial-planning firm.
After a year of rapidly rising rates, there’s greater incentive to avoid being stagnant with cash. While many money-market funds are paying more than 4% interest, Schwab’s sweep accounts offer just 0.45%.
Though it’s an open question just how much money customers could move away from its sweep vehicles, Schwab’s management acknowledged this behavior picked up last year.
“As a result of rapidly increasing short-term interest rates in 2022, the company saw an increase in the pace at which clients moved certain cash balances” into higher-yielding alternatives, Schwab said in its annual report. “As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and pay-downs on our investment portfolios.”
In their statement, Bettinger and Schwab wrote that “client deposits may move, but they are not leaving the firm.”
FHLB Borrowing
To plug the gap, the brokerage’s banking units borrowed $12.4 billion from the FHLB system through the end of 2022, and had the capacity to borrow $68.6 billion, according to an annual report filed with regulators.
Schwab borrowed an additional $13 billion from the FHLB so far this year, the filing showed.
Analysts have been weighing these factors, with Barclays Plc and Morningstar lowering their price targets for Schwab shares in recent weeks.
Bettinger and Schwab said that the firm’s long history and conservatism will help customers navigate the current cycle, as they have for more than 50 years.
“We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company,” they wrote in last week’s statement. “We are different than other banks.”
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>>> How Silicon Valley Bank skirted Washington's toughest banking rules
Yahoo Finance
by Dan Fitzpatrick, David Hollerith and Jennifer Schonberger
March 13, 2023
https://finance.yahoo.com/news/how-silicon-valley-bank-skirted-washingtons-toughest-banking-rules-215501909.html
Before Silicon Valley Bank went down, it was the 16th-biggest US bank and had more than $200 billion in assets. Yet it didn’t have the same level of regulatory scrutiny as JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) or Wells Fargo (WFC).
Why? Because lawmakers and regulators decided to loosen requirements for regional banks at the end of last decade. Congress and the Trump administration approved some changes in 2018 with a bipartisan bill that re-defined which banks were deemed "systemically important" to $250 billion in assets instead of $50 billion. The Federal Reserve, FDIC and OCC refined those rules in 2019.
The changes released certain regional banks from some of the strictest requirements imposed in the aftermath of the 2008 financial crisis, a downturn that pushed the banking system to the brink. The revised regulatory framework left Silicon Valley Bank and other mid-size peers in a new air pocket of the banking universe: too small to be deemed "systemically important" but now, as we've learned, big enough to bring the system to the brink again.
One key revision was the Fed’s decision to exempt banks with $100-$250 billion in assets from maintaining a standardized "liquidity coverage ratio" as long as they kept their short-term wholesale funding levels below a certain amount. The ratio is designed to show whether a lender has enough high-quality liquid assets to survive a crisis. A lack of liquidity turned out to be a major problem for Silicon Valley Bank as deposits left the bank and the value of its assets declined as interest rates rose.
Fed Chair Jerome Powell spoke in favor of the refinements during 2019, but not all regulators were happy with them at the time. They "weaken core safeguards against the vulnerabilities that caused so much damage in the crisis," then-Fed governor Lael Brainard said in an October 10, 2019 letter released by the Fed.
Days later, FDIC board member Martin Gruenberg highlighted regional banks as "an underappreciated risk" in an October 16, 2019 speech. He expressed concern about another change, noting that bank holding companies between $100-$250 billion in assets no longer had to supply resolution plans showing how they could be wound down in the event of a failure.
"These measures are unwarranted and misguided," he said, according to a transcript of his remarks published by the FDIC. "They only increase the challenges posed by the resolution of these institutions and the potential for disorderly failure, and disregard the lessons of the financial crisis."
The changes were part of a long, national debate following the 2008 crisis about which banks should be regulated more aggressively and how. A big question: Which banks are big enough to be "systemically important"? Or, put another way: Which banks are "too big to fail"?
JPMorgan, Bank of America, Citigroup and Wells Fargo clearly belonged in that group because they were so much bigger than the rest of the industry; each institution has more than $1.5 trillion in assets, and JPMorgan has more than $3 trillion. Goldman Sachs (GS), Morgan Stanley (MS), State Street (STT) and BNY Mellon (BK) were other obvious choices.
But what about the scores of smaller regional banks spread throughout the country? Congress and President Obama provided the first definition: $50 billion in assets. Any bank of that size or bigger would be considered "systemically important," as a result of a 2010 law known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, and thus subject to the strictest scrutiny. That included annual Fed stress tests designed to see if banks could survive adverse economic circumstances, among other regulatory requirements.
Eight years later, a new threshold emerged: $250 billion. That resulted from a 2018 law known as the Economic Growth, Regulatory Relief, and Consumer Protection Act that was signed by President Trump. Banks below that asset size, which would have included Silicon Valley Bank, would be exempted from the Fed’s annual stress tests.
Silicon Valley Bank and other regional banks had lobbied for such a change. In fact, Silicon Valley Bank’s CEO Greg Becker told a Senate committee in 2015 that if the $50 billion threshold was not raised his company would be "subject to the array of regulatory requirements designed for the largest, most complex banks." He also said that his business model and risk profile didn't "pose systemic risk."
The 2018 law, however, wasn’t the final word on regional banks. The legislation gave the Fed the power to make decisions about banks with assets of $100 billion, and decide whether those institutions should be held to standards that applied to bigger banks. Silicon Valley wasn’t yet that big; it had $56 billion in assets as of June 30, 2018.
What the Fed decided to do in consultation with the FDIC and OCC was to group banks in five categories according to the risk they posed, using a variety of measures. When the new framework was announced in October 2019, Powell said in a release that "our rules keep the toughest requirements on the largest and most complex firms" and "maintain the fundamental strength and resiliency that has been built into our financial system over the past decade."
Banks between $100 billion and $250 billion would be required to undergo supervisory stress tests every two years. But if they had less than $50 billion in average weighted short-term wholesale funding, they would not be required to maintain a standardized "liquidity coverage ratio," which measures how much high-quality assets a bank has to raise cash when funding disappears during challenging economic circumstances. They did need to continue internal liquidity stress testing that was specific to each institution.
At the time those rules were released, Silicon Valley Bank was in the $50-100 billion asset category, a group that didn’t have stress test requirements or standardized liquidity coverage ratio rules. It joined the $100 billion club in the fourth quarter of 2020.
In a recent federal filing before its collapse, the bank acknowledged it was not part of the Fed’s standardized liquidity coverage ratio requirements. If that were to change "as a result of further growth," the Fed "would require us to maintain high-quality liquid assets in accordance with specific quantitative requirements and increase the use of long-term debt as a funding source."
Senator Elizabeth Warren challenged Powell about the liquidity adjustments during a 2021 hearing. "So, let me just ask, do you regret slashing liquidity requirements designed to protect markets from crashing like they did in 2008?" Powell said: "I don’t see that there has been any evidence that that was a bad idea, but it’s one that could certainly be looked at again."
Fed officials on Sunday were unwilling to say whether any liquidity or stress test requirements could change for smaller banks in the aftermath of Silicon Valley Bank’s failure, saying they would be focused on drawing appropriate lessons learned in the days, weeks and months to come. On Monday, the Fed said Vice Chair for Supervision Michael Barr will lead a review of the supervision and regulation of Silicon Valley Bank. The review will be publicly released by May 1.
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>>> U.S. government guarantees all Silicon Valley Bank deposits, money available Monday
Yahoo Finance
by Jennifer Schonberger
March 12, 2023
https://finance.yahoo.com/news/us-government-guarantees-all-silicon-valley-bank-deposits-money-available-monday-223546372.html
Financial regulators said Sunday night depositors of the failed Silicon Valley Bank will have access to all of their money starting Monday, March 13, while announcing new facilities to backstop deposit withdrawals across the banking system amid fears of contagion following SVB's shock failure last week.
In a joint statement, the heads of the Federal Reserve, Treasury Department, and FDIC said: "After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors."
"Depositors will have access to all of their money starting Monday, March 13," the statement added. "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
The Federal Reserve also said it will offer funding to banks through a new facility to help ensure banks can meet all depositor withdrawals, essentially backstopping all deposits — both those insured and uninsured — across the U.S. financial system.
The Fed's financing will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year to banks, savings associations, and credit unions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.
According to the Fed, the BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.
The Fed said it is carefully monitoring developments in financial markets.
"The Federal Reserve is prepared to address any liquidity pressures that may arise," the central bank said in a release. "This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy."
The lending facility is designed by the Fed to cover all insured deposits in the U.S. banking system and will be backed by a $25 billion exchange stabilization fund at Treasury, which officials do not expect to tap.
Fed officials told the media on a call Sunday evening these actions were designed to provide more liquidity and reduce contagion and should help prevent contagion to small medium large banks.
The Fed is not purchasing securities at banks only lending against their book value. Fed officials stressed no bank is being bailed out, but banks are instead receiving longer-term liquidity at a higher valuation and lower risk.
Auction delayed, Signature Bank seized
On a call with the media late Sunday, a Treasury official noted the government did seek bids for Silicon Valley Bank's assets, but officials opted not to proceed with an auction given the fluidity of the situation.
With the government aiming to open banks Monday morning, regulators determined it would be better to rely on the deposit insurance fund to assure money would be available to depositors.
Treasury officials noted that are some institutions which have similarities to Silicon Valley Bank, and concerns about depositors at those institutions remains.
Similar to the Fed's position, Treasury officials stressed these actions protect depositors, not investors, and pushed back on the notion these actions constitute a bailout given equity and bondholders in Silicon Valley Bank will be wiped out.
In their joint statement, regulators also announced a similar systemic risk exception for Signature Bank (SBNY), which was closed on Sunday by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Signature Bank's closure marks the third-largest U.S. bank failure.
On Friday, Silicon Valley Bank became the largest bank to fail since Seattle's Washington Mutual during the height of the 2008 financial crisis and, behind Washington Mutual, and the second-largest bank failure in U.S. history. It was also the first bank to fail since 2020.
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>>> Two U.S. Banks Collapse in 48 Hours. Which One's Next?
Silvergate served the cryptocurrency industry, while SVB was the bank for Silicon Valley tech startups.
The Street
by LUC OLINGA
MAR 10, 2023
https://www.thestreet.com/technology/two-us-banks-collapse-in-48-hours-which-one-is-next?puc=yahoo&cm_ven=YAHOO
It's a black week for the American financial system: In just 48 hours, the banking sector has been shaken by the collapse of two major banks.
Most worrying is that these banks served two so-called growth economic sectors: the tech sector and the cryptocurrency industry.
SVB Financial Group, (SIVB) - the lender to Silicon Valley startups, failed on March 10, falling into the hands of the FDIC. The federal agency has taken control of the banking company, reviving the ghosts of the 2008 financial crisis.
"Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver," the federal agency said in a news release.
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds."
It added that it may pay a dividend to uninsured depositors as it sells the assets of SVB (SIVB)
The FDIC is a guarantor for bank depositors.
SVB: The To-Go Bank for Tech Startups
At the end of last year SVB had $209 billion in total assets and $175 billion in total deposits. SVB becomes the second biggest failure of a U.S. bank after Washington Mutual in 2008.
SVB was a central player in the innovation economy. It was the backbone of the tech industry in Silicon Valley. It played an important role in the startup ecosystem by providing specialized financial services, industry expertise, a valuable network, and a strong reputation.
It also offered a range of financial services tailored specifically to the needs of startups, such as venture debt, corporate banking, and asset management. These services are designed to help startups manage their finances, optimize their cash flow, and scale their businesses.
SVB suffered from the rise in interest rates from the Federal Reserve because it hurt the value of its investment assets, especially bonds. As a result, the bank had to resort to a capital raise as many startups withdrew their deposits from the bank since they were burning a lot of cash.
SVB had to sell bonds, primarily U.S. Treasury securities, at a discount to cover these withdrawals. The rise in interest rates has made existing bonds less valuable. In selling these bond positions, SVB had to take a significant loss.
But its attempt to raise $2.25 billion failed.
Crypto Bank Silvergate Collapsed
Two days earlier, Silvergate, the crypto bank, collapsed. The bank was where most of the big crypto firms went, because traditional banks did not want to do business with them. And that reluctance stemmed from warnings from regulators who consider the crypto industry a risky sector.
The company said on March 8 that it intended "to wind down operations and voluntarily liquidate the bank in an orderly manner and in accordance with applicable regulatory processes."
It added: "In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of bank operations and a voluntary liquidation of the bank is the best path forward."
"The bank’s wind down and liquidation plan includes full repayment of all deposits. The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets."
Verging on Bigger Fall Than 2008: Economist Schiff
The rout of the La Jolla, Calif., bank was due to pressure from regulators, in particular the Department of Justice, which has opened an investigation into its business relations with the empire of the former crypto king Sam Bankman-Fried.
Bankman-Fried has been charged with 12 counts of fraud, stemming from the collapse of his crypto empire, the cryptocurrency exchange FTX and its sister company, Alameda Research.
Silvergate was established in 1988. The bank initially specialized in lending to industrial customers and at the time also offered loans for both residential and commercial real estate.
But in 2013, the bank began to court crypto firms, when traditional banks were reluctant to do so due to the opacity prevailing in the sector. Silvergate thus became the crypto bank.
In 2019, the firm made its initial public offering, promising a complete refocus on the industry, which was then experiencing a renaissance. As of Sept. 30, Silvergate had $11.9 billion in digital assets held as deposits.
But the bankruptcy of FTX and Alameda on Nov. 11 scared away customers. The bank thus reported only $3.8 billion in digital assets held as deposits as of Dec. 31. FTX was one of Silvergate's big customers.
The question now is whether other U.S. banks will fall? Could SVB and Silvergate's issues spread to other regional banks especially since suspicion can lead customers to rush to these banks to withdraw their money?
"The U.S. banking system is on the verge of a much bigger collapse than 2008," said economist Peter Schiff, known for his dire predictions.
"Banks own long-term paper at extremely low interest rates. They can't compete with short-term Treasuries. Mass withdrawals from depositors seeking higher yields will result in a wave of bank failures."
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>>> Why Silicon Valley Bank's crisis is rattling America's biggest banks
Rising rates and deposit withdrawals pinched SVB and Silvergate. Could the same happen to bigger banks?
Silvergate’s ‘hand was forced’ in sale of crypto securities to cover deposit outflows
by Dan Fitzpatrick
·
March 10, 2023
https://finance.yahoo.com/news/why-silicon-valley-banks-crisis-is-rattling-americas-biggest-banks-121159393.html
The problems of two small banks on the West Coast are rippling across markets and causing new investor concerns about some of the country’s largest financial institutions.
Why? Three words: rising interest rates.
The Federal Reserve’s aggressive campaign to bring down inflation helped set the stage for major problems at two California lending institutions — SVB Financial (SIVB) and Silvergate Capital (SI) — as an outflow of deposits forced both to sell assets at a loss. Those assets were bonds.
Banks are big investors in assets like Treasury bills because they need lots of safe places to park their cash. Many financial institutions piled into these investments during a period of historically-low interest rates that spanned the early years of the pandemic, as banks took in tons of new deposits and lending was somewhat restrained.
But now the Fed is hiking rates at a rapid clip, with Fed Chair Jay Powell warning earlier this week the central bank may have to speed up the pace of its rate increases to cool the economy further. The problem that creates for banks is simple: higher rates lower the value of their existing bonds.
The withdrawals at SVB's Silicon Valley Bank have come from startups and technology firms, many of which also ran into new trouble once the Fed began raising rates.
The deposit outflow forced SVB to sell assets and take a $1.8 billion loss, a move the bank made “because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.” Its shares fell more than 60% Thursday.
In pre-market trading on Friday, SVB shares were down another 60% after overnight reporting from Bloomberg said VC firms ranging from Peter Thiel's Founders Fund to Union Square Ventures had told portfolio companies to pull their money from Silicon Valley Bank.
Banks don't have to realize losses on bonds that may have gone down in value amid rising rates if they're not pushed to sell these assets. But Silvergate Capital and SVB Financial didn’t have that choice. Customer withdrawals at Silvergate Bank and SVB’s Silicon Valley Bank forced their hand.
At Silvergate, which caters to cryptocurrency clients, customers yanked their money in the panic that followed the 2022 collapse of cryptocurrency exchange FTX. Silvergate said in January that it had realized losses of $886 million from selling securities as deposits fell. That weakened the bank considerably. On Wednesday it said it would wind down its bank, and its shares plunged Thursday.
After disclosing the $1.8 billion loss and new capital raise, Silicon Valley’s CEO Greg Becker urged calm in a call with venture capitalists Thursday, according to The Information, asking these investors not to withdraw money. It now is seeking to raise $2.25 billion of new capital to cover the new losses.
The concern now among investors is that much bigger banks could be forced to do the same. That sent the stocks of giant financial institutions tumbling Thursday, including the biggest of the big: JPMorgan Chase (JPM) and Bank of America (BAC). A major bank index fell by the most Thursday in nearly three years.
The biggest U.S. banks are much stronger than they were in the lead up to the last big banking crisis, in 2008, in part because regulators forced them to hold more capital and survive numerous stress test scenarios over the last decade and a half. And the giants have more diverse funding and customer bases than banks such as Silicon Valley or Silvergate, which gives them many more options during challenging times.
Longtime banking analyst Mike Mayo said Thursday during an appearance on CNBC the biggest banks are "a pillar of strength and stability" and much more resilient than they were prior to the 2008 crisis. "The biggest risks are outside the largest banks," he said, and yet all banks are "getting painted with the same brush."
Bank stocks, he said, "have gotten Powelled," referring to the Fed chair.
"Going from zero to 5% interest rates in a period that is faster than any time in four decades, you are going to have casualties."
Federal Deposit Insurance Corporation Chair Martin Gruenberg highlighted the new interest rate risks facing the industry during a speech on March 6, noting that unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion at the end of 2022 across all U.S. banks.
"The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies," he said. "First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities."
These unrealized losses, he added, "weaken a bank’s future ability to meet unexpected liquidity needs."
The good news, according to Gruenberg, is that "banks are generally in a strong financial condition, and have not been forced to realize losses by selling depreciated securities."
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>>> 20 banks that are sitting on huge potential securities losses—as was SVB
MarketWatch
March 11, 2023
By Philip van Doorn
https://www.marketwatch.com/story/20-banks-that-are-sitting-on-huge-potential-securities-lossesas-was-svb-c4bbcafa?mod=article_inline
SVB Financial Group faced a perfect storm, but there are plenty of other banks that would face big losses if they were forced to dump securities to raise cash
Bank depositors can be quick to bail if there is any hint of a liquidity problem.
Silicon Valley Bank has failed following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.
Trading of SVB Financial Group’s SIVB, -60.41% stock was halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.
California regulators closed Silicon Valley Bank and handed the wreckage over to the Federal Deposit Insurance Administration later on Friday.
Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we will show how much they reported in unrealized losses on securities — an item that played an important role in SVB’s crisis.
Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses, as a percentage of total capital, as of Dec. 31.
First, a quick look at SVB
Some media reports have referred to SVB of Santa Clara, Calif., as a small bank, but it had $212 billion in total assets as of Dec. 31, making it the 17th largest bank in the Russell 3000 Index RUA as of Dec. 31. That makes it the largest U.S. bank failure since Washington Mutual in 2008.
One unique aspect of SVB was its decades-long focus on the venture capital industry. The bank’s loan growth had been slowing as interest rates rose. Meanwhile, when announcing its $21 billion dollars in securities sales on Thursday, SVB said it had taken the action not only to lower its interest-rate risk, but because “client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”
SVB estimated it would book a $1.8 billion loss on the securities sale and said it would raise $2.25 billion in capital through two offerings of new shares and a convertible bond offering. That offering wasn’t completed.
So this appears to be an example of what can go wrong with a bank focused on a particular industry. The combination of a balance sheet heavy with securities and relatively light on loans, in a rising-rate environment in which bond prices have declined and in which depositors specific to that industry are themselves suffering from a decline in cash, led to a liquidity problem.
Unrealized losses on securities
Banks leverage their capital by gathering deposits or borrowing money either to lend the money out or purchase securities. They earn the spread between their average yield on loans and investments and their average cost for funds.
The securities investments are held in two buckets:
Available for sale — these securities (mostly bonds) can be sold at any time, and under accounting rules are required to be marked to market each quarter. This means gains or losses are recorded for the AFS portfolio continually. The accumulated gains are added to, or losses subtracted from, total equity capital.
Held to maturity — these are bonds a bank intends to hold until they are repaid at face value. They are carried at cost and not marked to market each quarter.
In its regulatory Consolidated Financial Statements for Holding Companies—FR Y-9C, filed with the Federal Reserve, SVB Financial, reported a negative $1.911 billion in accumulated other comprehensive income as of Dec. 31. That is line 26.b on Schedule HC of the report, for those keeping score at home. You can look up regulatory reports for any U.S. bank holding company, savings and loan holding company or subsidiary institution at the Federal Financial Institution Examination Council’s National Information Center. Be sure to get the name of the company or institution right — or you may be looking at the wrong entity.
Here’s how accumulated other comprehensive income (AOCI) is defined in the report: “Includes, but is not limited to, net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and accumulated defined benefit pension and other postretirement plan adjustments.”
In other words, it was mostly unrealized losses on SVB’s available-for-sale securities. The bank booked an estimated $1.8 billion loss when selling “substantially all” of these securities on March 8.
The list of 10 banks with unfavorable interest margin trends
On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.
Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:
Bank Ticker City AOCI ($mil) Total equity capital ($mil) AOCI/ TEC – AOCI Total assets ($mil)
Customers Bancorp Inc. CUBI, -13.11% West Reading, Pa. -$163 $1,403 -10.4% $20,896
First Republic Bank FRC, -14.84% San Francisco -$331 $17,446 -1.9% $213,358
Sandy Spring Bancorp Inc. SASR, -2.91% Olney, Md. -$132 $1,484 -8.2% $13,833
New York Community Bancorp Inc. NYCB, -5.99% Hicksville, N.Y. -$620 $8,824 -6.6% $90,616
First Foundation Inc. FFWM, -9.11% Dallas -$12 $1,134 -1.0% $13,014
Ally Financial Inc. ALLY, -5.70% Detroit -$4,059 $12,859 -24.0% $191,826
Dime Community Bancshares Inc. DCOM, -2.81% Hauppauge, N.Y. -$94 $1,170 -7.5% $13,228
Pacific Premier Bancorp Inc. PPBI, -1.95% Irvine, Calif. -$265 $2,798 -8.7% $21,729
Prosperity Bancshare Inc. PB, -4.46% Houston -$3 $6,699 -0.1% $37,751
Columbia Financial, Inc. CLBK, -1.78% Fair Lawn, N.J. -$179 $1,054 -14.5% $10,408
SVB Financial Group SIVB, -60.41% Santa Clara, Calif. -$1,911 $16,295 -10.5% $211,793
Source: FactSet
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Ally Financial Inc. ALLY, -5.70% — the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.
To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.
Banks with the highest percentage of negative AOCI to capital
There are 108 banks in the Russell 3000 Index RUA that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:
Bank Ticker City AOCI ($mil) Total equity capital ($mil) AOCI/ (TEC – AOCI) Total assets ($mil)
Comerica Inc. CMA, -5.01% Dallas -$3,742 $5,181 -41.9% $85,406
Zions Bancorporation N.A. ZION, -2.44% Salt Lake City -$3,112 $4,893 -38.9% $89,545
Popular Inc. BPOP, -1.56% San Juan, Puerto Rico -$2,525 $4,093 -38.2% $67,638
KeyCorp KEY, -2.55% Cleveland -$6,295 $13,454 -31.9% $189,813
Community Bank System Inc. CBU, -0.22% DeWitt, N.Y. -$686 $1,555 -30.6% $15,911
Commerce Bancshares Inc. CBSH, -1.61% Kansas City, Mo. -$1,087 $2,482 -30.5% $31,876
Cullen/Frost Bankers Inc. CFR, -1.08% San Antonio -$1,348 $3,137 -30.1% $52,892
First Financial Bankshares Inc. FFIN, -0.90% Abilene, Texas -$535 $1,266 -29.7% $12,974
Eastern Bankshares Inc. EBC, -3.16% Boston -$923 $2,472 -27.2% $22,686
Heartland Financial USA Inc. HTLF, -1.26% Denver -$620 $1,735 -26.3% $20,244
First Bancorp FBNC, -0.31% Southern Pines, N.C. -$342 $1,032 -24.9% $10,644
Silvergate Capital Corp. Class A SI, -11.27% La Jolla, Calif. -$199 $603 -24.8% $11,356
Bank of Hawaii Corp BOH, -6.15% Honolulu -$435 $1,317 -24.8% $23,607
Synovus Financial Corp. SNV, -2.91% Columbus, Ga. -$1,442 $4,476 -24.4% $59,911
Ally Financial Inc ALLY, -5.70% Detroit -$4,059 $12,859 -24.0% $191,826
WSFS Financial Corp. WSFS, -2.78% Wilmington, Del. -$676 $2,202 -23.5% $19,915
Fifth Third Bancorp FITB, -4.17% Cincinnati -$5,110 $17,327 -22.8% $207,452
First Hawaiian Inc. FHB, -3.48% Honolulu -$639 $2,269 -22.0% $24,666
UMB Financial Corp. UMBF, -3.35% Kansas City, Mo. -$703 $2,667 -20.9% $38,854
Signature Bank SBNY, -22.87% New York -$1,997 $8,013 -20.0% $110,635
Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has hurt SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc. CMA, -5.01%, which tops the list, also improved its interest margin the most over the past four quarters, as shown here.
But it is interesting to note that Silvergate Capital Corp. SI, -11.27%, which focused on serving clients in the virtual currency industry, made the list. It is shuttering its bank subsidiary voluntarily.
Another bank on the list facing concern among depositors is Signature Bank SBNY, -22.87% of New York, which has a diverse business model, but has also faced a backlash related to the services it provides to the virtual currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.
Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”
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UnitedHealth (UNH) - >>> When you’re looking for beginner-friendly stocks, it’s often a smart idea to stick with industry leaders, such as top U.S. health insurer UnitedHealth. The company serves more than 75 million people worldwide and has one of the best net margins in the industry. In addition to its core UnitedHealthcare business, the company also owns Optum, which provides technology, analytics, and more to the healthcare and pharmaceutical industries.
https://www.fool.com/investing/stock-market/market-sectors/financials/insurance-stocks/
UnitedHealth also has a track record of shareholder-friendly management. It’s increased its dividend every year since 2010 and spends billions on share buybacks. Over the 10-year period through mid-2022, UnitedHealth has delivered 900% total returns for investors, more than triple the S&P 500 production during the same period.
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Markel - >>> Markel is a specialty insurer, choosing to insure unusual risks, which is a much-needed business in both strong economies and recessions. Not only does Markel typically run a nice underwriting profit, but the company has an interesting investment strategy.
https://www.fool.com/investing/stock-market/market-sectors/financials/insurance-stocks/
Instead of solely focusing on safe investments, such as high-grade bonds, Markel puts about one-third of invested assets in publicly traded stocks and also buys entire businesses through its Markel Ventures segment. For this reason, Markel is often described as a smaller-scale version of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), which happens to be Markel's largest stock investment.
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American Express - >>> How Warren Buffett's Berkshire Hathaway came to own 20% of American Express
Yahoo Finance
by Tanya Kaushal
January 29, 2023
https://finance.yahoo.com/news/warren-buffett-berkshire-hathaway-own-20-of-american-express-173821038.html
American Express (AXP), one of the world's top credit card companies, has also long been a favorite of Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett.
"You can't create another American Express," Buffett told Bloomberg in December. "I could create another shoe store. I could create another business publication. I could do all kinds of things with hundreds of billions of dollars. But I can't put in the minds of people what is in their minds about American Express."
As of September 29, 2022, Berkshire held 151,610,700 AmEx shares, or 20.29% of the total. At the end of 2021, AmEx was Berkshire's largest securities holding by weight and third-largest holding by market cap, with its stake valued at $24.8 billion — which grew to $26.1 billion by September 29, 2022.
In 2022, Berkshire built a stake of at least 20.2% of Occidental Petrleum (OXY) and obtained regulatory approval to buy up to 50% of the oil giant's common stock. So while AmEx may no longer be Berkshire's largest holding by weight, the company's value to Berkshire is clear.
“It's sort of like a Good Housekeeping seal of approval," American Express CEO Stephen Squeri told Yahoo Finance recently. "Warren and Berkshire are iconic investors, and to have him speak about the brand and speak about the company, and to speak about the direction that we're going so enthusiastically [is important]."
In 2020, when the pandemic hit, AmEx stock declined to as low as $66 as lockdowns and travel bans dragged down profits by 39%. But Buffett retained his stake in the company, even as he sold airline and bank stocks.
AmEx was able to rebound after enduring the COVID-induced economic downturn and reached its highest price in decades at $196 a share in 2022.
That momentum has carried over into 2023: AmEx's latest quarterly results showed a slight miss for its fourth quarter, but the company indicated it remains positive on its outlook for the remainder of the year.
How Buffett acquired his stake in AmEx
Although AmEx's brand emerged from the pandemic in a position of strength, that hasn't always been the case.
Buffett's interest in AmEx began in the 1960s, during the first wave of consumer credit via banks. For American Express, it wasn't without a bit of controversy.
In 1963, Anthony De Angelis, the founder of Allied Crude Vegetable Oil Company, used his company's inventory as collateral for loans from more than 50 companies, including AmEx. De Angelis used these loans to drive up prices in the soybean oil market and increase the value of Allied.
Eventually, a whistleblower came forward claiming that Allied was misleading AmEx to get more loans by filling up oil tanks with water. This was proven to be true and De Angelis filed for bankruptcy and went to prison for seven years. The impropriety became known as the "salad-oil scandal" and mounted concerns on Wall Street as AmEx now had to pay Allied's bill.
"Every trust department in the United States panicked," Buffett said about the scandal. "I remember the Continental Bank held over 5% of the company and all of a sudden not only do they see that the trust accounts were going to have stock worth zero, but it could get assessed. The stock just poured out, of course, and the market got slightly inefficient for a short period of time."
Buffett used the opportunity to acquire 5% of AmEx for roughly $20 million.
The credit card boom of the '70s and '80s made AmEx a top player in the market. By the late '90s, two-thirds of American households had a credit card. Buffett could now go all out and make his first large stake in the company in 1991 with $300 million.
Within seven years, Buffett owned more than 50 million shares of the company. Berkshire Hathaway hasn't purchased any American Express stock since the late 1990s, but its stake in AmEx has continued to increase as a result of stock buybacks.
Between 1998 and 2005, Berkshire's stake climbed from 11.2% to 12%. In 2020, AXP became Berkshire's largest holding by percentage.
And even though AmEx had a rough start to 2016 financially, Buffett stood by his investment.
“Now we own 20% of American Express,” Buffett said at the 2022 Annual Berkshire Hathaway Shareholders Meeting. “That happens to have worked out extremely well. If they overpaid for the stock and all that — it doesn’t solve every problem — but it’s a wonderful thing if you’ve got an asset you like and they take your ownership interest up.”
AmEx's pandemic revamp
One of American Express's greatest assets has been its perception as a status symbol, which has endured after undergoing a series of rebranding efforts.
The company has a simple revenue model: Most of its revenue is generated from interest from balances and fees from cardholders and from merchants. Merchants are charged more than AmEx competitors such as Visa (V) or Mastercard (MA) because AmEx cardholders tend to be wealthier and spend more, which benefits merchants down the line.
AmEx also collects revenue from the data it gathers on cardholder spending, which is used to target marketing and provide offers to customers. That has, in turn, helped AmEx capture the interest of millennial and Gen Z consumers in recent years as the company has evolved from being a traditional luxury credit card provider to a digital payment provider.
AmEx rebranded its Platinum card as a "lifestyle card" by increasing its fees and at-home perks and dove into e-commerce and food delivery services with by increasing rewards. Since the strategic changes went into effect, the company doubled its number of Platinum cardholders, with millennials and Gen Z customers making up roughly 60% of all new consumer cardholder growth.
And as pandemic restrictions were lifted, AmEx grew its global reach with new travel benefits. They offered more rewards, points, and a new Centurion airport luxury lounge. AmEx's payment method is now accepted on most websites in over 178 countries, according to Statista.
“This whole concept of generational relevance is huge for us," Squeri told Yahoo Finance. "We'll continue to modify our products and add value to our products that not only speaks to millennials but speaks to Gen Xers and speaks to Boomers. Millennials and Gen Zers are the fastest-growing segment that we have.”
The AmEx CEO also stressed that Buffett "gets it right" as AmEx's largest shareholder.
"He gets that the AmEx brand is special," he said. "He tells me that all the time. We both agree the customer base is special. Anybody that has Warren as their largest shareholder would be pretty happy."
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>>> Travelers Announces Initial Estimate for Fourth Quarter 2022 Catastrophe Losses, Which Were Driven by the December Winter Storm, as well as Preliminary Fourth Quarter 2022 Results
BusinessWire
January 17, 2023
https://finance.yahoo.com/news/travelers-announces-initial-estimate-fourth-115700078.html
NEW YORK, January 17, 2023--(BUSINESS WIRE)--The Travelers Companies, Inc. (NYSE: TRV) today announced preliminary results for the fourth quarter of 2022.
For the fourth quarter of 2022, the Company expects to report net income of $819 million, or $3.44 per diluted share, and core income of $810 million, or $3.40 per diluted share.
Fourth quarter 2022 results include the Company’s estimate for catastrophe losses of $459 million pre-tax ($362 million after-tax), net of reinsurance. Catastrophe losses primarily resulted from the significant winter storm that impacted much of the U.S and Canada in late December.
"We are pleased with the solid results for the quarter in light of the late December winter storm," said Alan Schnitzer, Chairman and Chief Executive Officer. "While the footprint of the storm was substantial, impacting 37 U.S. states, the District of Columbia and Canada, our loss experience is consistent with our modeled estimates.
"Aside from the catastrophic weather, underlying results in our commercial businesses were exceptional. Underlying results in Personal Insurance remain challenged by elevated industrywide loss costs. We recorded another quarter of progress with strong pricing and other actions to address these challenges. Across all three segments, we are also pleased with continued strong net written premium growth in the quarter, positioning us well as we enter the new year."
The Company also expects results in the fourth quarter of 2022 to include an underlying underwriting gain of $723 million pre-tax ($571 million after-tax), net investment income of $625 million pre-tax ($531 million after-tax), which includes $601 million pre-tax ($510 million after-tax) from the fixed income portfolio, and net favorable prior year reserve development of $185 million pre-tax ($145 million after-tax).
Conference Call
As previously announced, Travelers will review its fourth quarter and full year 2022 results at 9 a.m. ET on Tuesday, January 24, following the release of results earlier that morning. Investors can access the call via webcast at investor.travelers.com and by dialing 888-440-6281 within the United States or 646-960-0218 outside the United States. A slide presentation, statistical supplement and live audio broadcast will be available on the same website. Following the event, replays will be available via webcast for one year at investor.travelers.com and by telephone for 30 days by dialing 800-770-2030 within the United States or 647-362-9199 outside the United States. All callers should use conference ID 5449478.
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>>> Central Bank’s $143 Billion Record Loss Costs Swiss Government Usual Payout
Bloomberg
by Bastian Benrath
January 9, 2023
https://finance.yahoo.com/news/central-bank-132-billion-record-063017399.html
Central Bank’s $143 Billion Record Loss Costs Swiss Government Usual Payout
(Bloomberg) -- Switzerland’s government will not receive a payout from the Swiss National Bank for 2022, as the central bank projects the biggest loss in its 116-year history.
The SNB expects an annual loss of about 132 billion francs ($143 billion), more than five times the previous record, it said Monday in preliminary results. The largest part of this, 131 billion francs, stems from collapsed valuations of its large pile of holdings in foreign currencies, accrued as a result of decade-long purchases to weaken the franc.
The value of the SNB’s foreign-exchange reserves fell some 17% last year. As of December, it held 784 billion francs, down from 945 billion francs a year earlier. Still, the year-end number exceeds the gross domestic product of Saudi Arabia.
Positions in Swiss francs saw a valuation loss of around 1 billion francs, while the SNB earned about 400 million francs on its gold holdings.
It is only the second time since the SNB was established in 1906 that it has to skip its yearly payment to the federal government and Swiss cantons, forcing many of the 26 administrative districts to adjust their spending plans. For 2021, the institution had paid out 6 billion francs.
The conference of cantonal finance chiefs told SDA that while the loss is “regrettable,” interim earnings had suggested such an outcome. “It’s an established fact that SNB profits fluctuate widely and distributions cannot be taken for granted,” the body was cited as saying.
Broader Trend
The 2022 loss in Switzerland is one of the most startling examples of how the global environment of rising interest rates has shifted the financial backdrop for central banks with associated fiscal consequences.
In the neighboring euro zone, national central bank governors face increasing pressure to explain why contributions to domestic public finances from their activities are ceasing. In the UK, the Bank of England is no longer paying into the public purse and instead is receiving transfers from the Treasury to cover projected losses in its bond-buying program.
The SNB’s private shareholders will not receive a dividend for 2022 either. Unlike other central banks, the Swiss institution is a publicly traded joint-stock company, with about half the shares held by the public sector and the rest by companies and private individuals.
Earnings from the SNB’s operations don’t influence monetary policy. Final results are due on March 6.
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>>> Blackstone’s $69 Billion Real Estate Fund Hits Redemption Limit
Investment firm will restrict repurchase requests in December
Real estate fund has breached quarterly repurchase limits
Bloomberg
By Sridhar Natarajan and Dawn Lim
December 1, 2022
https://www.bloomberg.com/news/articles/2022-12-01/blackstone-real-estate-fund-tops-limit-for-redemption-requests
Blackstone Inc.’s $69 billion real estate fund for wealthy individuals said it will limit redemption requests, one of the most dramatic signs of a pullback at a top profit driver for the firm and a chilling indicator for the property industry.
Blackstone's $69 Billion Property Fund Signals Pain Ahead
Blackstone Real Estate Income Trust Inc. has been facing withdrawal requests exceeding its quarterly limit, a major test for the one of the private equity firm’s most ambitious efforts to reach individual investors. The news, in a letter Thursday, sent Blackstone stock falling as much as 10%, the biggest drop since March.
“Our business is built on performance, not fund flows, and performance is rock solid,” a Blackstone spokesperson said, adding that BREIT’s concentration in rental housing and logistics in the Sun Belt leaves it well positioned going forward. This year, the fund has piled into more than $20 billion worth of swaps contracts through November to counteract rising rates.
The fund became a behemoth in the real estate industry since its start in 2017, snapping up apartments, suburban homes and dorms and growing rapidly in an era of ultra-low interest rates as investors chased yield. Now, soaring borrowing costs and a cooling economy are rapidly changing the landscape for the fund, causing BREIT to caution that it could limit or suspend repurchase requests going forward.
Blackstone’s creation of BREIT cast a spotlight on the space for nontraded real estate investment trusts. Unlike many real estate investment trusts, BREIT’s shares don’t trade on exchanges. It has thresholds on how much money investors can take out to avoid forced selling. This means if too many people head for the exits, its fund board can opt to restrict withdrawals or raise its limits. BREIT said requests have exceeded the 2% of the net asset value monthly limit and 5% of the quarterly threshold.
“If BREIT receives elevated repurchase requests in the first quarter of 2023, BREIT intends to fulfill repurchases at the 2% of NAV monthly limit, subject to the 5% of NAV quarterly limit,” BREIT said in a letter Thursday.
Blackstone’s top executives have bet big on the fund. Bloomberg reported last month that President Jon Gray had put $100 million more of his own money in BREIT since July, as had Chief Executive Officer Steve Schwarzman, a person familiar with the matter said at the time.
In the past year, rich individuals, family offices and financial advisers have become more cautious about tying up money in assets that are hard to trade and value. At UBS Group AG, some advisers have been reducing exposure to BREIT. A major chunk of redemptions for the fund has come out of Asia this year, said a person familiar with the matter who asked not to be identified citing private information.
“The BREIT outflow bear case is playing out, impacting shares this morning, and we expect it to remain an overhang on shares in the coming quarters,” Michael Brown, an analyst at Keefe Bruyette & Woods, said in a note Thursday titled “The Gates are Going Up.”
“Growth of the retail channel has been a key driver of BX’s success in recent years and the growth challenges facing the company on the retail side could continue to weigh on BX’s valuation,” Brown said.
Real Estate Chill
The Blackstone move is the latest sign of a slowdown for the real estate industry. Soaring borrowing costs have caused many landlords to struggle with refinancing and even led banks to explore potential sales of US office loans. On the residential side, the housing market has slowed extensively.
Higher costs of debt have forced Blackstone to readjust valuations on some BREIT holdings and are thinning returns for the fund. For this year through October, a major share class of the fund delivered 9.3% net returns. That compares to 13.3% one-year returns.
Still, BREIT’s returns are outperforming those of the S&P 500 Index. The fund is heavily concentrated in urban warehouses and rental housing, areas Blackstone dealmakers believes will provide strong cash flows in a downturn. Separately on Thursday, the firm announced it is offloading its stake in two Las Vegas hotels in a deal that frees up cash for BREIT.
The Las Vegas deal values the properties at $5.5 billion and is expected to generate roughly $730 million in profit to BREIT shareholders, according to a person familiar with the matter who asked not to be identified citing private information.
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>>> Brookfield Asset Management (BAM) is an alternative asset manager and REIT/Real Estate Investment Manager firm focuses on real estate, renewable power, infrastructure and venture capital and private equity assets. It manages a range of public and private investment products and services for institutional and retail clients. It typically makes investments in sizeable, premier assets across geographies and asset classes. It invests both its own capital as well as capital from other investors. Within private equity and venture capital, it focuses on acquisition, early ventures, control buyouts and financially distressed, buyouts and corporate carve-outs, recapitalizations, convertible, senior and mezzanine financings, operational and capital structure restructuring, strategic re-direction, turnaround, and under-performing midmarket companies. It invests in both public debt and equity markets. It invests in private equity sectors with focus on Business Services include infrastructure, healthcare, road fuel distribution and marketing, construction and real estate; Industrials include manufacturers of automotive batteries, graphite electrodes, returnable plastic packaging, and sanitation management and development; and Residential/ infrastructure services. It targets companies which likely possess underlying real assets, primarily in sectors such as industrial products, building materials, metals, mining, homebuilding, oil and gas, paper and packaging, manufacturing and forest product sectors. It invests globally with focus on North America including Brazil, the United States, Canada; Europe; and Australia; and Asia-Pacific. The firm considers equity investments in the range of $2 million to $500 million. It has a four-year investment period and a 10-year term with two one-year extensions. The firm prefers to take minority stake and majority stake. Brookfield Asset Management Inc. was founded in 1997 and based in Toronto, Canada with additional offices across Northern America; South America; Europe; Middle East and Asia.
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Blackstone - >>> The private equity club: how corporate raiders became teams of rivals
Financial Times
by Antoine Gara
August 9, 2022
https://www.ft.com/content/aec70aab-7215-4fa7-9ee3-1224d967dc28?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev
The industry was founded by mercenary dealmakers who bludgeoned opponents. But firms now nurture complex relationships with their competitors
When buyout groups Hellman & Friedman and Permira began stalking a takeover of business software giant Zendesk in February, they tried to bring in a third partner for what would be a large deal. They called Blackstone, a firm that manages more than $125bn in private equity assets and that they each knew well from previous transactions.
Blackstone was initially interested in Zendesk but in the end it passed on the investment. However, the firm’s involvement did not end there. When H&F and Permira eventually announced their $10.2bn acquisition of the software company in June, the press release did not name any of the Wall Street banks that would usually provide the bridge loans to complete such a deal.
Instead, H&F and Permira said that amid choppy capital markets they had secured more than $4bn of debt financing. The debt came from a group of would-be competitors led by Blackstone.
Firms like Blackstone and Apollo, another lender in the deal, made their names as swashbuckling takeover artists. The industry was founded from the 1970s to the early 90s by small teams of mercenary dealmakers, who then duelled with each other to win control of large corporations such as RJR Nabisco, Alliance Boots, and Philips Semiconductors.
The Zendesk takeover shows how deep the ties can run between leading private equity firms
Private equity firms have since grown to manage almost $10tn in assets and have become the dominant force in global financial markets.
But as the industry has expanded, its character has been transformed. Firms that once bludgeoned opponents now nurture complex business relationships with their competitors. Private equity has become just a fraction of their overall assets under management, with credit investing businesses now managing hundreds of billions of dollars, including providing loans for leveraged buyouts.
The result of these sprawling empires is that once heated rivals increasingly see the benefits of a level of co-operation between different business units that once seemed inconceivable.
“Private equity started 35 years ago as a dark art. Now it is an asset class,” Marc Rowan, chief executive of Apollo Global, told an audience earlier this year. “There are no permanent friends or permanent enemies anymore.”
With private equity deals now accounting for over 25 per cent of global M&A activity — a record market share — the collective power of the leading groups is starting to attract the attention of regulators.
Private equity takeovers, once rubber stamped by antitrust authorities, are now being treated with the scrutiny reserved for large corporations, competition watchdogs have told the Financial Times.
It is a striking reversal for a sector that has more often in the past been criticised by politicians for its ruthlessness rather than its clubbiness.
“When you have repeated relationships, you are just not going to go to war with the same ferocity,” says Josh Lerner, a professor at Harvard Business School, who has studied private equity for decades.
Relationships that run deep
The Zendesk takeover is illustrative of how deep the ties can run between leading private equity firms.
The origins of the takeover go back to 2016 when Permira invited H&F to make a minority investment in a call centre technology company called Genesys, which it had bought from Alcatel-Lucent four years earlier. H&F invested $900mn in Genesys at a $3.8bn valuation, more than double Permira’s initial investment.
H&F and Permira initially studied merging Genesys with Zendesk, according to sources directly involved in the deal. When the idea did not advance, they turned to Blackstone, which helped arrange more than $4bn in debt financing that is now the largest private financing on record.
For Blackstone, it meant supporting a deal led by two of its most important customers. Blackstone Credit, the buyout firm’s $230bn in assets lending arm, is a reliable lender to both firms. It provided the majority of $1.2bn in financing for H&F’s takeover of NPD Group in October 2021 and $2.2bn in debt for Permira’s take-private of cyber security group Mimecast two months later.
H&F co-led the largest leveraged buyout of 2021 alongside Blackstone, taking control of medical supplier Medline Industries for $34bn. A year earlier, the two firms struck an equally ambitious deal to merge their combined investments in human resources IT company Ultimate Software and cloud software specialist Kronos, in a $22bn deal.
To buy Zendesk, H&F and Permira raised billions in debt against a business that generated just $80mn in profits last year, far more than what regulated banks could offer, according to three people involved in the deal.
Blackstone, which considers H&F a skilled partner for takeovers, took part in the financing, as did Apollo, which financed more than $750mn of the takeover, and counts both firms among the 25 private equity firms to which it has lent over $40bn. Famed for its ruthless tactics with debtholders, Apollo now aspires to become a go-to financier for the deals organised by competitors.
“The zero-sum game mentality of old school dealmakers that always assumed that for them to win someone had to lose is really an outdated point of view,” says an executive at one of the industry’s largest global firms. “There are so many opportunities. Today you are competing and tomorrow you will bring them in as a partner on a deal. It is the new reality.”
By the 2008 crisis, buyout firms could not always afford to purchase on their own some of the companies they considered attractive targets, such as Toys ‘R’ Us
Aggressive outsiders
The modern day private equity buyout traces to Michael Milken’s Drexel Burnham Lambert, the investment bank that popularised the “junk bond”. Drexel financed small teams of dealmakers targeting corporate giants such as Disney, Texaco and then RJR Nabisco, the signature LBO of the go-go 1980s.
Milken, and many of Drexel’s clients, were considered aggressive outsiders, unafraid to gatecrash Wall Street.
“The Drexel guys that Milken was backing were pretty non-genteel types,” says a buyout executive who worked in that era. “It was like the Gold Rush. The guys who couldn’t make it in the city went off to look for gold.”
By the 2008 crisis, private equity had become part of the financial mainstream as it pulled off a string of ever-larger takeovers. These so-called “club deals” hinted at the willingness of some firms to co-operate out of self-interest.
Buyout firms, then privately owned partnerships almost exclusively focused on corporate takeovers, could not always afford to purchase on their own some of the companies they considered attractive targets — such as hotelier Hilton, utility TXU, retailer Toys “R” Us, and hospital chain HCA. However, by assembling consortiums of competitors that each contributed a slice of the equity, almost any deal became possible.
These club deals led to some legal battles. A 2007 civil lawsuit in Massachusetts led by a pension fund in Detroit accused 16 private equity firms of forming consortiums that rigged bids in sale processes.
The case centred on the $33bn LBO of HCA, which was won by Bain Capital, KKR and Merrill Lynch, after there were no other competing bids. Emails unearthed by lawyers showed competitors refraining from outbidding each other.
“I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals,” said David Rubenstein, one of Carlyle’s founders, in an email unearthed during the litigation.
These deals were not all successes. Toys “R” Us, for instance, fell into restructuring. Moreover, to settle the Massachusetts litigation, Goldman Sachs and Bain Capital paid $121mn, while KKR, Blackstone and TPG agreed to pay $325mn, all without admitting or denying guilt.
By the time of the financial crisis, club deals had mostly vanished as investors found themselves exposed to the same failing investments in multiple funds and called for an end to the practice.
But the crisis also opened a window for buyout firms to transform themselves into much broader operations that are shifting the balance of power in finance towards private markets.
Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void.
They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance.
It set off private equity’s march into new businesses such as lending, insurance-related investments, real estate and infrastructure, which were far from their original speciality in buyouts.
Blackstone acquired debt manager GSO in 2008, seeding its expansion into credit and insurance-based investments, which now comprise 28 per cent of the group’s $940bn in assets.
Apollo, under current chief executive Rowan, built an insurer called Athene that was designed to invest fixed-rate annuity premiums into complex debts, like senior loans. These credit investments are now Apollo’s biggest and fastest growing business.
In private lending markets, the fastest growth has come from financing software takeovers, like Zendesk, which banks cannot handle due to the level of leverage involved. Several other large software deals this year, like Thoma Bravo’s $10.4bn takeover of Anaplan, were financed by private lenders because the leverage ratios on the debt are beyond what banks are comfortable handling.
In these deals, lenders will “club up” by assembling a consortium of competitors, resembling the consortiums of the pre-crisis era.
These private financings have continued as interest rates rise — just as many investment banks have been refusing to make new lending commitments until loans from deals struck earlier in the year have been sold on. The result has been a halt in the market for bank-financed takeovers and the private lenders winning market share.
“The idea that we would work with KKR and Blackstone to provide debt for us once seemed like a crazy idea. Today, people don’t even think about it,” says the head of one private equity firm. “There are no clean lines. Everyone is a competitor, a collaborator and a partner.”
This web of relationships has changed the character of the industry. “It is costlier than ever to be a jerk,” says Steven Kaplan, an expert on private equity who teaches at the University of Chicago. “If they behave badly in one deal, they will be treated differently in the next deal.”
The ties stretch far beyond lending. The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv.
These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive.
“A lot of times you have good companies that a sponsor owns, but they need to sell to show dollars realised for their fundraising,” says the executive.
There has also been a surge in so-called “secondary buyout transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation.
One of the industry’s earliest major deals was H&F’s 2014 sale of a $750mn minority interest in Kronos, a seller of cloud-based time sheet services, to a group of buyers led by Blackstone, that were willing to take lower governance rights and leave H&F in control of the deal.
Five years later, H&F led a deal to acquire Ultimate Software for $11bn, bringing in Blackstone and GIC, its same partners on the Kronos stake sale. Blackstone’s debt arm co-led $900mn in financing for the riskiest piece of the deal’s $3.4bn total debt package, helping to get it over the line.
The two private equity firms then merged Ultimate Software with Kronos a year later, generating billions of dollars in gains, underscoring how close relationships can get deals done.
Can it last?
The first test of the private equity industry’s new co-operative structure was the coronavirus pandemic. Broad swaths of the global economy closed, threatening to create a wave of defaults for private lenders that had financed a flurry of takeovers.
What occurred instead was a mass forbearance as private equity borrowers and their lenders amended loans to give companies breathing room. To smooth the new and more lenient liquidity measures and show good faith, some borrowers added additional equity to the deals.
“The whole concept was we’re not going to foreclose,” says one borrower involved in numerous negotiations. “They’re in the business of ideally doing multiple deals with your portfolio companies. They know that if they act poorly, my job is to not show them future business.”
One such example was a company called European Wax Centre, an operator of hair removal salons that was acquired in 2018 by private equity firm General Atlantic with a $180mn loan from private lender Blue Owl. When the pandemic shuttered the company’s salons, Blue Owl voluntarily amended the loan to forestall a cash crunch and General Atlantic made an over $10mn cash infusion as a concession.
After the economy reopened, European Wax recovered and its debts were refinanced at par. Last year, the company went public, valuing General Atlantic’s stake at $639mn, several multiples of its original investment.
Young Soo Jang, a PhD student at the University of Chicago, has studied private lenders’ behaviour by examining over 200 deals that fell into distress during Covid.
He found private lenders were twice as likely as the broadly syndicated loan market to ask for borrowers to agree to inject new capital into deals, forestalling restructuring. Five per cent of distressed private deals led to bankruptcies, according to the research, half the rates of bank financed deals.
“A lot of the direct lenders put out a lot of capital?.?.?.?They were extremely nervous,” adds one executive involved in these deals. “Everyone benefited from the fact that there was such a sharp snap back in the economy.”
The global economy sidestepped a brewing financial crisis during the pandemic thanks to an unprecedented policy response.
But as financial markets enter another troubled moment amid the war in Ukraine and central bank tightening, the ties between firms will be tested again.
“This increased co-operation and cosiness is really a bull market phenomenon,” says Lerner, the Harvard professor, who expects falling markets will unearth new conflict as deals sour, pitting parties against each other.
However, the firms involved in the Zendesk financing insist these new relationships will not break.
“It is very hard to be a credible direct lender and a hostile investor,” says the head of one firm involved in the deal. Another adds: “We’re just trying to get our money back and get a return.”
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Citigroup - >>> Warren Buffett broke up with most of his beloved banks — why is he still swooning over this one?
MoneyWise
by Vishesh Raisinghani
June 18, 2022
https://finance.yahoo.com/news/warren-buffett-broke-most-beloved-130000046.html
The Oracle of Omaha has had a busy quarter.
According to his latest 13F filing, Warren Buffett has deployed roughly one-third of his cash into new investments during the first three months of the year.
As always, Buffett’s biggest swings are noteworthy. However, his decision to sell most bank stocks while adding Citigroup (C) to Berkshire Hathaway’s (BRK) portfolio is puzzling Wall Street.
Here’s why this contradiction has caught so much attention.
Buffett loves banks
Buffett is deeply familiar with banking and financial services. He believes the business is relatively straightforward and can be extremely lucrative if managed well.
“If you can just stay away from following the fads, and really making a lot of bad loans, banking has been a remarkably good business in this country,” he told Berkshire Hathaway investors in 2003.
What about the 2008 Global Financial Crisis? Buffett went on a shopping spree during that time, picking up stakes in JP Morgan (JPM) and Goldman Sachs (GS).
For several years, major banks have been the biggest holdings in the Berkshire portfolio. In 2009, he even said Wells Fargo (WFC) was his highest-conviction investment.
“If I had to put all my net worth in one stock, that would’ve been the stock,” he told Berkshire shareholders.
This year, Buffett has completely exited all these investments. Only a few banks remain in the portfolio.
That doesn’t mean the love affair with financial services is over.
In fact, Buffett added a new bank to his collection this year: Citigroup. During the first quarter of 2022, he added 55 million shares of Citigroup to the Berkshire portfolio.
The stake is now worth $2.5 billion, making it the 16th largest holding in the basket.
The bet seems to be predicated on a turnaround story.
Citigroup’s transformation
Citigroup has lagged behind its peers. Over the past five years, the stock is down over 28%.
Compare that to Bank of America’s 37% return over the same period. Even the SPDR S&P Bank ETF (KBE) is up 1.9%.
The company is now attempting a turnaround to catch up. Last year, Citigroup’s board appointed Jane Fraser as the new CEO — making her the first female leader of a major U.S. bank.
Fraser's strategy involves focusing on the more profitable segments of the business. Citigroup is selling or shutting down operations in Mexico, Australia, Philippines, South Korea and elsewhere.
Citi stock hasn’t fully reflected this new strategy.
An undervalued opportunity?
Citigroup stock currently trades at a price-to-earnings ratio of 5.6. Its price-to-book ratio is 0.52. That’s significantly lower than the industry average of 9.45 and 1.12 respectively.
Put simply, the stock is cheap.
If the new management team can streamline operations and boost profitability, the bank’s valuation could catch up with peers.
Meanwhile, a rising interest rate environment should provide another tailwind.
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>>> U.S. banking stress indicator could worsen after Fed hike
Reuters
June 16, 2022
By Mehnaz Yasmin
https://finance.yahoo.com/news/u-banking-stress-indicator-could-222209460.html
(Reuters) -An indicator of credit risk in the U.S. banking system may be showing signs of stress, as the Federal Reserve's aggressive rate hike path ratchets up expectations of economic pain.
The so-called FRA-OIS spread, which measures the gap between the U.S. three-month forward rate agreement and the overnight index swap rate, increased to 29.55 basis points on Thursday, its widest since May 23, according to data from Refinitiv. The measure was at -11.66 bps earlier in the week.
Widely viewed as a proxy for banking sector risk, a higher spread reflects rising interbank lending risk.
"The recent spike in the spread between forward rate agreement and overnight index swap rate is concerning," said Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. "As the Fed turns more hawkish, there is a rise in recession concerns and that is increasing the underlying credit risk."
The central bank this month also began allowing bonds to mature off its more than $8 trillion balance sheet without replacing them, a process called quantitative tightening that can potentially sap liquidity in the financial system.
"Now that quantitative tightening has officially started, we have seen reserve drainage pretty persistent over the last several months," Jackson said, adding that he expects the FRA-OIS spread to widen even further.
The Fed raised rates by 75 basis points on Wednesday, its biggest increase since 1994, and expectations of more drastic tightening ahead have shaken markets and increased worries over a potential recession.
That echoes concerns of some other investors, who have worried that market conditions could worsen as the world’s largest holder of U.S. government debt reduces its presence in the market.
Wall Street is also pricing in a greater risk of default by major U.S. banks.
Spreads on five-year credit default swaps (CDS) of JP Morgan, Goldman Sachs, Morgan Stanley, Citigroup, Wells Fargo and Bank of America peaked to fresh two-year highs on Thursday.
Some strategists are concerned that these might point to "stress under the surface".
"The overall underpinnings of the economy are quite shaky," said Ryan Detrick, senior strategist at LPL Financial. "The next six months could be quite perilous."
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CME Group - >>> CME explores nickel contract after LME trade chaos
Reuters
Pratima Desai
May 9, 2022
https://finance.yahoo.com/news/rpt-cme-explores-nickel-contract-070000197.html
* CME hoping to offer nickel sulphate contract by end-2022
* Auto industry needs to be able to hedge battery materials
By Pratima Desai
LONDON, May 6 (Reuters) - CME Group is talking to market participants about the idea of a cash-settled nickel contract for companies to hedge costs of the electric vehicle battery raw material, two sources with knowledge of the matter said.
Market participants say a viable alternative trading venue would give disgruntled users the opportunity to move away from the London Metal Exchange (LME) where nickel trading was thrown into chaos early in March.
Nickel prices on the LME doubled to a record above $100,000 a tonne within hours in March - as war in major producer Russia lit a fire under an already rallying market.
The spike was driven by expectations that Chinese stainless steel producer Tsingshan Holding Group and others would buy metal to cover substantial short positions.
The LME suspended nickel trade and cancelled deals worth billions of dollars, raising questions about its ability to run an orderly market.
The Shanghai Futures Exchange (ShFE) has a nickel contract, but using it is difficult for non-Chinese firms as they need to be affiliated with a local entity and because it is priced in yuan.
For now, there are no feasible alternatives for hedging or trading nickel, mostly used to make stainless steel. The CME is considering launching a nickel sulphate contract, possibly by the end of this year, the sources said.
Nickel trading volumes on the LME have dropped since the market's suspension in March. In April the number was 819,108 lots or 4.91 million tonnes compared with more than 1.7 million lots or 10 million tonnes in February.
Both sources with knowledge of the matter said it was not possible to quantify how much volume a CME nickel contract could take from the LME's contract.
Nickel sulphate is a chemical used to make the cathode component of the rechargeable lithium-ion batteries used to power electric vehicles.
"CME have been talking to market participants, looking at the opportunity and appetite for a nickel sulphate contract," one source said.
"A financially settled nickel sulphate contract may work, electric vehicles are the future and the auto industry needs to be able to hedge the materials used to make them."
CME declined to comment.
Benchmark Mineral Intelligence estimates nickel demand for electric vehicle batteries will rise to nearly 1.7 million tonnes in 2030, or 33% of the total, from around 350,000 tonnes or 12% of the total last year.
Industry sources say a cash-settled nickel sulphate future has a better chance of success than a physically deliverable nickel metal contract, which would require producers to deliver metal to CME warehouses.
The CME's aluminium, zinc and lead contracts are physically deliverable and hampered by a lack of stock in its approved warehouses, industry sources say. The contracts are competing directly with already established LME products.
Volume for CME aluminium at nearly 460,000 tonnes in April is a fraction of the 95 million tonnes traded on the LME.
"The CME can't offer what the physical market needs, being able to hedge days, weeks, months and years ahead," a second source with knowledge of the matter said. "Copper is the only CME base metal contract that works and that's because it's popular with speculators."
Some speculators prefer the CME's copper contract as trades are settled as soon as they are closed, while those on the LME are settled on the third Wednesday of each month.
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>>> Wall Street sees greater risk of default by major banks
Reuters
by Mehnaz Yasmin
May 3, 2022
https://finance.yahoo.com/news/wall-street-sees-greater-risk-181252560.html
(Reuters) - The cost to insure bonds of Goldman Sachs, Morgan Stanley and Citigroup against default hit two-year highs on Monday on growing fears the U.S. Federal Reserve's aggressive moves to tame inflation might tip the economy into recession.
Credit risks have worsened since the Ukraine crisis as some big U.S. banks took a hit to their mainstay businesses, with capital market activity coming to a standstill and lending expected to remain lackluster.
That has prompted bondholders to consider hedging strategies to protect against potential defaults.
The war in Ukraine and Western sanctions could knock more than 1% off global growth this year and add two and a half percentage points to inflation, the OECD has said.
JP Morgan Chase & Co, Goldman Sachs and Citigroup combined put aside a $3.36 billion in credit loss reserves in the first quarter. That is a reversal from the past 12 months when lenders released billions in reserves after losses related to COVID-19 failed to materialize.
Spreads on five-year credit default swaps (CDS) on Goldman Sachs closed at $108.92 on Monday, Morgan Stanley at $104.96 and Citigroup at $107.94, their highest in at least two years.
CDS is a contractual agreement that lets buyers swap credit risk with sellers and thus insures bondholders against default.
Spreads on five-year CDS on JP Morgan, Wells Fargo and Bank of America Corp also look set to exceed near two-year highs set in March.
"Any short-term spike in CDS on U.S. banks is likely related to fears over a Russian default," said Thomas J. Hayes, chairman at Great Hill Capital in New York.
The correlation co-efficient between Russia's five-year CDS on sovereign debt and the banks' CDS is between 0.5 and 0.6 in the five months ended May this year, suggesting a strong positive correlation.
A derivatives panel has ruled on Wednesday that Russia could be in default after it failed to make a payment due on April 4 in U.S. dollars on two sovereign bonds, bringing a payout on billions of dollars in default insurance a step closer.
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CME Group - >>> Nickel Drama Spurs Chicago Bourse Bid to Grab Trade From LME
Bloomberg
by Joe Deaux, Jack Farchy and Archie Hunter
April 11, 2022
https://finance.yahoo.com/news/nickel-drama-spurs-chicago-exchange-170243261.html
(Bloomberg) -- The Chicago Mercantile Exchange, trying to capitalize on the London Metal Exchange’s nickel-trading crisis, is offering incentives to traders to boost its less-popular aluminum futures contract, according to people familiar with the matter.
Representatives of the Chicago exchange have approached major physical and financial players in the aluminum market in recent weeks, offering them credits, said the people, who weren’t authorized to speak publicly. The CME is expanding the reach of an existing program, which is mostly limited to brokers, to other market participants like traders and banks, according to one of the people.
The Chicago exchange’s push comes about a month after an unprecedented squeeze in the nickel market sent the metal soaring by 250% in just two days, prompting the LME to halt trading and ultimately cancel trades. While the chaos was limited to the nickel market, it prompted base metals traders to question the LME’s ability to handle potential crisis situations in the higher volume markets of aluminum and copper.
“The crisis that surrounds the LME right now represents a golden opportunity for the CME,” said Jorge Vazquez, managing director at Harbor Intelligence, in a phone interview.
“The events leading up to the suspension and resumption of Nickel trading were unprecedented,” a spokeswoman for the LME said in an email. “The LME is committed to ensuring that the actions of all participants (including the LME itself) are fully reviewed, and appropriate actions taken to both restore confidence and support the long-term health and efficiency of the market.”
The CME’s existing incentive program began Feb. 1 and is scheduled to expire July 31.
Under that program, the CME offers a $125 credit per side to members and nonmembers on each side of an aluminum trade cleared through its Clearport system, according to a document seen by Bloomberg. It offers a $125 credit to members and a $75 credit to nonmembers via its Globex system. Credits are capped at $30,000 per month per participant.
Still Small
It’s not the first time CME has tried to gain a foothold in the LME’s territory.
In 2014, buyers had to pay a significant premium to ship aluminum to the U.S. Midwest when banks and trading houses joined in so-called “merry-go-round deals” at LME warehouses to collect higher rents. Burned by bottlenecks, traders in 2016 turned to aluminum premium hedging contracts that the CME launched to help purchasers of the physical metal hedge against fluctuations in the cost to deliver it.
But even if the CME is able to make inroads after the nickel crisis, its much smaller aluminum contract is still unlikely to challenge the LME as the global exchange of choice for the metal any time soon. The CME’s intention is to build open interest in the May and June futures above 1,000 contracts to entice other players like funds that need a certain minimum liquidity to participate, according to one of the people.
The CME’s aluminum futures contract has been around for years and seen little pickup by physical players like trading houses, producers and end-users like beverage and packaging companies.
Aggregate open interest for London was at nearly 600,000 contracts, or 15 million tons, as of last week’s close. That compares with about 300 contracts, or 7,500 tons, of open interest on the CME. However, the market traded more than 9,000 contracts on the CME during the week that ended April 8, the most since August.
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>>> Brookfield Asset Management (BAM) is an alternative asset manager and REIT/Real Estate Investment Manager firm focuses on real estate, renewable power, infrastructure and venture capital and private equity assets. It manages a range of public and private investment products and services for institutional and retail clients. It typically makes investments in sizeable, premier assets across geographies and asset classes. It invests both its own capital as well as capital from other investors. Within private equity and venture capital, it focuses on acquisition, early ventures, control buyouts and financially distressed, buyouts and corporate carve-outs, recapitalizations, convertible, senior and mezzanine financings, operational and capital structure restructuring, strategic re-direction, turnaround, and under-performing midmarket companies. It invests in both public debt and equity markets. It invests in private equity sectors with focus on Business Services include infrastructure, healthcare, road fuel distribution and marketing, construction and real estate; Industrials include manufacturers of automotive batteries, graphite electrodes, returnable plastic packaging, and sanitation management and development; and Residential/ infrastructure services. It targets companies which likely possess underlying real assets, primarily in sectors such as industrial products, building materials, metals, mining, homebuilding, oil and gas, paper and packaging, manufacturing and forest product sectors. It invests globally with focus on North America including Brazil, the United States, Canada; Europe; and Australia; and Asia-Pacific. The firm considers equity investments in the range of $2 million to $500 million. It has a four-year investment period and a 10-year term with two one-year extensions. The firm prefers to take minority stake and majority stake. Brookfield Asset Management Inc. was founded in 1997 and based in Toronto, Canada with additional offices across Northern America; South America; Europe; Middle East and Asia.
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CME Group - >>> 7 Wheat Stocks to Buy as the World Faces a Shortage of the Amber-Colored Grain
Investor Place
by Alex Sirois
March 17, 2022
https://finance.yahoo.com/news/7-wheat-stocks-buy-world-113020763.html
CME Group (CME)
CME Group is a leading derivatives marketplace. The exchanges it operates exist to help manage risk. That’s certainly true of commodities markets including wheat.
So technically CME Group isn’t a ‘wheat stock’ per se. But given its role in the wheat market, it makes sense to at least consider it.
Moreover, in a world where inflation rates have reached 7.9%, CME becomes doubly attractive. Its stock will rise if the company can effectively navigate these tumultuous times.
Black Sea Wheat and Australian Wheat are becoming much more influential market movers than in the past. CME stock could move as those particular markets swing into prominence.
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S+P Global - >>> S&P Dow Jones Indices Launches Index Tracking Commodities Used In Electric Vehicle Production
Yahoo Finance
March 30, 2022
https://finance.yahoo.com/news/p-dow-jones-indices-launches-140000666.html
LONDON, March 30, 2022 /PRNewswire/ -- S&P Dow Jones Indices ("S&P DJI"), the world's leading index provider, today announced the launch of the S&P GSCI Electric Vehicle Metals. This new futures-based index measures the performance of tradeable metals used in the production of electric vehicles and weights them according to their relative usage in a representative electric vehicle. S&P DJI has collaborated with S&P Global Commodity Insights to leverage and incorporate a representative set of metal usage data in the electric vehicles sector.
"We are excited to bring together the data and insights of two S&P Global divisions to launch an innovative index that tracks the performance trends of key metals such as cobalt, copper, aluminum, nickel and iron ore that are essential in the production of electric vehicles," said Fiona Boal, Global Head of Commodities at S&P Dow Jones Indices. "As global financial markets, investors and consumers alike increasingly embrace the use of greener technologies, there is high demand for certain types of commodities, particularly in the metals sector, that support the market's path towards energy transition. Through our indices, S&P DJI can offer valuable insights to clients and investors as they develop thematic and targeted investment strategies to reflect this transition."
Indeed, the S&P GSCI Electric Vehicle Metals leverages S&P Global Commodity Insights' data to help determine its constituents and production weights and ensure that the index broadly reflects the relative metal usage in a representative electric vehicle. An important and unique index feature is its flexibility in reweighting, adding or removing constituents at regular intervals to ensure that it can adapt to rapid changes in electric vehicles technology, as well as the launch and adoption of new metals futures contracts.
The S&P GSCI Electric Vehicle Metals is part of the S&P GSCI family of indices. The S&P GSCI is the first major investable commodity index and measures the most liquid commodity futures, which provides diversification with low correlations to other asset classes.
To learn more about the S&P GSCI Electric Vehicle Metals, please visit
https://www.indexologyblog.com/2022/03/29/going-electric-introducing-the-sp-gsci-electric-vehicle-metals/ and for more information about the S&P GSCI index series and their methodologies, please visit
https://www.spglobal.com/spdji/en/
ABOUT S&P DOW JONES INDICES
S&P Dow Jones Indices is the largest global resource for essential index-based concepts, data and research, and home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based on our indices than products based on indices from any other provider in the world. Since Charles Dow invented the first index in 1884, S&P DJI has been innovating and developing indices across the spectrum of asset classes helping to define the way investors measure and trade the markets.
S&P Dow Jones Indices is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies, and governments to make decisions with confidence. For more information, visit https://www.spglobal.com/spdji/en/.
ABOUT S&P GLOBAL COMMODITY INSIGHTS
At S&P Global Commodity Insights, our complete view of global energy and commodities markets enables our customers to make decisions with conviction and create long-term, sustainable value.
We're a trusted connector that brings together thought leaders, market participants, governments, and regulators to co-create solutions that lead to progress. Vital to navigating Energy Transition, S&P Global Commodity Insights' coverage includes oil and gas, power, chemicals, metals, agriculture and shipping.
S&P Global Commodity Insights is a division of S&P Global (NYSE: SPGI). S&P Global is the world's foremost provider of credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help many of the world's leading organizations navigate the economic landscape so they can plan for tomorrow, today.
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>>> Equifax Inc. (EFX) provides information solutions and human resources business process automation outsourcing services for businesses, governments, and consumers. The company operates through three segments: Workforce Solutions, U.S. Information Solutions (USIS), and International. The Workforce Solutions segment offers employment, income, criminal history, and social security number verification services, as well as payroll-based transaction, employment tax management, and identity theft protection products. The USIS segment provides consumer and commercial information services, such as credit information and credit scoring, credit modeling and portfolio analytics, locate, fraud detection and prevention, identity verification, and other consulting; mortgage services; financial marketing services; identity management services; credit monitoring products; and online information, decisioning technology solutions, as well as portfolio management, mortgage reporting, and consumer credit information services. The International segment offers information service products, which include consumer and commercial services, such as credit and financial information, and credit scoring and modeling; and credit and other marketing products and services, as well as offers information, technology, and other services to support debt collections and recovery management. The company serves customers in financial services, mortgage, employers, consumer, commercial, telecommunication, retail, automotive, utility, brokerage, healthcare, and insurance industries, as well as state, federal, and local governments. It operates in the United States, Canada, Australia, New Zealand, India, the United Kingdom, Spain, Portugal, Argentina, Chile, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Paraguay, Peru, Uruguay, Brazil, the Republic of Ireland, Russia, Cambodia, Malaysia, Singapore, and the United Arab Emirates. The company was founded in 1899 and is headquartered in Atlanta, Georgia. <<<
S&P Global - >>> Is This the Best Dividend Aristocrat for the Next Decade?
Motley Fool
By Dave Kovaleski
Mar 17, 2022
https://www.fool.com/investing/2022/03/17/is-this-the-best-dividend-aristocrat-for-the-next/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
KEY POINTS
S&P Global has increased its dividend for 48 straight years and counting.
It has three unique advantages that should allow it to continue doing so through the decade.
It just boosted its quarterly dividend for the second quarter.
This company has increased its dividend for 48 straight years. Here's why that will continue.
In a couple of years, Standard & Poor?s Global ( SPGI 1.42% ) will enter a very exclusive club -- it will become a Dividend King.
Dividend Kings are stocks that have increased their annual dividends for at least 50 straight years. Currently there are only 33 of them -- but Standard & Poor?s is knocking on the door of the king?s castle with 48 straight years of dividend increases. Not only should it become dividend royalty, but it should extend its streak of annual increases throughout the decade. Here?s why Standard & Poor?s Global will continue to deliver on its dividend.
Why S&P Global Stands Out
There are three reasons Standard & Poor's is a great dividend stock. The big one is the market-leading positions of its businesses, two of which have significant moats. Its largest business is its credit rating business. It is one of just three major credit raters, and it is the largest, tied with Moody's, with a 40% market share. While revenue here will fluctuate based on credit issuance, S&P should always dominate in this market because there's really no room for more than a few credit raters and the regulatory barrier to entry is high.
The other market-leading position is that of its indexing business. S&P is best known for its benchmarks, most notably the S&P 500. It is one of a handful of major indexers along with FTSE/Russell, MSCI, and Nasdaq. S&P, as one of the largest, should see continued growth with the explosion of exchange-traded funds, because ETFs pay fees to index owners like S&P to use their indexes.
The third major business, and the fastest growing, is market intelligence, which provides data and research for investment professionals. S&P just completed its acquisition of IHS Markit, an information and data provider for complementary markets, creating a market intelligence powerhouse -- one of the largest in its field.
So not only are each of these dominant businesses in their respective fields, but they also provide the company with a diversified revenue stream. Each of these businesses performs differently in various market cycles, so if credit issuance is down, market intelligence or indexing might be up.
This is the second key reason that S&P is a great dividend stock, because this diversity of revenue has allowed the company to consistently generate earnings over the years. Over the last 10 years through March 14, earnings have gone up about 22% on an annual basis, and the stock price has climbed 23% per year.
Lots of cash and recurring flows
These two advantages set S&P up for continued market dominance and earnings growth. But the third advantage it has is its business model. It's asset-light as it's all data-based, so it is able to keep operational expenses relatively low and its margins extremely high.
It has an operating margin -- which is the amount of profit a company makes on every dollar of sales after all expenses are subtracted -- of 50%. And, because all of its businesses generate fee- or subscription-based revenue, the income is steady and stable. That gives the company tons of cash, currently about $6.5 billion even after the acquisition of IHS Markit, which is the key to sustaining a dividend.
S&P just raised its dividend for the next quarter, bumping it up to $0.85 per share from $0.77, a 10% boost. It pays out a yield of 0.90%, which is lower than the average yield on the S&P 500, but very sustainable with a payout ratio of 22%.
When you consider the unique advantages that S&P Global enjoys, it is clear that the company should be able to deliver a rising dividend throughout the decade.
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>>> Kinsale Capital Group, Inc. (KNSL), a specialty insurance company, provides property and casualty insurance products in the United States. The company's commercial lines offerings include construction, small business, excess and general casualty, commercial property, allied health, life sciences, energy, environmental, health care, inland marine, public entity, and commercial insurance, as well as product, professional, and management liability insurance. It markets and sells its insurance products in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands primarily through a network of independent insurance brokers. The company was founded in 2009 and is headquartered in Richmond, Virginia.
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>>> 5 Property & Casualty Insurers to Gain From Better Pricing
Zacks
by Tanuka De
March 14, 2022
https://finance.yahoo.com/news/5-property-casualty-insurers-gain-154303191.html
The Zacks Property and Casualty Insurance (P&C) industry is likely to benefit from better pricing, prudent underwriting and exposure growth. Industry players like Chubb Limited CB, Cincinnati Financial Corporation CINF, W.R. Berkley Corporation WRB, Everest Re Group Limited RE and Kinsale Capital Group KNSL are poised to grow despite a rise in catastrophic activities. Given an active catastrophe environment, the policy renewal rate should accelerate, apart from the rate firming up. This apart, increasing adoption of technology and emergence of insurtech will help in the smooth functioning of the industry players.
Though pandemic-related uncertainties weigh on merger and acquisition (M&A) activities, a low rate environment, improvement in surplus, and reopening of economic activities set the stage for a better M&A environment.
About the Industry
The Zacks Property and Casualty Insurance industry comprises companies that provide commercial and personal property insurance, and casualty insurance products and services. Such insurance helps to safeguard property in case of any natural or man-made disaster. Liability coverages are also provided by some players. Coverages offered also include automobiles, professional risk, marine, excess casualty, aviation, personal accident, commercial multi-peril, and professional indemnity and surety. Premiums are the primary source of revenues. These companies invest a portion of premiums to meet their commitments to policyholders. Though the rate environment is still near-zero level, there are indications that it could rise this year after the Fed completes tapering. All eyes are on the FOMC scheduled on Mar 15-16. However, the tension between Ukraine and Russia remains a dampener.
4 Trends Shaping the Future of Property and Casualty Insurance Industry
Improved pricing to help navigate claims: Catastrophes are a concern for insurers due to the high degree of losses incurred. They implement price hikes to ensure uninterrupted claims payment. Per Willis Towers Watson’s 2022 Insurance Marketplace Realities report, rates will continue to rise but by a small margin. Better pricing will help insurers write higher premiums and address claims payment prudently. Per Deloitte insights, global non-life premiums are estimated to grow 3.7% in 2022.
Catastrophe loss induces volatility in underwriting profits: The property and casualty insurance industry is susceptible to catastrophe events, which drag down underwriting profit. Per Swiss Re, the insurance and reinsurance industry incurred the fourth-highest global insured catastrophe losses of about $112 billion in 2021. Swiss Re Institute's preliminary sigma estimates insured losses from natural catastrophes of $105 billion. According to a Verisk and the American Property Casualty Insurance Association report, underwriting loss was $5.6 billion during the first nine months of 2021 with the combined ratio deteriorating 70 basis points to 99.5 due to higher non-cat loss, especially in personal auto. However, exposure growth, better pricing, prudent underwriting and favorable reserve development will help withstand the blow. Also, frequent occurrences of natural disasters should accelerate the policy renewal rate.
Merger and acquisitions: Consolidation in the property and casualty industry is likely to continue as players look to diversify their operations into new business lines and geography. Buying businesses along the same lines will also continue as players look to gain market share and grow in their niche areas. With the reopening of the economy, optimistic growth outlook and sturdy capital level, the industry is witnessing a number of mergers, acquisitions and consolidations.
Increased adoption of technology: The industry is witnessing increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing and robotic process automation that expedite business operations and save cost. The industry has also witnessed the emergence of insurtech — technology-led insurers — creating competition for incumbent players. The focus of insurtech is mainly on the property and casualty insurance industry. Accelerated digitalization has become the need of the hour and the insurers continue to invest heavily in technology to improve basis points, scale and efficiencies. Per Deloitte Insights, the technology budget is projected to increase 13.7% in 2022. As insurtechs use the latest technologies and concepts that the incumbents are just beginning to experiment with, there remains a huge market risk.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid prospects in the near term. The Zacks Property and Casualty Insurance industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #65, which places it in the top 26% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 26% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. The estimates have moved up 2.5% since September 2021 end.
Before we present a few property and casualty stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms S&P 500 and Sector
The Property and Casualty Insurance industry has outperformed both the Zacks S&P 500 composite as well as its sector over the past year. The stocks in this industry have collectively gained 12.4% in the past year compared with the Finance sector’s increase of 1.6% and the Zacks S&P 500 composite’s rise of 6.1%.
One-Year Price Performance
Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 1.27X compared with the S&P 500’s 6.24X and the sector’s 3.14X.
Over the past five years, the industry has traded as high as 1.42X, as low as 1.17X and at the median of 1.31X.
Price-to-Book (P/B) Ratio (TTM)
Price-to-Book (P/B) Ratio (TTM)
5 Property and Casualty Insurance Stocks to Add to Portfolio
We are recommending two Zacks Rank #1 (Strong Buy) stocks and three Zacks Rank #2 (Buy) stocks from the P&C Insurance industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kinsale Capital Group: This Richmond, VA-based company offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. This Zacks Rank #1 company is poised for long-term growth, given its continued focus on the E&S market, improved revenues, solid underwriting results and effective capital deployment measures. The Zacks Consensus Estimate for its 2022 and 2023 bottom line has moved 5.9% and 8.2% north, respectively over the past 30 days. The consensus estimate also suggests a respective year-over-year increase of 15.3% and 15% for 2022 and 2023.
Price and Consensus: KNSL
Cincinnati Financial: Fairfield, OH-based Cincinnati Financial markets property and casualty insurance. This Zacks Rank #1 company should continue to grow given the disciplined expansion of Cincinnati Re, an agent-focused business model, and strong performance at the Commercial Lines segment.
Estimates for Cincinnati Financial’s 2022 and 2023 bottom line have moved 5.7% and 5.5% north, respectively, over the past 30 days.
Price and Consensus: CINF
Everest Re: Hamilton, Bermuda, Everest Re Group, carrying a Zacks Rank 2, writes property and casualty, reinsurance and insurance in the U.S, Bermuda and international markets. Everest Re has a huge market share in the insurance and reinsurance market and is expected to benefit from capital adequacy, financial flexibility, traditional risk management capabilities, improved pricing and focus on building a portfolio with a mix toward product lines with better rate adequacy and higher long-term margins.
Estimates for Everest Re’s 2022 and 2023 bottom line have moved 1.8% and 1.2% north, respectively over the past 30 days. The consensus estimate suggests a respective year-over-year increase of 14.7% and 15.4% for 2022 and 2023. The expected long-term earnings growth rate is 10.1%.
Price and Consensus: RE
W.R. Berkley: Greenwich, CT-based W.R. Berkley is one of the nation’s largest commercial lines property-casualty insurance providers benefiting from its insurance business. This Zacks Rank #2 insurer should continue to benefit from its well-performing insurance business. Rate increases, reserving discipline, and growing premiums from international business, mainly supported by the emerging markets of the United Kingdom, Continental Europe, South America, Canada, Scandinavia, Asia and Australia bode well.
Estimates for W.R. Berkley’s 2022 and 2023 bottom line have moved 6.3% and 1.5% north, respectively over the past 30 days. The consensus estimate also suggests a respective year-over-year increase of 6.5% and 8.6% for 2022 and 2023. The expected long-term earnings growth rate is 9%.
Price and Consensus: WRB
Chubb: Based in Zurich, Switzerland, Chubb is one of the world’s largest providers of P&C insurance and reinsurance. It has diversified through acquisitions into many specialty lines and also provides specialized insurance products. The company is poised to benefit from its focus on capitalizing on the potential of middle-market businesses, and strategic initiatives, which pave the way for long-term growth.
Chubb carries a Zacks Rank #2. Estimates for its 2022 and 2023 bottom line have moved 3% and 1.5% north, respectively over the past 30 days. The consensus estimate also suggests a respective year-over-year increase of 16% and 10.1% for 2022 and 2023. The expected long-term earnings growth rate is 10%.
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>>> S&P Global Inc. (SPGI), together with its subsidiaries, provides credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets. It operates in six divisions: S&P Global Ratings, S&P Dow Jones Indices, S&P Global Commodity Insights, S&P Global Market Intelligence, S&P Global Mobility, and S&P Global Engineering Solutions. The S&P Global Ratings division operates as an independent provider of credit ratings, research, and analytics, offering investors and other market participants information, ratings, and benchmarks. The S&P Dow Jones Indices division is an index provider that maintains various valuation and index benchmarks for investment advisors, wealth managers, and institutional investors. The S&P Global Commodity Insights division offers data and insights for global energy and commodity markets and enable its customers to make decisions. The S&P Global Market Intelligence division delivers data and technology solutions for customers to provide insights for making decisions. It offers data and services that bring end-to-end workflow solutions, including capital formation, data and distribution, ESG and sustainability, leveraged loans, private markets, sector coverage, supply chain, and issuer solutions, as well as credit, risk, and regulatory solutions. The S&P Global Mobility division provides insights derived from unmatched automotive data, enabling its customers to anticipate change and make decisions. The S&P Global Engineering Solutions division offers engineering expertise and solutions in industries, such as aerospace and defense, energy, architecture, construction, and transportation. Its solutions empower business and technical leaders to transform workflows and make decisions. S&P Global Inc. was founded in 1860 and is headquartered in New York, New York.
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>>> The plumbing of the world's financial system has been replaced — and almost nobody noticed
Yahoo Finance
by Felix Salmon
December 28, 2021
https://www.yahoo.com/now/end-era-lending-120056573.html
Banks and regulators around the world have managed to replace the plumbing of the entire financial system, even as almost nobody has noticed.
Driving the news: As of Monday, Libor — the interest rate that once underpinned some $300 trillion in financial contracts from derivatives to corporate credit lines — will effectively be dead.
Why it matters: The easily-manipulable Libor was at the center of one of the biggest scandals in the history of finance, which came to light back in 2012.
Banks racked up some $9 billion in fines and a number of traders received prison sentences.
Libor has now been replaced with much more solid and reliable benchmarks.
How it works: Banks make money from lending money out at a higher interest rate than their own cost of funds. Libor was supposed to be a measure of banks' cost of funds, so if a bank priced a loan at, say, 1 percentage point over Libor, then it knew its profit margin would be 1 percentage point.
Trillions of dollars of loans and derivatives were traded based off Libor, which meant that if traders could — illegally— push it up or down by even a few hundredths of a percentage point, they could make enormous sums of money.
Because Libor was generated by surveying banks and asking them what their interbank lending rates were, it was easy for the banks to lie in the direction that would make their traders the most money.
Where it stands: Libor is being replaced by a suite of new products — Sonia for British pounds, Tona for Japanese yen, Saron for Swiss francs, and so on.
The U.S. dollar is the only currency that will still continue to publish an official Libor rate, but even that will only be used for legacy loan products. All new loans will have to be priced off something else. A long-standing but less famous benchmark called SOFR, which is published by the New York Fed, is the leading replacement.
Between the lines: Switching over from Libor to the new benchmarks was a massive undertaking. The world's financial markets couldn't just shut down for planned maintenance and come back refreshed on Monday morning.
Instead, deeply embedded infrastructure needed to be replaced while it was still being used intensively.
Even the Federal Reserve, which led the charge to end Libor in the U.S., ended up using the old benchmark for its pandemic-era Main Street Lending Program.
The bottom line: The Libor days are over. It's a testament to hard work at thousands of companies — exacerbated greatly by the pandemic — that nothing broke during the transition.
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Mastercard - >>> Don't let this payment giant's low yield -- or huge size -- keep you away
Motley Fool
https://www.fool.com/investing/2021/08/22/3-warren-buffett-dividend-stocks-begging-to-be-bou/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Jason Hall (Mastercard): With a dividend yield south of 0.5% at recent prices, investors looking for yield often overlook Mastercard. Ironically, growth investors might also eschew the company, assuming that with a market cap above $351 billion, its growth days are over.
I think investors in either camp are making a mistake to skip Mastercard. Simply put, this stalwart's scale and brand power have it lined up to ride a massive wave of digital-payments growth around the world in the decades ahead.
Mastercard has a massive economic moat in its trusted, well-known payments network that gives it a massive network effect advantage. Having a relationship -- whether as a cardholder, accepting merchant, or a bank that issues Mastercard -- gives you access to the other two. And the more of each that is a Mastercard partner, the more of the others that want access. That's a killer advantage.
This economic moat is why Mastercard's stock has consistently outperformed the S&P 500 on just about every three-, five-, and 10-year period since going public, and is likely to continue outperforming. It's also likely the reason why Mastercard is in the Berkshire Hathaway portfolio.
One last thing: The yield may be low, but the dividend growth is incredible. Here's how much it's increased since being implemented, juicing Mastercard's total returns an extra 570%:
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Fiserv - >>> 3 Nasdaq 100 Stocks That Are Best Buys Now
The tech-oriented Nasdaq exchange offers lots of opportunities. These three stocks are the best.
Motley Fool
by Rich Duprey
Aug 23, 2021
https://www.fool.com/investing/2021/08/23/3-nasdaq-100-stocks-best-buys-now/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Fiserv
Payments and financial services technology provider Fiserv (NASDAQ:FISV) has a three-pronged approach to facilitating cashless transactions that ought to benefit from the post-pandemic economic recovery.
It offers businesses of any size the opportunity to meet their customers however they shop. Its Carat technology lets large merchants adopt an omnichannel approach to commerce while the Clover platform was built for small- and medium-sized companies to accept and process payments whether in store or online.
Fiserv also offers digital payments processing, fraud protection, and credit and debit cards to financial institutions, while also allowing them to manage customer deposit and loan accounts. It also provides them with financial and risk management services.
The growth in cryptocurrencies also presents a unique opportunity for Fiserv. Over the past year it moved $4 billion worth of payments volume in and out of crypto wallets, but moved $2 billion in the second quarter alone, indicating the swift increase cryptocurrencies are experiencing.
Recessions can wreak havoc on a financial services company like Fiserv, as last year showed. The decline in global economic activity resulted in a significant decrease in payment volumes and transactions, so there will be periods when its business slumps. The benefit for investors is that economy-expanding bull markets tend to last a lot longer than bear markets, and as demand for digital financial services increases, Fiserv should see its own business ramp up for years to come.
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Visa - >>> Is It Time to Buy the Dow Jones' 3 Worst-Performing Stocks in August?
Pullbacks have translated into lower prices, but not every lower-priced name is worth purchasing just yet.
Motley Fool
by James Brumley
Sep 2, 2021
https://www.fool.com/investing/2021/09/02/time-to-buy-dow-jones-worst-performing-stocks/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
In some ways, it might look and feel like the world is putting the coronavirus in the rearview mirror. But the fact is COVID-19 remains a lingering problem for a slew of corporations that don't have an easy way to work around the challenges linked to the pandemic. Not even all of the blue-chip powerhouses that make up the Dow Jones Industrial Average (DJINDICES:^DJI) are immune to certain headaches. Their stocks have suffered as a result.
Still, beaten-down stocks can be bargains if they have a good chance of recovering in the foreseeable future.
With that as the backdrop, here's a rundown of the three biggest DJIA losers from last month. Bargain-hunting investors will find at least one of the three merits a closer look while at its depressed price.
Worst of the worst
There's no need to dance around the issue. August's biggest losers among the Dow's stocks are Visa (NYSE:V) and Amgen (NASDAQ:AMGN) -- both with 7% setbacks -- and Boeing (NYSE:BA) with a loss of nearly 5% last month versus the Dow's overall gain of 1.2%.
For Boeing, the weakness extends a five-month stock price pullback that ultimately stems from a failure to eradicate COVID-19 before the delta variant reaccelerated its spread. The air travel business is not quite back to its full stride, but it's moving in that direction. Boeing is even securing new orders for its once-marred 737 MAX as airlines anticipate a full rebound in the foreseeable future.
Investors aren't so sure, though, that more virus-related shutdowns are possible and are shedding their Boeing shares just in case travel demand contracts rather than continues to improve. The aircraft maker is simply too vulnerable to even the slightest and most temporary of disruptions.
Visa's pullback is rooted in similar concerns, although it was made all the more vulnerable by the stock's huge price run-up through late July.
All told, Visa stock gained 76% between its March 2020 low and this July's high, leaving it primed for profit-taking, which most investors did following the release of fiscal third-quarter results. Quarterly revenue of $6.1 billion was up 27% year over year, easily topping estimates. CFO Vasant Prabhu also made a point of saying during the company's third-quarter conference call that the spread of COVID-19's delta variant wasn't crimping consumer spending. But, as was the case with Boeing, investors aren't quite buying it -- at least not like they were just a month before.
Even Amgen's setback is linked to the rekindled spread of the coronavirus, although not due to its direct impact on consumer spending. Rather, the company dialed back its full-year earnings guidance, citing logistical difficulties in getting prospective patients in front of doctors. The knee-jerk response to the report was a 6% stock price rout that's worsened in the meantime.
Perception versus perspective
None of the three companies are doomed. Indeed, two years from now, shareholders of all three will likely be struggling to recall the details of their current challenges. If you own or decided to buy any or all of these stocks following their August dips, it wouldn't be the end of the world.
Still, there's nothing inherently wrong with holding off a bit on a purchase, either.
Boeing will be fine in the long run. Despite the woes of its 737 MAX program, the company still has more than 5,000 unfilled orders for its various aircraft. Also keep in mind that before the delta variant of COVID-19, some airlines were moving back to pre-pandemic levels, promising a return to profitability sometime this year. But the stock itself remains overly sensitive to even hints of prospective problems. There's no clarity as to when the market will start seeing Boeing's glass as half full rather than half empty. Until then, the risk outweighs the reward.
Visa's in a similar (although not identical) boat, subject to perceptions as much as to its fiscal reality. Despite last month's pullback, the stock remains overbought, tempting more shareholders to lock in gains while its price remains firm.
The only name among the three that's a truly compelling buy here and now is Amgen.
Yes, the pandemic remains a stumbling block, but last month's selling has pulled the stock back to its late-2019 prices; the market is pricing in bigger problems than it actually has. This is the same company behind blockbuster drugs like Otezla, Enbrel, and cholesterol-fighting Repatha, just to name a few. It then has about 17 other drugs in its portfolio to round its list of revenue creators and dozens more in its pipeline.
There's certainly no lack of opportunity here, and newcomers will be stepping into Amgen's deep R&D bench while its dividend yield (based on a payout that isn't exactly threatened at this time) is a healthy 3.2%.
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>>> A Digital Money Rush Is Great. A Run, Not So Much
Stablecoins will become much more widely used and need balanced regulation before they’re too big to fail.
Bloomberg
By Andy Mukherjee
July 22, 2021
https://www.bloomberg.com/opinion/articles/2021-07-22/fed-needs-to-regulate-stablecoins-before-they-become-too-big-to-fail-in-a-crisis?srnd=premium
In Hong Kong, money has been privately issued since 1846. The bill in my wallet is a promise from HSBC Holdings Plc’s local banking unit to pay the value written on it. In accepting it, I gave no thought to the creditworthiness of the lender. Whoever it’s passed on to will also take the banknote at face value, and won’t ask for Hong Kong dollars printed by Standard Chartered Plc instead.
Not requiring due diligence on cash sounds commonsensical, but it’s actually a highly valuable property of money everywhere. Indeed NQA, or “No Questions Asked,” is so important that Yale School of Management finance professor Gary Gorton and Federal Reserve attorney Jeffery Zhang have made it the centerpiece of their new paper, titled “Taming Wildcat Stablecoins.”
Blockchain-based stablecoins such as Tether and the upcoming Diem are the latest form of private money: Tokens that don’t offer Bitcoin-type speculative thrills but seek acceptance instead as one-to-one clones of national currencies. They could become a powerful part of the modern digital economy, provided we know how to prevent a run on them.
Trust in physical cash is supplied by regulators. Since the value of Hong Kong’s currency is pegged to the U.S. dollar, the city’s three note-issuing institutions 1 buy certificates of indebtedness from the monetary authority by paying it 1 dollar for every 7.8 local units they print. Hong Kong’s 7.5 million people don’t have to ask any further questions about the worth of their money.
However, as digital stablecoins proliferate globally, NQA may not hold. That’s what happened during the free banking era in the U.S., when notes issued by a lender in Tennessee would sometimes be discounted by 20% in Philadelphia. “There was constant haggling and arguing over the value of notes in transactions,” Gorton and Zhang write. “Private bank notes were hard to use in transactions.”
Things changed because of the Civil War. President Abraham Lincoln wanted desperately to raise money for the war effort by selling bonds to newly chartered national lenders. The law Congress passed in 1863 also ushered in a uniform currency. Thereafter, banks were taxed for paying out other types of notes, driving them out of existence.
The researchers argue that stablecoins are in a similar situation. In the current regulatory vacuum, they’ll struggle to become no-questions-asked money. For NQA, they’ll need the state’s blessing — and oversight. That’s been in short supply because rapid growth of the novel product has taken regulators by surprise.
But while blockchain technology is new, the economic logic of stablecoins isn’t. Buying $100 worth of these tokens is no different from a depositor parking $100 in a checking account, which preserves its value because of deposit insurance and regulatory scrutiny. Stablecoins will need a similar setup. Or, if the issuers want to avoid the cost of being a commercial bank, regulators will have to insist on transparent, one-to-one backing of liabilities with safe assets. Only then can the public reliably trust tokens claiming to mimic official units of account — dollar, euro, pound, yen, yuan and so on.
Without these safeguards, allowing stablecoins to compete with bank deposits could spawn another combustible financial product. Money market mutual funds, which have avoided being regulated as bank deposits, had to be bailed out twice in a dozen years: during the 2008 crisis, and then again last year when Covid-19 struck. Gorton and Zhang caution that if policy makers wait a decade, stablecoin issuers will become the money market funds of the future. Doubts about a token’s ability to honor its promise of 1:1 exchange into fiat money could prompt users to make a beeline for redemption. Fire sales of assets by the coin issuer could afflict other corners of finance, forcing governments “to step in with a rescue package whenever there’s a financial panic,” the researchers say.
At a little over $100 billion, the combined market value of the top five coins tracking the dollar — Tether, USD Coin, Binance USD, Dai and Terra USD — is modest at present. But that’s because stablecoin users have mostly come from cryptocurrency investors. With Visa Inc. starting to accept USD Coin to settle card payments, it’s only a matter of time before usage goes mainstream. The Diem Association, a consortium of Facebook Inc. and other companies and nonprofits, has tied up with a bank. Diem’s dollar stablecoin can thus be launched from within the the U.S. banking system, and Facebook’s enormous reach could make it take off. Given the rapid pace at which the landscape is changing, Treasury Secretary Janet Yellen is right to tell U.S. regulators to hurry up and put in place a regulatory framework for stablecoins.
If the rules strike the right balance between supporting innovation and maintaining stability, the U.S. may not need to follow China into offering an official digital currency, a possibility that a top Fed official raised recently.
Will the Fed choose regulated private stablecoins, a central bank-issued digital currency, or both? Even as the rest of the world awaits answers, some decisions should be made right away. Tether, the most used dollar coin, is owned by Hong Kong-based iFinex Inc. Every country could potentially have a crypto or fintech firm mirror their official unit of account. Trying to regulate entities once they’re already too big to fail would be pointless.
Money in the 21st century may not need to be official. But it still has to be no-questions-asked, like the Hong Kong dollars in my wallet. That’s a power that only regulators can bestow. They should use it well.
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Paymentus, Flywire - >>> Buy These 3 New Stocks Before They Jump Over 40%, Says Goldman Sachs
Yahoo Finance
June 22, 2021
https://finance.yahoo.com/news/buy-3-stocks-jump-over-141651264.html
The IPO activity this year continues a heavy momentum built up last year – when despite the corona crisis and the economic dislocations, the market saw record breaking IPO activity, with 407 new public offerings. It’s an example of the stock market’s dynamism, and the confidence of both company managers and investors that stocks are the place to find returns.
This brings us to Goldman Sachs. The banking firm’s stock analysts have been looking for the equities primed to gain in current conditions. And just this week, they’ve tapped three stocks new to the public markets as likely to jump 40% or more in coming months – a solid return that investors should note. We ran them through TipRanks database to see what other Wall Street’s analysts have to say about them.
Paymentus Holdings (PAY)
We’ll start with Paymentus Holdings, a cloud-computing service in the online bill payment niche. The company offers a platform that is widely used in North America – boasting tens of millions of customers, more than 1,300 business clients on the billing end, and nearly 200 million payment transactions last year.
Paymentus provides payment services for billers across a wide range of industries, including utilities, insurance, telecom, healthcare, and government. The company’s IPN, or instant payment network, links the platform to business partners, and allows consumers to handle their bills through a greater range of options: Amazon’s Alex; the PayPal app, in person at Walmart, or even through online banking.
With the growing share of online billing in the world of commerce, Paymentus had to consider upping its profile - and an IPO was a natural move. IPOs by their nature both increase a company’s public visibility and bring in new capital for expansion. Paymentus priced its initial offering at $21 per share, put 10 million shares on the market, and gave the underwriters an option on an additional 1.5 million shares. In the actual event, on May 26, the company sold the offered shares – and easily raised the initially estimated $210 million.
Among the bulls is Goldman Sachs analyst Matthew O’Neill, who is impressed by Paymentus’ application of modern cloud software organization to the complex business of consumer bill-paying.
“Paymentus believes that it has a best-in-class product and can take share from legacy software and processes for billers. Paymentus currently has penetrated less than 1% of the $4.6tn U.S. Bill Payment TAM. We expect Paymentus to gain further share in this market through its tech stack, particularly with its Paypal/Venmo integration and other attractive features for its clients," O’Neill noted.
The analyst added, “Paymentus currently operates across non-discretionary verticals, but there is an opportunity for it to expand into new channels and verticals where there are consistent recurring payments for essential services. The company believes that its modern configurable tech solutions allow it to cost-effectively expand its offerings.”
In line with these comments, O’Neill rates PAY a Buy along with a $54 price target, suggesting ~64% upside potential for the year ahead. (To watch O’Neill’s track record, click here)
Overall, PAY has received 8 recent analyst reviews, breaking down to 6 Buys versus 2 Holds and making the analyst consensus rating a Strong Buy. The stock has current trading price of $32.35 and an average price target of $31.22, indicating ~14% upside potential for the next 12 months. (See PAY stock analysis on TipRanks)
Flywire Corporation (FLYW)
Let’s stick with online payments. Flywire got its start as an online payment service specializing in the educational industry, but it has since branched out to the healthcare and travel sectors, as well. The company’s payment platform offers secure processing for customers around the world, offering both improved collections and localized payment options. The Boston-based company operates on a truly global scale, with over 2,250 client businesses who operate in 240 countries and 130 different currencies.
Flywire moved into the public arena on May 26, in an IPO that saw 10.44 million shares go on the market. The underwriters of the offering had an option on an additional 1.566 million shares. The new stock started trading on the NASDAQ, and the company’s initial pricing put it at $24 per share. The share sale brought in over $366 million on the first day, well above the $250 million the company was aiming for.
"We see opportunity for Flywire to expand within its existing education and healthcare verticals, which have large TAMs. Currently, Flywire has penetrated less than 15% of the cross-border tuition market, and with the addition of domestic payments processing, we believe there is ample runway in education. Flywire is also active in healthcare and travel, with additional opportunity in B2B payments," O’Neill opined.
The analyst added, "We expect Flywire to continue to grow within its verticals due to its software-driven strategy, which strengthens its competitive moat in cross-border payments by delivering convenience and ease of use to clients and their customers."
This company, while new to the public markets, has already made its mark with Wall Street’s analysts – they’ve given FLYW shares a unanimous Strong Buy consensus, based on 9 positive reviews set since the IPO. The shares are priced at $35.52 and the $42.63 average price target indicates room for ~20% share price growth this year. (See FLYW stock analysis on TipRanks)
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>>> Payoneer empowers global commerce by connecting businesses, professionals, countries and currencies with its innovative cross-border payments platform. In today's borderless digital world, Payoneer enables millions of businesses and professionals from more than 200 countries to reach new audiences by facilitating seamless, cross-borderpayments. Additionally, thousands of leading corporations including Google, Airbnb, Elance-oDesk and Getty Images rely on Payoneer's mass payout services.
With Payoneer's fast, flexible, secure and low-cost solutions, businesses and professionals in both developed and emerging markets can now pay and get paid globally as easily as they do locally. Founded in 2005 and based in New York, Payoneer is venture-backed, profitable and ranked in the top 100 of Inc. 5000's Financial Services companies.
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Ecofin Digital Payments Infrastructure Fund (TPAY) -
Ecofin Global Water ESG Fund (EBLU) and Ecofin Digital Payments Infrastructure Fund (TPAY) will Transfer to NYSE Arca
Business Wire
December 21, 2020
https://www.businesswire.com/news/home/20201221005715/en/Ecofin-Global-Water-ESG-Fund-EBLU-and-Ecofin-Digital-Payments-Infrastructure-Fund-TPAY-will-Transfer-to-NYSE-Arca
LEAWOOD, Kan.--(BUSINESS WIRE)--Ecofin, which is focused on sustainable investing, today announced that it will transfer the listing of two exchange-traded funds from Cboe BZX to NYSE Arca upon market open on January 4, 2021.
Current shareholders are not required to take any action, nor is the transfer expected to have any effect on the trading of fund shares.
The following ETFs are retaining their current ticker symbol and transferring to NYSE Arca:
Ecofin ETF
Ticker
Ecofin Global Water ESG Fund
EBLU
Ecofin Digital Payments Infrastructure Fund
TPAY
By moving EBLU and TPAY to NYSE Arca, the adviser’s entire suite of ETFs will be available on one exchange.
For more information on these funds and how Ecofin is generating returns and making an impact, visit www.ecofininvest.com.
About the Ecofin Brand
Ecofin focuses on sustainable investments and is dedicated to uniting ecology and finance. Our mission is to generate strong risk-adjusted returns while optimizing investors’ impact on society. We are socially-minded, ESG-attentive investors, harnessing years of expertise investing in sustainable infrastructure, energy transition, clean water & environment and social impact. Our strategies are accessible through a variety of investment solutions and seek to achieve positive impacts that align with UN Sustainable Development Goals by addressing pressing global issues surrounding climate action, clean energy, water, education, healthcare and sustainable communities.
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>>> Stripe to Offer Citi, Goldman Accounts Through E-Commerce Giants
Bloomberg
By Jennifer Surane
December 3, 2020
https://www.bloomberg.com/news/articles/2020-12-03/stripe-to-offer-citi-goldman-accounts-through-e-commerce-giants
Online stores to have access to checking accounts, services
‘Business banking has largely been left behind,’ Stripe says
Stripe Inc. will team up with some of the world’s largest banks to offer checking accounts to businesses that sell their wares on e-commerce platforms such as Shopify Inc.
Stripe said banks including Citigroup Inc., Goldman Sachs Group Inc. and Barclays Plc will now be able to offer checking accounts and other financial services through e-commerce providers. If a coffee shop, for instance, uses Shopify to sell mugs and coffee beans online, it will now be able to open a bank account too.
“Everything about running an online business has been transformed by technology, but business banking has largely been left behind,” Karim Temsamani, head of banking and financial products at Stripe, said in a statement. “But we’re changing this.”
Businesses use Stripe’s software to accept online payments, and the company has benefited during the pandemic as people stuck at home have relied more heavily on e-commerce to do their shopping. The company is in talks to raise a new funding round that could value it at as much as $100 billion, Bloomberg reported last month.
For online firms, setting up a bank account takes an average of seven days, Stripe said. Almost a quarter of businesses ultimately have to send a fax to open the account, and more than half need to visit a bank branch. With its latest offering, which will be known as Stripe Treasury, the company is seeking to disrupt all that.
Still, Stripe is relying on established banks for the service.
“Our vision is for this partnership to fuel global commerce by enabling Stripe to launch the next-generation banking proposition for their clients,” Manish Kohli, global head of payments and receivables in Citigroup’s treasury and trade solutions business, said in the statement.
Stripe’s plans were reported earlier Thursday by the Wall Street Journal.
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>>> Stripe chases $100bn valuation with no sign of IPO
FinTech Futures
by Ruby Hinchliffe
1st December 2020
https://www.fintechfutures.com/2020/12/stripe-chases-100bn-valuation-with-no-sign-of-ipo/
Stripe, with its last private valuation standing at $36 billion, is reportedly chasing a new valuation of up to $100 billion, according to Bloomberg.
Co-founded by Irish brothers, Patrick and John Collison, Stripe could see its valuation quadruple in just two years.
Its latest funding round – the value of which is yet to be disclosed – follows a $600 million funding round just seven months ago. Stripe’s total money raised to date is almost $2 billion, according to PitchBook data.
But Stripe is still a private company, and there is no talk of it holding an initial public offering (IPO) – prompting speculation that the brothers, worth $4.3 billion each, are putting it off.
The company did, however, hire Dhivya Suryadevara – formerly General Motors – as its new chief financial officer (CFO) this year.
A crazy valuation?
At $100 billion, that would make Stripe the most valuable venture-backed start-up in the US, according to CB Insights.
Axios points out that Chinese firm, ByteDance’s divestment of its majority stake in TikTok had cleared on Friday, which paves the way for Stripe to be a record-breaker.
It is possible that the latest funding won’t happen, or that it will happen, but at a lower valuation.
Regardless, there is logic behind such an inflated valuation for the payments processing software provider.
COVID-19 has caused e-commerce sales to skyrocket, seeing Stripe benefit from the industry’s anticipated 20% growth in 2020. That’s according to IBM’s US Retail Index.
But it’s clear there’s still major room for growth too. Forbes quoted two years ago that less than 10% of global commerce happens online.
Which is why Stripe has since bought Nigerian company, Paystack, for $200 million. It also led a $12 million round for Manila-based PayMongo.
And as its public competitors – Square, PayPal, and Ayden among them – are seeing their stocks as much as double and triple this year, it’s unsurprising that Stripe’s value is in turn driven up.
This year has also continued the trend of Stripe not only serving start-ups, but also working with enterprise industry names.
Zoom, Just Eat, media group NBC and toy-maker Mattel all made the list of new clients. They join the likes of Amazon, Salesforce, Lyft and Instacart.
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Square - >>> 3 Tech Stocks That Are Better Than Snowflake
Investors can still win big with these fast-growing stocks.
Motley Fool
Chris Neiger, Danny Vena, And Brian Withers
Dec 13, 2020
https://www.fool.com/investing/2020/12/13/3-tech-stocks-that-are-better-than-snowflake/
Shares of Snowflake, a cloud data company, have soared since the company went public back in September. Some investors have flocked to the tech stock because of its massive opportunity in the cloud data space, and the fact that Warren Buffett's Berkshire Hathaway is an investor in the company.
But despite all of the attention Snowflake has received, there are still a lot of fast-growing companies that could be even better long-term investments. Here's why MongoDB (NASDAQ:MDB), Okta (NASDAQ:OKTA), and Square (NYSE:SQ) fit the description.
MongoDB: Creating a home for messy data
Danny Vena (MongoDB): One of the key takeaways from 2020 is that cloud-based solutions are no longer a luxury but a necessity, providing access anywhere, anytime. That's one of the reasons investor demand for Snowflake has been off the charts. Unfortunately, Snowflake's valuation is also off the charts, with the stock trading at 214 times its trailing-12-month sales of $490 million, making it one of the most expensive growth stocks around.
Investors looking for a less expensive cloud alternative should consider MongoDB. One of the challenges with legacy databases is that they couldn't accommodate any data that didn't fit neatly into rows or columns. That's where MongoDB comes in. The company offers a cloud-native solution that houses data and electronic information of all types, including photos, audio, social media posts, video, and even full documents.
MongoDB offers a free version of its flagship database that customers have downloaded more than 90 million times since it was introduced in 2009, and over 35 million times in 2019 alone. After experiencing firsthand the ease and utility of MongoDB's flagship product, many developers take the plunge and sign up for Atlas -- the company's cloud-centric, fully managed database-as-a-service product.
While the pandemic temporarily stunted MongoDB's growth, the company has come roaring back. In the third quarter, revenue grew 38% year over year, while subscription sales increased 39%. More importantly, adoption of Atlas grew even faster, as revenue climbed 61% year over year and now accounts for roughly 47% of the company's total sales. Not bad for a product that was introduced just four years ago.
The customer metrics are equally compelling. MongoDB added more than 2,400 customers during the quarter, bringing the total customer count to 22,600, up 42% year over year. Atlas customers grew more quickly -- to 21,100, up 49%. Those contributing at least $100,000 in annual recurring revenue climbed to 898, up 31%. Finally, the company's net AR expansion rate, which tracks the rate at which existing customers spend more, remained above 120% for the 24th consecutive quarter.
The company's customer satisfaction scores are also enviable. Atlas commands a net promoter score of 74. That's a remarkably high score; 50 or higher is considered excellent, and any number above 70 is considered world-class.
The digital transformation is ongoing and the data that needs to be stored is growing exponentially. The database software market is estimated to be $71 billion in 2020, growing to $97 billion by 2023. Considering MongoDB's revenue topped out at $422 million last year, it has a long runway for growth.
Oh, and did I mention that at just 34 times sales, it's a steal compared to Snowflake.
Okta: Taking advantage of the cloud trend
Brian Withers (Okta): Even though Snowflake is putting up massive growth, investors can get in on the cloud trend without a triple-digit nosebleed valuation. As enterprises move more of their software to the cloud, Okta's identity management platform is a key enabler to keep their infrastructure secure. It makes it easy for information technology teams to secure their cloud applications and provides authorized users the ability to sign on to all of their apps with a single password.
Cloud software is still in the early stages of adoption. IDC reports that 81% of enterprise organizations have at least one core application in the cloud, but only 13% of large companies are 100% dependent on the cloud. As businesses extend their use of cloud-based software tools, the need for a robust identity management solution like Okta's only grows stronger.
With these tailwinds, the company has grown to a $768 million trailing-12-month revenue business. For the upcoming fiscal year, its top line is expected to surpass the $1 billion mark, representing a 29% year-over-year growth. This is a decline from the current year's expected 40%, but it is likely to beat its guidance as it's done frequently in the past.
One indicator that Okta's revenue growth forecast could be light is the solid increase in its remaining performance obligations (RPO). RPO represents the total value of all customer contracts, which grew at an impressive 53% last quarter. Additionally, the company had an important win last quarter as Amazon Web Services (AWS) now includes Okta as part of its marketplace. This opens up the platform to a whole new set of customers. With stable subscription revenue accounting for 95% of its top line, investors can be confident growth will continue long into the future.
Even though Snowflake is growing faster at triple-digit rates, that growth comes at a tremendous price. Not that Okta is cheap, but its lofty price-to-sales ratio of 39 looks like a bargain next to Snowflake's 224. Okta is a better way for investors to profit as organizations continue their move to the cloud.
Square - This company is betting on the shift to digital payments
Chris Neiger (Square): For years, Square has been helping merchants of all sizes shift from physical cash to a digital payment world. The company's point-of-sale terminals are often used with digital card readers and near-field communication devices that make paying with a phone or tapping a credit card to pay easier than ever.
The pandemic has accelerated the shift to digital payments as many people have preferred not to handle physical money. This has helped boost Square's business, with third-quarter revenue skyrocketing 148% year over year (excluding its Caviar business). Square users are also spending a lot more through the company's payment platform, as gross payment volume jumped 91% in the recent quarter to $31.7 billion.
Additionally, the company's popular Cash App, which allows users to send money to friends, saw the number of its daily transacting customers nearly double year over year in the third quarter. Cash App sales also popped 174% in the quarter.
Digital payments were already becoming mainstream before the pandemic, but the trend is even more solidified now. This year the digital payment market will reach $910 billion, and by 2024 it'll be worth an estimated $1.5 trillion. For investors looking for a fast-growing tech stock that's tapping into this massive money trend, Square looks like a great long-term bet.
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Square - >>> Forget FAANG, Buy These 2 Unstoppable Stocks Instead
While tech stocks are overvalued, these investments have triple-digit revenue growth and incredible upside over the next decade.
Motley Fool
by Taylor Carmichael
Dec 11, 2020
https://www.fool.com/investing/2020/12/11/forget-faang-buy-these-2-unstoppable-stocks-instea/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
As we get ready to close the book on 2020, allow me to call out two sectors that will create enormous wealth for investors over the next decade.
The first is virtual currencies and digital wallets. Fintech is changing banking and payments forever and Square (NYSE:SQ) is at the center of this revolution. It could eventually become the most valuable financial stock in the world.
Another trend creating a lot of wealth is the (state by state) legalization of marijuana. Billions and billions of dollars will be made in this sector. We can already spot one winner -- the highly profitable (and fast-growing) REIT stock Innovative Industrial Properties (NYSE:IIPR).
Both of these stocks have creamed the FAANG stocks over the last few years and will continue to outperform over the next decade. Here's why you should forget about FAANG and buy these two cash machines instead.
Why Square is more valuable than any bank
The banking system is highly commoditized. If you blindfolded me and set me down in the lobby of an unknown bank, I couldn't tell you if I was in a Bank of America, a JPMorgan Chase, or a Wells Fargo. They're identical. They all have ATM services, online banking, and safety deposit boxes, and all these banks rely on the same credit check reports.
Square is a different breed. It's a fintech specialist that makes financial services cheaper and faster. Right now, the company provides technology for people performing financial tasks. Square customers use its Cash app to transfer money and make payments. When Square jumped into the brokerage business and offered free trades and fractional shares, Schwab followed, and a race to zero-commission trades began.
Last year Square introduced Square Card, a debit card that allowed businesses in the seller network to start making payments from existing revenue streams without the need to set up a bank account. In the third quarter, sellers spent more than $250 million on their Square cards.
Square's technology allows people to transfer money, use debit cards, and buy stocks and trade currencies. It's already providing a lot of traditional banking services. And now Square has been cleared to do the most important banking function -- provide loans. Square's new virtual bank, Square Financial Services, will be headquartered in Salt Lake City, as its charter was approved by the Federal Deposit Insurance Corporation (FDIC) and Utah regulators.
Square is already a huge business, with over $7 billion in annual revenues. And it's still growing incredibly fast; revenues are up 139% in the most recent quarter. While fintech has been very profitable, it's actually just getting started.
What will be amazing is when Square starts loaning money to all the businesses in its network. At first, banking will be a very small part of Square's business. But as the loan division ramps up, Square will start taking market share from the banks. And the company has serious advantages in that regard. Consider all the data Square has about the companies in its network. If you're a restaurant using Square's point-of-sale technology, Square knows all about your revenues and your ability to make payments. Square doesn't need to run credit checks or ask anybody else about your ability to repay debt. The company has a huge advantage over the banks in financial information about its customers. This knowledge is power and will be immensely profitable to Square (and its investors) in the future.
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Visa - >>> Don't miss this explosive secular trend
https://www.fool.com/investing/2020/10/24/5-great-stocks-you-can-buy-and-hold-forever/
Like NextEra, Visa (NYSE:V) is riding a mega-growth secular trend: As the war on fossil fuels is propelling NextEra, the war on cash is lifting Visa.
The e-commerce boom and the digitization of major service industries like banking have triggered a major shift from cash to cashless modes of payments like debit and credit cards, online payments, and mobile wallets. Visa is already the world's largest payments processor, facilitating transactions between consumers, merchants, and financial institutions. In 2019, it had 3.4 billion cards in circulation across 200 countries, processed 553 million transactions per day, and generated $23 billion in revenue.
That's an enormous business, and this could be just the beginning. Visa is extensively using technologies like blockchain, and expanding into newer areas such as business-to-business and person-to-person payments, both of which are multitrillion-dollar addressable markets. Its value-added services like analytics and fraud management also provide it with tremendous growth opportunities.
With Visa's operating margins already north of 60% and with management targeting a dividend payout of 20% to 25%, patient investors could reap multibagger returns from this fintech stock.
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>>> Visa CEO Al Kelly Just Said This About the DOJ Lawsuit
The Justice Department's lawsuit is related to the payment processing giant's planned purchase of Plaid. The CEO also discussed earnings and another new acquisition.
Motley Fool
Dave Kovaleski
Oct 31, 2020
https://www.fool.com/investing/2020/10/31/visa-ceo-al-kelly-just-said-this-about-the-doj-law/
It was a busy end to October for Visa (NYSE:V). The payment processor announced a new acquisition, reported a decline in earnings for its fiscal fourth quarter, and learned of a lawsuit against it by the Justice Department. Chairman and CEO Al Kelly and his executive team addressed all three of these issues on the company's quarterly earnings call Wednesday. Here is what they had to say.
An L-shaped recovery for cross-border transactions
Visa beat earnings estimates for its Q4, which ended Sept. 30, but it was still a bumpy ride, as net income fell 29% year over year to $2.1 billion, or $0.97 per share. Revenue was down 17% to $5.1 billion on a sharp 29% drop in the volume of cross-border transactions -- those for which the merchant is in a different country than the issuer of the customer's card.
"The cross-border recovery has been sluggish since borders remain closed or there are significant impediments to crossing borders like quarantine and other such restrictions," said Vice Chairman and CFO Vasant Prabhu. "From May through August, cross-border volumes were persistently down in the mid 40% range. September saw a 6 point recovery, which has continued into October."
Prabhu said the September uptick was driven by a few "relatively frictionless" corridors, including travel from the U.S. to Mexico and the Caribbean. While the recovery has been V-shaped for domestic transaction volumes, the pattern has been L-shaped for cross-border volumes.
"The cross-border business remains a significant and continued drag on revenue growth," he added.
Pass the YellowPepper
The other big news of the week was the announcement that Visa plans to buy YellowPepper, a Miami-based financial technology company, or fintech, that works with financial institutions in Latin America and the Caribbean. YellowPepper's technology allows issuers, processors, and governments to initiate secure, real-time transactions for customers across a variety of payment platforms and networks using just an email address, phone number, or some other personal credential.
"For Visa, the acquisition extends our network of networks strategy by significantly reducing the time to market and cost for issuers and processors, regardless of who owns or operates the payment rails," Kelly said.
It also facilitates an easier integration for financial institutions to Visa's person-to-person digital payment platform, Visa Direct, as well as Visa's B2B Connect, which allows financial institutions to process cross-border business-to-business payments.
"Having a software platform like YellowPepper makes it easier for these connections to happen and gives us an on-ramp to sell value-added services and accommodate the needs of various clients to have network-agnostic solutions," Kelly said. "It's going to give us a good path toward accelerating both core payments as well as value-added services and new flows throughout Latin America. And then over time, we will look to extend the capability beyond that region."
No one likes a Plaid suit
But an earlier acquisition hit a snag this week when Visa and its consulting firm, Bain and Co., were sued by the Justice Department regarding Visa's $5.3 billion purchase of Plaid back in January.
Plaid is a fintech that helps consumers securely connect their financial accounts to their apps. The Justice Department filed a petition in the U.S. District Court for the District of Massachusetts to enforce Bain's compliance with the department's investigation of the proposed acquisition. The petition alleges that Bain has withheld important documents that the Justice Department requested via its CID (civil investigative demand). It goes on to say that Bain's "unsupported claims of privilege over the documents" have stymied the Antitrust Division's investigation.
In June, Justice Department officials asked Bain to answer interrogatories and produce documents that "discuss Visa's pricing strategy and competition against other debit card networks that may be important to the division's analysis of the proposed acquisition's effects."
The Wall Street Journal reported Wednesday that the deal could be in jeopardy because of antitrust concerns, citing people familiar with the matter. Regulators could decide soon to block the deal, the Journal reported, based on the premise that it could limit "nascent competition in the payments sector."
Kelly addressed the topic briefly in the earnings call, saying, "In terms of Plaid, I want to say two things. First, we continue to engage with the Department of Justice on the review of the acquisition. Second, the Department of Justice's lawsuit yesterday against Visa and Bain and Co. is related to a dispute over documents they requested as part of the review of the deal. Beyond that, we're not going to comment further."
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>>> Mastercard Stock Is Having Its Worst Day Since March. Earnings Were Worse Than Expected.
By Daren Fonda
Oct. 28, 2020
https://www.barrons.com/articles/mastercard-stock-is-falling-as-earnings-fall-short-of-forecasts-51603897285?siteid=yhoof2
Mastercard’s revenue and profit for the third quarter came in lower than expected as cross-border card transactions—a key profit driver—remained severely depressed due to the pandemic and border closures.
The stock was down 6% in morning trading, marking its worst day since March 20.
Payment processing company Fiserv (ticker: FISV), meanwhile, reported a solid quarter, sending its stock up about 2% in early trading.
Mastercard (MA) reported revenue of $3.8 billion, down 14% from a year ago, and 3% less than Wall Street had expected. The firm reported adjusted earnings of $1.60 a share, down 26% year over year, missing estimates for $1.65.
One big hurdle for Mastercard is cross-border transactions, which generate higher margins than domestic transactions and are a key driver of earnings. The dollar volume of cross-border transactions was down 36%, due largely to a steep drop in travel-related activity. Fees on cross-border transactions totaled $791 million in the quarter, down 48% from a year earlier.
Cross-border volume overall is down 29% year to date, pressuring Mastercard’s revenue and profit, both expected to fall this year compared to 2019.
Mastercard CEO Ajay Banga said in a statement that the company is “seeing encouraging progress in the trajectory of domestic spending, while travel spending remains a challenge.” He added that Mastercard is winning new business in core payments and making progress in digital payments and other growth areas.
Barron’s has been positive on payment companies such as Mastercard, Visa (V), and PayPal (PYPL). The pandemic is accelerating a shift from cash to cards and digital payments. But Mastercard’s results imply that international transactions remain a source of weakness as border closures and travel restrictions keep businesses and consumers largely homebound.
Mastercard’s results actually showed improvements from the second quarter, noted Cowen analyst George Mihalos. All key metrics improved slightly, he wrote, including cross-border transaction volumes, which picked up in the last few weeks of October.
Still, cross-border volume outside the European Union was down in the mid 40 percentages in October, year over year, as in-person transactions slumped due to tighter Covid restrictions, noted Jefferies analyst Trevor Williams.
The volume of U.S. transactions “switched” by Mastercard—industry terminology for purchases authorized, cleared, and settled—may also have gotten a bump from Amazon Prime Day, which was later this year, along with government disbursements to consumers. Normalizing for those effects would have dented switched volumes by about two percentage points, he added.
Mizuho analyst Dan Dolev noted that the cross-border recovery isn’t occurring nearly fast enough to meet estimates. While the improvement in the third quarter was above the lows of July, down 39% year-over-year, the decline in late October “is still dramatic and hurts growth.”
Wolfe Research’s Darrin Peller urged investors to stick with the stock, however, despite the near-term weakness. The company’s structural position should be stronger on the other side of the pandemic, he wrote, benefiting from greater e-commerce and digital transactions, accelerating contactless payments, and strong demand for services such as data analytics, cybersecurity, and business payments to employees and contract workers.
Peller maintained an Outperform rating on the stock.
Fiserv, meanwhile, reported a rebound in revenue growth as its merchant acquisition business—running payment systems for retailers and other merchants—grew 6% in the quarter. The company also made headway with Clover, a rival point-of-sale system to Square (SQ) for small businesses.
Fiserv stock is down about 16% this year, due to concerns about a broad retail slowdown and ongoing weakness in merchant acquiring. MoffettNathanson analyst Lisa Ellis noted that the stock is “stuck in purgatory” as investors digest the path of the pandemic. But she raised her estimates for 2021, and outlined factors that could get the stock moving, including gains in merchant acquiring, e-commerce, and convincing investors that Clover will be a major competitor in small-business payments.
Dolev also viewed Fiserv’s results positively, writing that results in merchant acquiring could “boost morale” on the stock, and that the trends bode well for rival payment processors, such as Fidelity National Information Services (FIS), Global Payments (GPN), and Square.
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>>> Is Fiserv a Buy?
Credit risk isn't the only issue hurting financial companies, as this fintech shows.
Motley Fool
Brent Nyitray
Oct 21, 2020
https://www.fool.com/investing/2020/10/21/is-fiserv-a-buy-due-oct-19/
The financial sector has been a lousy place for investors this year. Between the banks taking big provisions for loan losses and the real estate investment trusts (REITs) dealing with tenant delinquencies, it's been a struggle. Unlike most of the financials, Fiserv (NASDAQ:FISV) doesn't make its money taking credit risk -- it's a fintech company that earns fee income from the services it provides. Does a lack of credit exposure mean Fiserv is a better buy?
Merger synergies will be a big driver of earnings
Fiserv offers electronic payment processing, retail point of sale, and e-commerce services, some of which it added through its acquisition of First Data in July 2019. It added the Clover point-of-sale operating system through that merger, and it partners with Early Warning Services to offer the Zelle brand of person-to-person payment technology.
Falling retail sales have affected Fiserv during the COVID-19 pandemic; while year-over-year comparisons have been difficult because of the First Data merger, internal revenue growth (that is, organic growth) fell about 7% in the second quarter. On the earnings call, Executive Chairman Jeffery Yabuki said, "At our May 7th call, we shared our thesis that April would be the likely trough and we expected to see gradual improvement from there, and that is exactly what has happened. Each month revenue has improved sequentially from the lows of April and culminated with a return to internal revenue growth in July."
Going forward, synergies from the First Data merger should boost earnings. Synergies generally come in two flavors: revenue and cost synergies. Cost synergies are the most common, and involve cost cutting by eliminating redundant functions. Examples of cost synergies would involve the elimination of duplicate investor relations functions, or other overhead. Revenue synergies are cross-selling opportunities, which are often hard to quantify and even harder to realize. Fiserv expects to realize about $1.2 billion in synergies from the merger, and so far has realized $750 million through July.
Decent multiple with decent earnings growth
On the conference call, CEO Frank Bisignano said that the company expected to earn adjusted earnings per share of $4.33 for 2020, adjusted for divestitures. This works out to be a price-to-earnings ratio (P/E) just under 23 times at Wednesday morning's prices. Below is a chart of Fiserv's P/E ratio for the two years before the First Data merger.
As you can see, the current forward P/E around 23 is toward the bottom of the pre-merger range. The Street expects Fiserv to earn $4.40, which is a little better than the company guided on the second-quarter call. The current estimate for 2021 earnings is $5.38 per share, which represents 22% earnings growth and puts the company's P/E to growth (PEG) ratio right around 1. Legendary investor Peter Lynch was a huge fan of stocks with PEG ratios at 1 or below.
Debt and intangible assets are a negative
That said, Fiserv has a lot of debt, around $21 billion worth. The debt burden doesn't appear to be an issue since Fiserv generated almost $900 million in free cash flow in the second quarter and has about $1.1 billion in debt maturing in the next two years. In addition, interest expense was covered over 7 times last year by EBITDA (earnings before interest, taxes, depreciation, and amortization). That said, the debt isn't the only balance sheet issue: Nearly $40 billion of the company's assets are intangible assets like goodwill, which are extremely hard to monetize. They certainly stick out when book value is only $33 billion to begin with.
So, is Fiserv a buy? Valuation-wise, Fiserv is certainly trading toward the low end of its P/E range, and has an attractive PEG ratio. I doubt a long-term investor would be making a mistake buying the company at these levels. That said, I would rather get involved once the smoke has cleared from COVID and we start seeing stronger consumer spending. Until then, the stock will probably correlate with the rest of the financial sector.
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>>> Visa and Mastercard have a lot in common, but COVID-19 puts one key difference in focus
MarketWatch
Oct. 30, 2020
By Emily Bary
https://www.marketwatch.com/story/visa-and-mastercard-have-a-lot-in-common-but-covid-19-puts-one-key-difference-in-focus-11604090026?siteid=yhoof2
Visa is more exposed to debit spending, which is growing quickly amid economic concerns and a shift away from cash
The COVID-19 crisis is accelerating the transition from cash to cards.
Visa Inc. and Mastercard Inc. are often viewed as one and the same in the investment community, but the small differences between their businesses are coming into focus as the COVID-19 alters the way people spend their money.
Consumers have been showing an increasing preference for debit cards versus credit cards given the weak economic climate brought on by the pandemic, and right now this skew favors Visa V, +1.66%, which has a larger debit business. Visa generated 52% of its volume in the September quarter from debit transactions, compared with 44% for Mastercard MA, +0.46%.
“What happened in the COVID-19 crisis is that the replacement for cash is basically debit,” Mizuho analyst Dan Dolev told MarketWatch. People may be more hesitant about touching cash, but they’re also less inclined to use credit during a downturn due to unease over spending borrowed money.
What’s more, the purchases people are making right now are ones that normally tilt toward debit anyway, according to Susquehanna analyst James Friedman, who has positive ratings on Visa and Mastercard. “People historically pay for groceries with debit, pay for gas with debit, and pay for travel and restaurants with credit,” he told MarketWatch. The travel and restaurant industries are under pressure, but groceries are a utility purchase.
Both Visa and Mastercard saw worldwide debit volume growth of about 20% in the September quarter, though Visa benefitted more from this momentum given that debit makes up a larger portion of its business. The companies each reported results Wednesday.
The debit and credit businesses are “bifurcating so dramatically,” according to MoffettNathanson analyst Lisa Ellis, magnifying a difference between Visa and Mastercard that’s “normally not a big deal.” In contrast to debit’s 20% volume increase, credit is down about 5% to 10%, she said.
Visa Chief Financial Officer Vasant Prabhu highlighted on the company’s earnings call that debit is growing at twice the rate it was prior to the pandemic, and that the category “stayed resilient through the shutdowns,” posting growth in the U.S. even earlier in the pandemic when there were more restrictions on activities.
“They’re situated perfectly for what’s happening,” Dolev said of Visa, noting that the debit skew could also prove beneficial even during normal economic times given a trend of some younger consumers preferring debit. On trendy peer-to-peer platforms like Square Inc.’s SQ, +0.22% Cash App and PayPal Holdings Inc.’s PYPL, +0.87% Venmo, many users choose to fund their accounts with debit cards.
In normal recessionary times, debit stays strong for a while before a swing back into credit takes place after a few years, Ellis said, but the COVID-19 crisis adds a new dimension. In addition to the cyclical shift toward debit because of the pandemic, there’s also been a step up in cash displacement, which is a secular trend that she expects to continue. Much of that movement from cash to cards seems to be happening through debit.
The U.S. and U.K. already had about 70% card penetration prior to the pandemic, and “a lot of what’s left is low dollar amounts and demographics that are less digitally involved, like lower-income or older populations,” Ellis said. When these groups enter the digital arena, they’re more likely to do so with debit, she argued.
Prabhu seemed to hint at these dynamics on Visa’s earnings call, when he said that debit is “the biggest beneficiary of the accelerated growth of e-commerce and the shift away from cash.”
This comment was interesting and not necessarily intuitive, Susquehanna’s Friedman argued, since debit “is such a utility” and not always “used for discretionary spend, which e-commerce is famous for.” That the COVID-19 crisis has moved more debit spending over to online channels is suggestive to him of new e-commerce users coming into the fray.
Ellis said that the debit trends are one reason she tilts toward Visa shares over Mastercard’s these days, though she has buy ratings on both names. She’s also upbeat about the company’s Visa Direct platform, which allows for “push” payments, a popular way for gig economy companies to pay drivers and delivery people. Mastercard has its own version of this, called Send, but Ellis said Visa is investing more in this area and may be benefitting from its larger scale.
The card companies also have different geographical makeups. Visa derived about 45% of volume from the U.S. prior to the pandemic, while Mastercard got about 36%. U.S. card volumes seem to be growing faster than global volumes, partly because of the shift from cash to cards. It’s easier for consumers to make that transition in countries like the U.S. where cards are commonplace and most merchants have the infrastructure to accept them, per Ellis’s analysis.
Visa’s geographic mix may also be proving beneficial as some international travel corridors start to reopen. Both Visa and Mastercard called out a bit of recovery in intra-Europe travel while noting that most international borders remain closed. But Visa sounded slightly more upbeat about current travel dynamics, highlighting that corridors like the U.S., Mexico, and the Caribbean, as well as the Persian Gulf, are starting to reopen.
Wedbush analyst Moshe Katri said that Visa has more exposure to those cross-border corridors outside of Europe where travel activity is doing a bit better. He has outperform ratings on Visa and Mastercard shares.
Mastercard could be due for “a nice trade upward” if international travel resumes upon broad availability of a vaccine, said Mizuho’s Dolev, though he still thinks Visa is “better positioned structurally right now” due to its debit makeup.
Dolev has buy ratings on both stocks.
Mastercard, for its part, is upbeat about a credit rebound. “As travel comes back, you’ll see that reflected in credit,” President Michael Miebach said on the company’s Wednesday earnings call. He stated that Mastercard’s multi-rail strategy allows the company to benefit regardless of how people choose to pay, whether it’s with credit, debit, QR codes, or push payments. “But I do expect credit to come back,” he continued.
Prior to the pandemic, Mastercard’s stock had been outperforming Visa’s for several years, and it remains to be seen whether the dynamics brought on by COVID-19 will alter that pattern. The two have had similar performances so far this year, with Visa’s stock off 4% and Mastercard’s down 5%.
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>>> Is MSCI a Buy?
The company leverages its knowledge and expertise to provide exceptional products to the financial industry while growing its subscription-based revenues year after year.
Motley Fool
by Courtney Carlsen
Sep 11, 2020
https://www.fool.com/investing/2020/09/11/is-msci-a-buy/
MSCI (NYSE:MSCI) provides investment products and financial data to some of the largest asset managers in the world. You might be more familiar with it for its exchange-traded funds (ETFs) than for its own business. But its business is a strong one, and it's been a big winner for investors, up almost 500% over the past five years.
The company has built up years of experience in the industry and an extensive collection of historical data, proprietary equity index data, risk algorithms, and environmental, social, and governance (ESG) data, along with strong intellectual property protection on its indexes. As a result, it has been able to effectively leverage this data and expertise to continually improve the index and ETF products it provides for its clients.
MSCI capitalizes on this domain knowledge through a subscription-based revenue model. In fact, subscription-based revenues make up 74% of its $1.6 billion in total revenue since June 30, 2019. Not only that, but the company is able to keep clients satisfied, as seen by its 90%-plus retention rate over the past five years. All of these factors make MSCI a great company to consider adding to your portfolio.
ETF investing is a strength of MSCI's.
A staple in the financial community
MSCI's global reach attracts many big-name clients, most notably BlackRock. The company provides support tools and services for the global investment community including indexes, portfolio construction, and risk management analytics. MSCI's goal is to help clients understand key drivers of risk and return, which in turn help them build better portfolios.
MSCI's stock market indexes make up about 60% of the company's total business. An index can focus on a general basket of stocks, such as the S&P 500, or on investments that fit a very specific criteria such as ESG stocks. MSCI uses its expertise to continuously innovate its ETF and index products. For example, it offers indexes that target systemic style factors, including volatility, size, momentum, and value. It also offers newer indexes for clients that will track ESG companies as well as ETFs based on on-trend factors, such as smart cities, the digital economy, and other disruptive technologies.
In total, MSCI calculates 226,000 indexes daily and 12,000 indexes in real time, and serves 7,800 clients across 90 countries.
Subscription-based revenues are a key growth driver
MSCI's principal business model is to license annual, recurring subscriptions for the majority of its index, analytics, and ESG products and services for a fee due in advance of the service period. For its index segment specifically, the company sells index data subscriptions that give clients access to MSCI index-linked investment products on a contractual basis, rather than on a usage basis.
In its most recent quarterly earnings report, MSCI reported total 12-month revenue of $1.6 billion, 74% of which came from recurring subscription services. Since the end of 2015, it has seen revenues growth at a compounded annual growth rate of 10%. During that same time period, adjusted earnings per share grew even faster, at a compounded annual rate of 28%.
Recurring subscription revenues continue growing, as well. In the second quarter of this year, the company reported recurring subscription revenue of $309.9 million, a 7.2% increase over the same period last year. This increase was driven thanks to 10% growth in recurring revenue from index products and a 22.7% increase in ESG products. Subscription revenue has continued to grow despite the challenges the economy has faced with COVID-19.
A look at the competition
MSCI has a number of competitors, depending on which operating segment you're looking at. In its index segment, the company competes with S&P Dow Jones Indices -- which is jointly owned by S&P Global and the CME Group -- as well as with FTSE Russell, a subsidiary of the London Stock Exchange Group. In analytics, the company finds competition from Qontigo, BlackRock Solutions, Bloomberg Finance L.P., and FactSet Research Systems.
What sets MSCI apart from its competitors is its extensive database on global markets, proprietary equity indexes, risk algorithms, and ESG. The company relies strongly on intellectual property rights to keep many aspects of its products and services proprietary. Also, its strong relationships with its clients gives it an advantage over competitors, especially since happy clients stay with MSCI for years.
A happy client base
MSCI's retention rate, a metric that tracks the company's ability to retain its customers over time, is consistently 90% and higher over the past five years.
MSCI also continues to grow its subscription run rate. This metric provides an estimate at a particular point in time of the annualized value of the company's recurring revenues under its client contracts for the next 12 months, assuming all contracts are renewed. The subscription run rate is a key operating metric for MSCI because a change in its run rate would ultimately impact its operating revenue over time. New subscription sales have an effect of increasing the company's run rate and operating revenues over time. In the past five years, the subscription run rate has consistently grown between 7% and 10%, and its subscription run rate has actually grown over 10% in each of the past three quarters.
MSCI does a good job of maintaining clientele, a sign that its customers are clearly satisfied with its services and products. Maintaining a high retention rate is essential for its subscription-based revenue model to work.
Is MSCI a buy at today's valuation?
Investors may be concerned that MSCI is too expensive for its current share price. The company has a price-to-earnings (P/E) ratio of 56, which is much above its recent norm between 30 and 40. But its consistent sales and earnings growth and customer loyalty make a strong argument that it deserves its premium.
MSCI is a great company that continues to thrive -- even in the face of the COVID-19 pandemic -- thanks to its subscription-based business model, which makes it a steady and stable investment choice despite its high valuation.
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Mastercard - >>> 3 Top Growth Stocks You Can Buy and Hold for the Next Decade
These growth stocks are potential multibaggers.
Motley Fool
by Neha Chamaria
Oct 17, 2020
https://www.fool.com/investing/2020/10/17/3-top-growth-stocks-you-can-buy-and-hold-for-the-n/
You need three things to buy and hold a stock for a decade: conviction, trust, and patience. You must be strongly convinced that the underlying company has solid growth catalysts for several years to come, trust that management will capitalize on those opportunities and unlock greater shareholder value, and be patient enough to hold onto the stock through volatility to reap rich returns years down the line.
If you think you can do it, here are three top growth stocks riding on three separate megatrends that could make you crazy rich only if you buy and hold them for a decade -- preferably even beyond.
Ride this energy shift
Renewable energy is changing the dynamics of the global energy sector. Among all the energy sources in the U.S., renewable energy grew the fastest, at a nearly 100% clip between 2000 and 2018, according to the Center for Climate and Energy Solutions. Further, renewables are projected to make up 45% of global electricity generation by 2040, up from only about 26% in 2018.
You probably already know how the world's biggest companies are already making the shift. Amazon, for example, strives to power its operations with 100% renewable energy as early as 2025.
Given the backdrop, renewable energy stocks are compelling buys for at least the coming decade. Consider Brookfield Renewable Partners (NYSE:BEPC)(NYSE:BEP), one of the world's largest owners and operators of renewable energy assets, worth $50 billion.
Brookfield typically buys value assets, develops and turns them around, where necessary, to make them profitable, and eventually monetizes mature assets to reinvest the proceeds opportunistically. Through recent acquisitions, the company has expanded significantly into solar and wind, although hydropower generates 66% of its cash flows. Brookfield has an incredible track record of cash flow generation, as evidenced in its dividend growth: The stock's dividends have grown at a compound annual rate of 6% in the past 20 years.
In the coming decade, Brookfield shares could easily generate annualized double-digit returns for three major reasons:
Brookfield has 18,000 megawatts (MW) of renewable capacity under development.
Management is targeting 6%-11% growth in funds from operations.
It aims to grow its annual dividend by 5%-9%.
Brookfield's development pipeline is not only among the largest in the world, but also nearly as large as its current capacity of 19,300 MW. If that should take care of growth, the fact that 95% of its cash flows are contracted should ensure cash flow resiliency, even through tough times. Whichever way you slice it, Brookfield Renewable looks like an easy multibagger stock in the making.
A megatrend poised to mint you money
The war on cash is raging, and it's only a matter of time before nations across the globe become cashless societies, as people ditch paper money for cards and other forms of digital payments. E-commerce, in particular, is a massive tailwind that should bolster the transition, opening up a world of opportunities for Mastercard (NYSE:MA).
Mastercard doesn't issue cards but facilitates transactions made through them on its payments-processing network. It's an incredibly asset-light, high-margin business model, as Mastercard earns a fee on every transaction made using its cards anytime, anywhere in the world. The advantage of network effects here is unmistakable -- the more cards issued by banks and financial institutions, the more value it adds to Mastercard.
Mastercard has 2.6 billion co-branded cards in global circulation and reported $7.3 billion in sales and an operating margin of 51% in the first half of 2020. Although the coronavirus outbreak hit its earnings, Mastercard's long-term story is getting even stronger as digital payments pick up, especially during the COVID-19 pandemic.
Meanwhile, management is savings costs, where possible, while pumping money into high-growth areas like business-to-business solutions and data and analytics. Mastercard's revenue from value-added services like data analytics, consulting fees, cyber and intelligence fees, and loyalty reward fees jumped 23% in 2019.
The global fintech industry is projected to grow exponentially in the coming years. With its solid global presence, partnerships with some of the world's biggest companies, suite of lucrative value-add services, and thirst to grow via acquisitions, Mastercard could earn multibagger returns for investors in the coming decade and beyond.
This e-commerce growth player won't fail you
E-commerce was already booming when the COVID-19 pandemic and ensuing lockdown and homebound lives added fuel to the fire. It was a huge blow for brick-and-mortar stores, as many were forced to shut shop. That's when Shopify (NYSE:SHOP) stepped in, helping merchants of all sizes set up online stores quickly with easy access to everything from inventory management to payments processing.
The results were visible in Shopify's numbers: In its second quarter, new stores created on its platform jumped 71% sequentially and its gross merchandise volume (GMV) soared 112% and revenue 97%, both year over year. GMV, which reflects the total dollar value of orders processed on Shopify's platform in a given period, hit $30.1 billion in the quarter, registering record growth since the company went public in 2015.
Meanwhile, Shopify continues to innovate. In Q2 alone, it launched channels enabling merchants to customize their storefronts within Facebook and Instagram and sell their products online on Walmart. It also expanded its contactless payments in Canada and saw 65% year-over-year growth in merchant cash advances and loans through Shopify Capital. The company also automated some areas of Shopify Fulfillment Network, its new logistics arm that's gotten off to a successful start.
With more than 1 million merchants across 175 countries already on board, Shopify has grown by leaps and bounds in recent years and will likely continue to do so as adoption of e-commerce further gathers steam. For patient investors in the stock, that could mean some solid returns in the coming years.
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