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VFH – VFH: Targeted QE To Balance High Inflation And Financial Stress

Written by Chetan Woodun on March 26, 2023. Posted in Stock Report, VFH.

FED, federal reserve, Control interest rates, Inflation, Interest rates. World economy crisis, American economy and business concept. FED on Wooden block with Percentage sign and arrow up and down. — Wipada Wipawin/iStock via Getty Images

Only last month, things were looking good for the banks forming part of the Vanguard Financials ETF (NYSEARCA:VFH) which had broken the $88 resistance level. However, the second week of March changed it all with a drop to the $75-$76 level with a flurry of events happening within a short span of time. However, comparing its performance with the iShares U.S. Regional Banks ETF (IAT) which is down by 33.5% as shown by the orange chart below during the last month reveals that the Vanguard fund has been much less impacted by the banking turmoil.

Now, in light of the latest Federal Reserve interest rate hikes, the aim of this thesis is to assess whether VHF can fully recoup its losses and post gains for the rest of 2023. For this purpose, it is useful to learn from the recent events which have induced a lot of volatility in banking stocks, especially the one by the U.S. central bank concerning monetary policy.

The Events

The Federal Reserve Monetary Committee or FOMC, which met on Tuesday and Wednesday, saw itself pressured between, on the one hand, the task of stabilizing a banking sector in difficulty and, on the other hand, the need to continue interest rate hikes to stem persistent inflation. Between price stability and sustaining the financial system, the Fed’s Chairman appeared to have chosen both, as the “ongoing increases in the target range” statement made in February appears to have been replaced by a more dovish stance of “some additional policy firming may be appropriate” to reach the 2% target.

Pursuing further, acknowledging that inflation “remains elevated” to be replaced by “has eased somewhat” in the February meeting denotes hawkishness as it entails more rate hikes. More important, the fact that Mr. Powell mentioned interest rates are already restrictive and on top, banks will be forced to further tighten lending in view of the recent turmoil implies a more dovish stance in the future. However, this position was somewhat moderated by the mention that there may be no rate cut in 2023.

Now, due to the Fed raising rates by 25 basis points in the middle of a banking crisis which is unprecedented, some view this as prioritizing the fight against inflation. However, learning from the European Central Bank (ECB) last Thursday, it is possible to do both at the same time. Hence, there was a 50 basis point hike to fight inflation while ensuring financial stability with a different set of tools. Hence, by rising by 25 basis points, instead of 50, the Fed ensures that it tightens at a less aggressive pace, but, at the same time, it also has in mind financial stability.

For this matter, the Fed’s emergency loans to banks reached a record of $153 billion in just one week, higher than the previous highs reached in 2008 during the Great financial crisis. Therefore, while individual liquidity issues may crop up at the regional banks, regulators can be relied upon to take extraordinary steps to contain risks, so that these do not spread to the banking sector. This in turn means that such stressful events can induce a significant degree of volatility in ETFs like IAT, but, there should be less damage to those holding the shares of larger banks like VHF whose top holdings are pictured below.

seek — Portfolio Composition (investor.vanguard.com)

Going deeper, one will notice that this list includes behemoths like Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Morgan Stanley (MS), and Goldman Sachs (GS) which are the so-called “too big to fail” banks, but, mind you, these diversified banks only constitute 21.5% of VFH’s assets.

Diversification, Regional Banks, and Risks

The word “diversified” takes all its importance, especially in the current context, where in addition to just taking deposits and issuing loans, VFH’s holdings provide asset and wealth management, as well as other financial advisory services like M&As. For this matter, 9.1% and 9.5% of the ETF’s overall weight are dedicated to “Asset Management and Custody” and “Investment Banking and Brokerage” respectively as seen below.

Popularity of the term Work from home — Sector Coverage (investor.vanguard.com)

Also, as illustrated with Berkshire Hathaway (BRK.B), the fund’s assets are skewed towards insurance, sectors which are less susceptible to be impacted during periods of banking stress, but rather at times of wider systemic issues.

Thus, diversification has imparted VFH with lower volatility, which is evident by a comparison of the performances last week when credit ratings and benchmarks analytics provider S&P Global (SPGI) and credit payment card processor American Express (AXP) produced upsides.

However, the ETF has exposure to regional banks, at 13.9% of its overall weight. Here, the problem is that after ten rate hikes by the Fed since 2022, monetary conditions are tight. One area where this has caused havoc is long-dated and fixed-rated treasuries whose value has gone significantly down as a result of interest rates going up, as exemplified by the more than 25% downside for the Vanguard Extended Duration Treasury ETF (EDV).

Now, banks in general have a large part of their assets constituted of these fixed-rated securities like 28% for BAC and 56% for Silicon Valley Bank Financial (SIVB). The problem crops up when depositors withdraw large amounts of money in panic mode with banks being forced to sell securities at a market value that is less than at par (or originally purchased), in order to obtain liquidity. This results in unrealized losses.

In addition to bond portfolios losing value and deposits flying away, another issue facing regional banks is commercial property loans where higher rates have beefed up borrowing costs, while adversely impacting property valuations. Now, many of these banks account for about 80% of commercial real estate loans.

In these circumstances, businesses may simply be more inclined to hoard money instead of depositing it in the aftermath of the recent bank runs, or, financial institutions becoming more cautious about to whom they loan money. Consequently, there are risks of strains starting to appear in the trillion-dollar-worth commercial real estate loans market, signifying that risks of a credit crunch may now have overtaken high inflation concerns.

Thus, the Fed’s priorities have changed.

Targeted QE as a Workaround Amid Volatility

One of these is prioritizing the stability of the financial system, with the creation of the new credit facility as I mentioned earlier. Created on March 12 by the Federal Reserve and called the Bank Term Funding Program (BTFP), this new facility can provide banks with loans for up to one year against treasuries, mortgage-backed securities, and other assets as collateral. These are valued at par, avoiding institutions in difficulty to have to liquidate them at the market rate and incurring losses.

Furthermore, the BTFP together with the Federal Reserve’s Discount Window which aims to ease pressures in reserve markets by extending credit to help alleviate liquidity strains in the banking system, constitute two supportive actions that are synonymous with “targeted QE (Quantitative Easing)”, in contrast to Quantitative Tightening which has been in place since early 2022.

Pursuing on a positive note, while stress around liquidity remains high, there are signs that things are stabilizing as there had been a reduction, by $1 billion, of the amount banks had borrowed from the Discount Window and BTFP in the week ended March 23. In these circumstances, one can expect VFH which has lost 13.8% to recoup losses as confidence returns in the banking system. Just assuming a 10% upside, I have a target of $82.4 (74.95 x 1.1).

However, volatility reigns.

In this respect, investors will note that contagion risks remain, as seen by the troubles of Deutsche Bank (NYSE:DB) on Friday impacting U.S. large banks like Morgan Stanley and Wells Fargo which fell by 4.2% and -2.8% respectively at one point. VFH was also down by 0.7%.

However, the German bank’s stock eventually rebounded driving others on both sides of the Atlantic Ocean in its wake. This recovery may have been triggered by confidence-building measures like Treasury Secretary Janet Yellen calling a meeting of the Financial Stability Oversight Council and the ECB maintaining that the banks in the euro area remain strong.

On a cautionary note, normally big banks should benefit from the reduced cost of capital as deposits flee from smaller regional ones, but, the fact that America’s second-largest bank BAC has fallen by over 6% in a short period as shown in the above chart shows that the market thinks otherwise. One of the reasons could be that the bank will ultimately have to disburse more by offering higher-yield deposits to avoid seeing a flight of capital toward money market funds. Therefore, this can have some dent in its profitability.

Calm Down, It Is Not Looking that Bad, for Now

However, we are far from a “Lehman moment” where the level of stress was considerably higher due to the highly opaque securitized products and bank regulations not being as ring-fenced as today. Also, with a substantial part of banks’ assets constituted of treasuries, things are not as bad.

Furthermore, these same government bonds whose value has gone down as a result of aggressive interest rate hiking are the cause of the problem as I explained earlier. Then, logically, the solution would have been to shift to reverse gear for monetary tightening, but, with targeted QE and existing FDIC protection for deposits not exceeding $250K, there are sufficient tools to contain contagion risks. Banks can also tap into the Federal Home Loan Bank funding.

Along the same lines, with 65% of exposure to non-bank sectors, VFH’s holdings are still benefiting from growth in the U.S. economy which expanded by 2.9% (annualized basis) in Q4- 2022. Also, with the latest job numbers still growing, there are ingredients for the ETF could recoup its losses.

Finally, the only caveat which could taint this rosy picture is a reduction in corporate borrowing as CFOs become keener to hoard deposits. In case such an action becomes widespread, then there are real dangers to economic growth.

INSP – Inspire Medical Systems: Sleep Apnea Equipment Specialist Looks Like A Buy

Written by Peter F. Way on March 26, 2023. Posted in INSP, Stock Report.

Business on Wall Street in Manhattan — Pgiam/iStock via Getty Images

This article’s primary focus is on Inspire Medical Systems, Inc. (NYSE:INSP)

Investment Portfolio Discipline Summary

“Blockdesk’s Standard Performance Comparison fund invests in equities whenever Market-Maker hedging activity forecasts that 80% or more of the near-coming price range is expected to be to the upside and 10% or less may be to the downside. This is a guide to the balance of expectations, since coming price change directions tend to be led by prior extremes, issue by issue.

Holding periods are limited to achieving forecast price range maximums by, if not before, 3 months. Active reinvestment in more promising investment alternatives at that time is called for in any forecast holding at a loss.”

Description of Primary Investment Candidate

“Inspire Medical Systems, Inc., a medical technology company, focuses on the development and commercialization of minimally invasive solutions for patients with obstructive sleep apnea (OSA) in the United States and internationally. The company offers Inspire system, a neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA. It also develops a novel, a closed-loop solution that continuously monitors a patient’s breathing and delivers mild hypoglossal nerve stimulation to maintain an open airway. The company was incorporated in 2007 and is headquartered in Golden Valley, Minnesota.”

Source: Yahoo Finance

street analyst estimates — Yahoo Finance

These growth estimates have been made by and are collected from Wall Street analysts to suggest what conventional methodology currently produces. The typical variations across forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined.

Risk and Reward Balances Among INSP Competitors

Here are several healthcare equipment industry services like INSP. Following the same analysis as with INSP, historic sampling of their prior Risk-Reward balances like those of today were taken, and are mapped out in Figure 1.

Figure 1

MM hedging implied forecasts — blockdesk.com

(used with permission)

Expected rewards for these securities are the average gains from current closing market price seen worth protecting short positions. Their measure is on the horizontal green scale.

The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.

Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Capital-gain attractive to-buy issues are in the directions down and to the right.

Our principal interest is in INSP at location [2], at the lower-right edge of the symbols cluster. A “market index” norm of reward~risk tradeoffs is offered by SPY at [9]. Most appealing (to own) by this Figure 1 view is INSP.

Comparing features of Alternative Investment Stocks

The Figure 1 map provides a good visual comparison of the two most important aspects of every equity investment in the short term. There are other aspects of comparison which this map sometimes does not communicate well, particularly when general market perspectives like those of SPY are involved. Where questions of “how likely’ are present other comparative tables, like Figure 2, may be useful.

Yellow highlighting of the table’s cells emphasize factors important to securities valuations and the security INSP, most promising of near capital gain as ranked in column [R]. Pink highlighted cells suggest positions unfavorable for “long” holdings.

Figure 2

detailed comparative data — blockdesk.com

(used with permission)

Why do all this math?

Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the prospective price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price drawdown RISK may be encountered during its holding period.

Readers familiar with our analysis methods after quick examination of Figure 2 may wish to skip to the next section viewing Price range forecast trends for INSP

Column headers for Figure 2 define investment-choice preference elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions.

Table cells with yellow fills are of data for the stocks of principal interest and of all issues at the ranking column, [R].

The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.

[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are emotionally most likely to accept losses.

The Range Index [G] tells where today’s price lies relative to the MM community’s forecast of upper and lower limits of coming prices. Its numeric is the percentage proportion to the downside of the full low to high forecast seen below the current market price.

The use of prior market actions subsequent to RIs like today make it necessary that those priors be representative of experiences in the just-past 5 year period of 1261 market days. Any RI sample of less than 20 market days could have occurred in one month of 21 market days. Out of the 5 years of 60 months such performance might well be not representative of the whole period.

[H] tells what proportion of the [L] sample of prior like-balance forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.

What makes INSP most attractive in the group at this point in time is its basic strength of reward to risk ratio of 2.1 to 1 in [T].

Further Reward~Risk tradeoffs involve using the [H] odds for gains with the (100 minus H) loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among alternative candidate securities, with ISPN in top rank.

Along with the candidate-specific stocks these selection considerations are provided for the averages of some 3000+ stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P 500 Index ETF (SPY) as an equity-market proxy.

Current-market index SPY is not competitive as an investment alternative with its Range Index of 42 indicating the other more than half of its forecast range is to the upside, yet only 7/10ths of previous SPY forecasts at this range index produced profitable outcomes, with enough losers to put its average in near breakeven result in column [ I ].

As shown in column [N] of figure 2, those levels in comparison to their row forecasts [E] vary significantly between stocks. What matters is the net profit between investment gains and losses actually achieved following the forecasts, shown in column [I]. The Win Odds of [H] tells what proportion of the Sample RIs of each stock were profitable. Odds below 80% often have proven to lack reliability.

Price range forecast trends for ISPN

Figure 3

trends of daily updated forecasts — blockdesk.com

(used with permission)

No, this is not a “technical analysis chart” showing only historical data. It is a Behavioral Analysis picture of the Market-Making community’s actions in hedging investments of the subject. Those actions define expected price change limits shown as vertical bars with a heavy dot at the closing price on the date of the forecast.

It is an actual picture of experienced market professionals expected future prices, not a simple hope of a recurrence of the past. These expectations are backed up by significant bets of investment capital made to protect market-makers or to earn a proprietary profit from risk-taking.

The special value of such pictures is their ability to immediately communicate the balance of expectation attitudes between optimism and pessimism. We quantify that balance by calculating what proportion of the price-range uncertainty lies to the downside, between the current market price and the lower expected limit, labeled the Range Index [RI].

In this structure a RI at zero indicates no further price decline is likely, but not guaranteed. The odds of 3 months passing without either reaching or exceeding the upper forecast limit or being at that time below the expected lower price (today’s) are quite slight.

The probability function of price changes for INSP are pictured by the (thumbnail) lower Figure 3 frequency distribution of the past 5 years of RI values with the today value indicated.

Conclusion

The multi-path valuations explored by the analysis covered in Figure 2 of prior Realized Payoffs [I], months and a half holding periods [J], Win Odds [H], and Odds-Weighted basis-points per day (1% of 1%) [R] is rich testimony to the near-future value prospect advantage of a current investment in Inspire Medical Systems, Inc. over and above the other compared alternative investment candidates.

PRIM – Primoris Services Corp: Promising Investment Opportunity, Strong Growth Prospects

Written by DzD Analysis on March 26, 2023. Posted in PRIM, Stock Report.

Solar panels fields on the green hills — LeoPatrizi

Investment Thesis

Primoris Services Corporation (NASDAQ:PRIM) should see a boost in revenue in 2023, thanks to its strong order backlog levels and the recent acquisition of PLH. The company has secured $290 million worth of projects related to the construction of solar facilities in the Midwest, which is in line with the growing trend toward renewable energy. Additionally, the government’s tax credits for renewable energy, funding for communication infrastructure development, and investments in oil and gas pipelines should provide long-term benefits for PRIM. The company’s attractive valuations and promising growth prospects make it a good investment opportunity.

Financial Performance Review

In 2022, PRIM’s revenue grew 26% Y/Y to $4.4 billion with 15% organic growth. The revenue growth was primarily driven by a healthy solar market, the expansion of PRIM’s communication services, and the acquisitions of PLH and B Comm. The revenue in the Utilities segment increased 22% Y/Y due to the acquisitions of PLH and B Comm and increased activity across the power and communications end markets. PRIM acquired PLH Group (PLH) in August 2022 to expand its capabilities in the utility markets, including power delivery, communications, and gas utilities. PLH is a utility-focused specialty construction company with a presence across the United States. PRIM acquired B Comm in June 2022 to expand its communications services in the utility markets. B Comm is a provider of maintenance, repair, upgrade, and installation services in the communications market. The revenue in the Energy/Renewables segment grew by 48.2% Y/Y due to the strong solar EPC business and the acquisition of PLH, partially offset by supply chain constraints. The Pipeline segment’s revenue declined by 28.4% Y/Y due to the substantial completion of pipeline projects in 2021 and a decline in midstream pipeline market demand.

The company’s gross margin in 2022 declined by 160 bps Y/Y to 10.3% due to the closeout of multiple projects in the Pipeline segment in 2021 and increased labor and fuel costs in the Utilities segment. The adjusted EBITDA margin declined 210 bps Y/Y to 6.4% due to the lower gross margins and increased SG&A expenses due to the integration of PLH.

Near-term Outlook

PRIM’s order backlog grew by $1.5 billion, or 37% Y/Y to $5.5 billion in 2022, with $570 million of the increase coming from acquisitions. The backlog in the Utilities, Energy/Renewables, and Pipeline segments grew by 32%, 29%, and 197% Y/Y, respectively. The Utilities segment’s order backlog benefited from the acquisitions of B Comm and PLH. The company was able to add new customers in the Central Texas region with the communication services provided by B Comm. In the Energy/Renewable segment, the company secured $400 mn worth of projects in Q4 FY22, including two $100 mn power projects and four $200 mn heavy civil construction projects. In the Pipeline segment, the company secured a large pipeline project in Q3 FY22, valued at more than $120 million. This project involves constructing approximately 60 miles of pipeline in Texas.

Looking ahead, I am optimistic that the company’s order backlog will continue to reap the rewards of the robust demand in the communications and renewable energy markets, specifically solar energy. The increased shift towards renewable energy post-Ukraine war has benefited the company. PRIM has recently secured multiple solar projects worth $290 million, covering the engineering, procurement, and construction of utility-scale solar facilities in the Midwest. In the communications market, the need for better connectivity has driven the deployment of fiber and 5G across the United States. These developments should drive the company’s revenue in the near-to-medium term. Despite facing supply chain constraints, notably in the delivery of solar modules, which has affected the company in the last few quarters, the situation is gradually improving in 2023, and this should benefit the company. Overall, I believe the company’s revenue in 2023 should benefit from the healthy order backlog, supply chain improvements, and the acquisition of PLH.

On the margin front, the company should benefit from declining SG&A expenses. With the completion of PLH’s integration into PRIM’s business and the elimination of duplicate overhead costs, the adjusted EBITDA margin should improve. Based on my revenue growth estimate of 22% for 2023 and the midpoint of management’s adjusted EBITDA guidance range of $350 mn to $370 mn, the adjusted EBITDA margin should improve by 30 bps Y/Y to 6.7% in 2023.

Medium and Long-term growth prospects

PRIM serves several end markets, including renewable energy, communications, power delivery, electric and gas utility, industrial, and oil & gas. These markets are experiencing significant medium- to long-term opportunities, which should benefit the company. PRIM’s Energy/Renewable segment should reap the benefits of the growing demand for renewable energy sources. As the need for power continues to increase, more power generation facilities are being developed that rely on renewable energy sources. Furthermore, the Inflation Reduction Act (IRA) has spurred an influx of capital investment in renewable projects by offering tax incentives for wind and solar facilities, as well as provisions for green hydrogen.

In the Utilities segment, the increasing demand for electricity and the expansion and modernization of the electric grid in the United States should benefit the company. Recently, the Department of Energy (DOE) announced $13 billion in funding to upgrade the existing grid and build a new transmission line. The funding includes $10.5 billion in funding under the Grid Resilience and Innovation Partnership (GRIP) program and $2.5 billion under the Transmission Facilitation Program. The segment should also benefit from the developments in the communications market. The Infrastructure Investment and Jobs Act (IIJA) and several state funds are provided to construct and improve broadband infrastructure across the United States. In the Pipeline segment, the company should benefit from the regulatory measures around the maintenance, repair, and inspection of pipelines in the oil and gas industry.

The healthy trends across all of PRIM’s end markets should benefit revenue growth in the medium- to long-term.

Balance Sheet & Cash Flow Analysis

The long-term debt at the end of 2022 was $1.14 billion, with net debt under $900 million. The net debt to EBITDA ratio was 3x compared to 3.25x at the end of the third quarter of 2022. Management is planning to bring down its leverage ratio to 2x by the end of 2024 by paying off its debt and improving EBITDA. This move towards a more sustainable financial position will position PRIM to pursue additional acquisitions like PLH Group and expand its utilities business. With adequate liquidity on hand, I am optimistic that the company can execute its growth strategy effectively

The capital expenditure in 2022 was $95 million, which was lower compared to the prior year’s $135 million. The company anticipates CapEx to be between $80 mn and $100 mn in 2023, of which 50% will be utilized for new equipment to meet the demand in its end markets and the remaining for maintenance of equipment.

Valuation

In my DCF calculations, I am assuming revenue growth to be in double digits in 2023, given the healthy order backlog and the acquisition of PLH. Beyond 2023, I have assumed growth to be high single digits, with a terminal growth rate at mid-single digits. I have assumed the debt ratio to decline as the company pays off its debt and reaches its historical levels of 30% in the long term. I used a discount rate of 7.86% by using the cost of equity of 9.85% and a cost of debt of 3.95%, which is below the industry level, and arrived at a fair value of $33.17 for PRIM.

Using the relative valuation, the stock is currently trading at 8.97x FY23 consensus EPS estimate of $2.65 and 7.39x FY24 consensus EPS estimate of $3.21, which is below its five-year average forward P/E of 11.98x.

Conclusion

To sum it up, I am bullish on PRIM stock, as I see the potential for an approximately 40% increase in stock price. The company has a robust order backlog that will likely benefit its revenues in the short term, in addition to the recent acquisition of PLH. As PRIM continues to pay down its debt and improve its leverage ratio, it should be better positioned to pursue more acquisitions and expand its business further. Looking ahead, PRIM has solid growth prospects that should support long-term revenue growth, and I believe the company is well-positioned for future success.

DON – DON: Higher Exposure To Financial And Real Estate Sectors Make It Vulnerable In 2023

Written by Ploutos Investing on March 26, 2023. Posted in DON, Stock Report.

Green Investing Piggy Bank with solar panels and Candlestick Graph — mphillips007

ETF Overview

Some may wonder whether to invest in large-cap, mid-cap or small-cap dividend funds. In this article, we will analyze WisdomTree MidCap Dividend ETF (NYSEARCA:DON) to see if it is a good investment choice among the three types of dividend funds. As the title of the ETF suggests, DON invests in mid-cap dividend stocks in the United States. The fund has generally performed better than its small-cap peer but inferior to its large-cap peer in the long run. In the near term, its higher exposure to financial and real estate sectors may make it more vulnerable in an elevated rate environment. Therefore, we think investors may want to seek other large-cap dividend funds instead.

Fund Analysis

DON underperformed against its large-cap peer since 2022 and in the long run

Last year was a terrible year for equities in general. DON was not without an exception. As can be seen from the chart below, the fund has lost nearly 14% of its value since the beginning of 2022. This was better than its small-cap peer, WisdomTree SmallCap Dividend ETF (DES), but inferior than its large-cap peer, WisdomTree LargeCap Dividend ETF (DLN). This was understandable as small-cap stocks usually do not have strong balance sheets than large-cap stocks, and in a rapidly rising interest rate environment such as last year, many small-cap stocks are ill-equipped to combat the headwind. In contrast, large-cap stocks are generally much more established. They tend to have stronger balance sheets and more robust business models.

This better performance in large-cap funds over mid-cap and small-cap funds is also evident in the long run. As can be seen from the chart below, DON’s total return of 134.7% in the past 10 years was much better than its small-cap peer DES’s 91.99%. However, DON’s performance was inferior than its large-cap peer DLN’s 163.5%. Not only because large-cap stocks have better balance sheets than their mid-cap and small-cap peers, they tend to have long runways of growth as well. As we know, not all small-cap stocks become large-cap stocks. Even if some of them with good growth potential become mid-cap stocks or large-cap stocks, they will be removed from DES’s portfolio as DES only includes small-cap dividend stocks. Therefore, DES do not reap the benefit of the growth potential of some of its small-cap stocks in its portfolio over a lengthy period. The same also applies to mid-cap as not all mid-cap stocks can grow become large-cap stocks. Even if they do become large-cap stocks, they will be quickly removed from their portfolio.

Lower exposure to technology sector is another reason why DON underperformed DLN

Another reason why DON has not performed well is that it does not have a high exposure to strong growth sectors such as technology sector. As the pie chart below shows, technology sector only represents 5.88% of DON’s portfolio. In contrast, technology sector represents over 18% of DLN’s total portfolio. No wonder DON’s growth is inferior than DLN in the long run.

Chart, sunburst chart Description automatically generated — WisdomTree Website

The fund has higher downside risk than DLN

Not only will DON underperform its large-cap peer DLN, the fund is likely going to have higher risk than DLN. As the pie chart above shows, DON has a high exposure to financials sector which accounts for 22.4% of the total portfolio. Real estate sectors also account for about 9.5% of the total portfolio. In contrast, DLN’s exposure to financial and real estate sectors are only 12.5% and 4.5% respectively. As we know, last year’s aggressive rate hike has caused tremendous stress to the financial system and caused some crisis in several regional banks just the past month. In addition, real estate sector is also under heavy pressure as the rate have risen rapidly and will remain elevated throughout 2023. Therefore, we think DON will have higher downside risk than DLN.

Our base case is a mild recession in H2 2023

Given that the Federal Reserve is likely going to keep the rate elevated beyond 2023, we think a mild recession will likely be the outcome in the second half of this year. In a recessionary environment, DLN will likely outperform as it has lower exposure to cyclical sectors such as financials and real estates than DON. In addition, we observed that DON has higher downside risk in the previous two recessionary environments. As can be seen from the chart below, DON suffered higher losses than DLN in the Great Recession in 2008/2009 and the 2020 recession.

Investor Takeaway

We do not think owning DON is a necessity in this uncertain macroeconomic environment. As we have analyzed, DLN appears to be a better choice in both the near-term and in the long run. Therefore, we think investors should probably invest in its large-cap peer DLN instead.

Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

PANW – Palo Alto Networks: A Smart Bet On AI-Backed Cybersecurity Business

Written by Dair Sansyzbayev on March 26, 2023. Posted in PANW, Stock Report.

Investment thesis

Palo Alto Networks (NASDAQ:PANW) is one of the most innovative artificial intelligence [AI] powered cybersecurity companies in the market. The company has achieved outstanding revenue growth over the past decade thanks to innovative cybersecurity solutions and high customer satisfaction. PANW has been able to build strong cash flow, which allows the company to reinvest in future growth. This is evidenced by the fact that management is providing a very positive outlook for the coming quarters. Despite the company’s impressive growth and strong fundamentals, my valuation analysis indicates that the stock is currently trading at a significant discount to its intrinsic value, making it an attractive investment opportunity.

Financials

The company’s latest fiscal year ended on July 31, 2022, so the latest available quarterly financials relate to Q2 of FY2023. The company announced 2Q2023 financials on February 21, delivering beat both in terms of revenue and EPS.

PANW latest earnings summary — Seeking Alpha

PANW reported impressive quarterly results with revenue growth of 26% YoY to $1.7 billion. Current remaining performance obligation [cRPO], a key indicator of the company’s future sales, rose 29% to $4.4 billion, suggesting a strong revenue pipeline. The company’s Subscription and Support performed well with a growth of 29%. In contrast, Product revenue grew at a slower pace of 15%, reflecting the company’s shift from hardware to a cloud-based software-as-a-service [SaaS] model. Although the company’s hardware security appliance lines accounted for about 20% of revenue, management is looking to exit this segment due to supply-chain issues in the tech industry. Despite these challenges, the non-GAAP gross margin expanded by 140 basis points to 75.5%, supported by both Services and Products.

The company’s non-GAAP operating income grew an impressive 55% to $377 million, and non-GAAP operating margin expanded by 430 basis points to 23% compared to the prior year, underscoring the management’s focus on profitable growth. Furthermore, PANW reported its third consecutive quarter of positive GAAP earnings in 2Q2023, reporting an EPS of $0.25, compared to a loss of $0.95 per share in 2Q2022. Non-GAAP EPS rose 81% from the prior year to $1.05, with share-based compensation charges being the primary exclusions from non-GAAP EPS at $0.94 in 2Q2023 and $0.90 in 2Q2022, along with other smaller charges.

In summary, the company demonstrated strong performance across all its key metrics last quarter, signaling a positive outlook for the company’s future growth.

Dipak Golechha, the CFO, also provided guidance and outlook for the next fiscal year and upcoming quarters during the last earnings call. Management expects operating margins to increase in the second half of fiscal 2023 and into fiscal 2024, resulting in faster earnings per share growth than revenue growth. In addition, management expects fiscal 2023 operating margins to be between 21.5% and 22% and earnings (excluding GAAP EPS ) to be between $3.97 and $4.03, an increase of 57% to 60%. The company also expects adjusted free cash flow margin to be between 36.5% and 37.5% and expects to be profitable in each quarter and in fiscal 2023 under GAAP.

FY 2023 guidance for PANW — Palo Alto Networks

Overall, PANW management provided a positive outlook and guidance for the next fiscal year and upcoming quarters. With expected increases in billings, revenue and non- GAAP EPS, along with improving profitability and operating margins, PANW appears well positioned to continue its growth trajectory in the cybersecurity industry.

While the most recent quarterly results together with near-term guidance provide a snapshot of the company’s current financial health, it’s important to take a deeper look at the financials over the past decade to fully understand the growth trajectory and potential for the future. Examining key financial metrics such as revenue, profit margins, and return on investment can provide valuable insight into the company’s performance and strategy over the long term.

PANW financials from 2013 to 2022 — Compiled by author based on historical information

As we can see the revenue has grown consistently year over year demonstrating a 30% CAGR, which I consider impressive on such a long term horizon. Gross profit grew in absolute terms in line with the topline but gross margin declined from 72.3% to 68.8% over the last decade. Operating margin has been negative over the decade but the trend has improved in the last year with an operating margin of -3.44% compared to -7.14% in the previous fiscal year.

For me as an investor it is important that PANW has consistently generated positive levered free cash flow [FCF] throughout the decade, reaching $1.4 billion in the last fiscal year. FCF margin has been volatile but generally increasing and FCF per share has also been on an upward trajectory.

To fuel growth, the company has been consistently investing in research and development [R&D] with R&D to revenue ratio steadily increasing from 16% in 2013 to 26% in 2022, indicating that the company is investing a significant portion of its revenue in R&D.

In terms of one of my favorite metrics for growth companies, revenue per employee, PANW has been improving steadily. This indicates that the company has been able to maintain a consistent level of productivity from its employees.

To summarize the company’s financial performance over the last decade, I believe that PANW’s financials show a positive trend with strong revenue growth and consistently positive FCF.

The stock is massively undervalued

If we look at PANW’s Seeking Alpha Quant valuation grade, we would probably never invest in this stock.

PANW SA valuation metrics — Seeking Alpha

However, for a growth company like PANW traditional valuation methods based on multiples is highly likely to be inappropriate to accurately determine the company’s fair value. Thus, to measure PANW stock intrinsic value I performed a discounted cash flow [DCF] analysis using conservative assumptions. For revenue projection I use consensus estimates which are available up to FY 2027. For fiscal years 2028 to 2032 I implement a 12% CAGR which is rounded down to even percentage forecast for cybersecurity market size growth up to 2030 provided by Grand View Research. To calculate future FCFs I implement TTM levered FCF margin of 34.92%. FCF are discounted using WACC of 10% which is a rounded up estimation of Gurufocus.

PANW DCF scenario 1 — Author’s calculations

Incorporating all assumptions gives me a fair value of PANW business at $112.75 billion which is significantly higher than the current market cap of $58.67 billion. This indicates a massive 92% upside potential.

It would be fair if readers challenge my assumptions, so I decided to perform a sensitivity test using much worse conditions with a topline growing at just 5% CAGR for years beyond FY 2027 and FCF margin deteriorating significantly to 25%. Even under this tough conditions the model suggests stock is fairly valued with a margin of safety of 6%.

PANW DCF scenario 2 — Author’s calculations

Based on the calculations above I think the market is significantly undervaluing the company if compared to the company’s FCF growth prospects.

Risks to consider

Investing in the company’s stock is not without risks. As a rapidly growing company, management must effectively address future growth by improving systems, processes, and controls. Failure to do so could negatively impact operational efficiency and put pressure on profit margins. In addition, PANW’s operating results can fluctuate significantly from period to period and be unpredictable, which could lead to short-term volatility in the share price. Although the Company’s recent growth rate has been impressive, this is no guarantee of the Company’s future performance. Another risk to the company is the intense competition it faces. The cybersecurity industry is highly competitive, with many large and established companies operating in the field. PANW competes with companies such as Cisco (CSCO), Check Point (CHKP) and Fortinet (FTNT), among others. As a cybersecurity company, PANW’s success is closely tied to its ability to protect its customers from cyber threats. However, ever-evolving cyber threats mean that PANW may be exposed to new and unpredictable risks in the future. Defects, errors or vulnerabilities in PANW’s products, subscriptions or support offerings could damage its reputation and negatively impact its operating results. The incorrect detection of applications, viruses, spyware, vulnerabilities, data patterns or URL categories could also have an adverse effect on PANW’s business.

In summary, investing in PANW stock involves risks, but I believe the massive upside potential outweighs those risks.

Bottom line

In summary, investing in PANW stock offers an attractive opportunity to benefit from the growth of the cybersecurity industry. Moreover, under my baseline scenario with conservative assumptions, I estimate a potential upside of 92% over the current market price. Even under extremely pessimistic assumptions, DCF analysis shows an upside potential of 6%. Analysis provides strong evidence that PANW is an attractive investment opportunity for investors seeking exposure to the cybersecurity industry. I believe PANW stock is a strong buy since it has the potential to deliver strong long-term returns for investors.

FRC – First Republic Bank: Why I Am Sticking To My Investment

Written by The Asian Investor on March 26, 2023. Posted in FRC, Stock Report.

First Republic Bank Branch in New York City — Anne Czichos

A couple of things have happened to First Republic Bank (NYSE:FRC) since I submitted a contrarian call to buy the community bank’s shares about two weeks ago. FRC stock has whiplashed ever since and the bank has seen significant deposit outflows in the days following the bank failure of Silicon Valley Bank. A series of 8K disclosures were meant to reassure investors that First Republic Bank has sufficient liquidity to manage a heightened level of deposit outflows, but investors have chosen to bet against the bank and they clearly expect the worst to happen. I continue to believe that First Republic Bank is not at risk of going out of business and that the common stock potentially offers very risk-tolerant investors triple-digit return potential!

Risk control and asymmetric upside potential

To account for extraordinarily high levels of volatility in the financial market, I have chosen to take a very small position in First Republic Bank: FRC accounts for just about 1.05% of my investment portfolio which chiefly consists of non-financial stocks. Given the asymmetric risk profile that I see with brutalized community banks, I believe investors could earn multiples of their investment here… if fears subside and confidence returns to the community banking sector. However, there is a chance that First Republic Bank might be shut down or be forced to do a highly dilutive capital raise which would likely seriously impair the remaining value of the equity. Therefore, investors must recognize that there is the potential to lose the entire investment if things turn south.

Liquidity update, estimated deposit outflows and 8K disclosures

Since my last call to consider FRC in the midst of the banking bloodbath, shares of First Republic have revalued lower by about 60%. However, the bank has made a number of 8K disclosures throughout the banking crisis that were meant to inform investors about the strategic actions the community bank has been taking.

It all started with an 8K disclosure dated March 12, 2023 in which First Republic Bank announced that it secured additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co which brought its unused liquidity to a massive $70B. Undoubtedly, huge deposit outflows forced the company to bolster its cash position.

Just days later, on March 16, 2023, First Republic Bank announced that eleven lenders banded together and deposited a combined $30B into the bank (8K source) in order to signal confidence in First Republic Bank’s liquidity situation. This move also failed to calm investors and the lender’s shares have continued to sell off since.

Additionally, last week, First Republic Bank announced that a number of executives have agreed to reduce their annual bonuses to zero for 2023 while others have forfeited vesting all performance-based incentives (Source). The latest 8K, dated March 22, 2023, was meant to instill confidence in the bank yet again and align shareholder and executive interests. Since shares continued to fall last week, it is safe to say that the latest measures have not yet had a positive effect on investor sentiment.

FRC’s business banking business and recent news about deposit outflows

What was First Republic Bank’s strength before the crisis, its banking business, has become its major weakness. The bank’s focus on venture banking — taking in deposits from venture capital-backed companies and making loans to them — has revealed an unforeseen vulnerability after Silicon Valley Bank shut its doors. The key problem with SVB was not deteriorating credit quality, but rather that the bank was forced to liquidate its bond portfolio at a significant loss in order to fund deposit outflows. Most banks now have unrealized investment losses, according to JP Morgan, including First Republic Bank… which is not a big issue of these assets don’t have to be sold. Additionally, FRC’s capital position is not necessarily much worse than those of other community banks.

A potential solution to the crisis

Since First Republic Bank has a considerable focus on business clients — 63% of its deposits came from its venture banking business which are at a higher risk of leaving the bank due to the FDIC’s $250,000 insurance limit — the bank has seen considerable deposit outflows. The bank said in its 8K disclosure for March 16, 2023 that “daily deposit outflows have slowed considerably” which is also what U.S. officials have remarked on lately. About 79% of First Republic Bank’s deposits were uninsured as of the end of FY 2022. Before the crisis, First Republic Bank’s business deposits were growing steadily and according to the bank’s Q4’22 update, the bank had exceptionally good credit quality, too.

However, my guess is that the bank will sell a portion of its loan book in order to raise cash which would the best solution for First Republic Bank, and certainly preferable over an equity raise. The bank owned $166.9B in loans at the end of the December-quarter which mostly were collateralized by real estate. I can see FRC selling a portion of its loans at a fair price to larger banks in a big to shore up its balance sheet.

First Republic: Deposit losses and impact on valuation

First Republic Bank is by far the worst performing community bank, largely due to its high percentage (79%) of uninsured deposits and the need to raise $30B in additional deposits from other companies.

It is impossible to know precisely at this point how many deposits First Republic Bank has lost, but the Wall Street Journal, citing insiders, said the bank has lost about half of its deposit base, which would calculate to about $70B.

This means that FRC is also going to report at a significant decline in its book value in Q1’23. First Republic Bank reported a book value of $75.38 at the end of FY 2022. Assuming a 50% decline in book value, chiefly due to deposit outflows and a shrinking balance sheet resulting from the crisis in the financial sector, FRC may report a BV around $37-38 per-share at the end of the first-quarter. Of course, more aggressive assumptions about deposit losses would translate into even higher book value declines. A, say, 60% decrease in cash/deposits implies, roughly speaking, a 60% decline in book value… which could put the Q1’23 BV closer to $30 per-share. Since First Republic Bank’s shares are trading at $12.36, the valuation implies an 84% discount to BV. If deposits indeed declined by 60%, then the valuation may more accurately reflect a 59% discount to book value.

FRC offers by far the biggest book value discount and therefore also has the highest perceived risk. However, fear clearly is present here and investors may overestimate the decline of FRC’s deposit base.

Risks with First Republic Bank

If deposit outflows continue, the big banks might decide that it is a better idea to convert the $30B in deposits into equity, which of course would heavily dilute shareholders. First Republic Bank has enough liquidity, in my opinion, through the Bank Term Funding Program, the FED’s discount window and other banks, so I don’t believe the bank couldn’t fund incremental deposit withdrawals. What would change my mind about FRC is if the company would have to liquidate (a portion of) its bond holding portfolio and realize losses, or if the bank would do a dilutive equity offering.

Final thoughts

First Republic Bank remains a high-risk, high-potential rebound stock in the community banking market, despite the stock being down dramatically since I took my initially position more than a week ago. The reason why I am sticking to my guns here is that I consider it highly unlikely that the FED will allow fear and panic to spread in the financial market as it has learned the lessons from 2008 financial crisis. This lesson is that failing to provide a liquidity backstop will eventually lead to a crisis much bigger, much harder to control and much more expensive than the initial, forceful intervention. First Republic Bank likely has suffered very considerable deposit outflows since I last covered the stock, but recent liquidity measures have proven to support the bank while deposit outflows appear to have stabilized lately. With the stock now trading at an 84% discount to book value, I believe investors continue to face a very attractive trading opportunity!

MSFT – Microsoft Plans To Use AI To Solve A Huge Pain Point For Doctors

Written by Sai Balasubramanian M.D. J.D. on March 26, 2023. Posted in MSFT, Stock Report.

Among the many challenges that physicians face, one of the most cumbersome is clinical documentation. In a study published by the Journal of Graduate Medical Education, it was found that nearly 92% of physicians surveyed reported that “documentation obligations are excessive,” and 73% reported that clinical documentation often has a negative impact on patient care.

The goal behind detailed clinical documentation is to ultimately ensure great record keeping: in an ideal world, a comprehensive patient chart enables any treating provider to see a patient’s entire medical and treatment history. Furthermore, the healthcare system has been built in such a way that documentation plays a critical administrative role. Healthcare organizations use patient charts to code and bill for services provided. Documentation also acts as a record of the patient journey, which has become especially important in the growing landscape of healthcare litigation.

However, for many providers, this is one of the most challenging aspects of the job, reporting that they spend far more time documenting a patient’s visit rather than with the patient itself.

This is a key pain point that technology companies are vigilant about, and now, Microsoft is working on a dynamic solution. Nuance Communications, which is owned by Microsoft, is the leader behind Dragon, one the healthcare industry’s most popular note dictation tools. The Dragon product is already well known as one of the best in class, boasting “voice recognition that’s 3x faster than typing with up to 99% accuracy,” in addition to flexibility of use, with easy synchronization across devices and systems.

Microsoft wants to leverage its work with AI and Chat-GPT to take this tool to the next level. In a press release earlier this week, Nuance expressed its commitment to increasing AI driven innovation, announcing “Dragon Ambient eXperience (DAX) Express, a workflow-integrated, fully automated clinical documentation application that is the first to combine proven conversational and ambient AI with OpenAI’s newest and most capable model, GPT-4…[as a means to] reduce administrative burden and empower clinicians to spend more time taking care of patients and less time on paperwork.”

The company explains that by employing “a unique combination of conversational, ambient, and generative AI, DAX Express automatically and securely creates draft clinical notes in seconds for immediate clinical review and completion after each patient visit in the exam room or via telehealth patient conversations. Clinicians will benefit from the seamless capabilities of Dragon Medical One, DAX, and DAX Express, which are tightly integrated into the electronic medical record, beginning from pre-visit through post-encounter, reducing cognitive burdens and helping increase the joy of practicing medicine.”

The value for this product will be determined by how accurately and seamlessly these draft clinical notes can be created, in an effort to ease physician workflows. The reality is that generative AI is actually quite accurate in a technical and objective sense; however, the key unlock in this space will be to ensure that the generated product is adaptive and easily modifiable by the provider for specific patient needs.

Scott Guthrie, Executive Vice President of the Cloud and AI Group at Microsoft, explained that “Microsoft and Nuance have been ahead of the curve in innovating AI solutions, and organizations large and small have long trusted our responsible, secure applications and infrastructure…With DAX Express, we are leveraging the revolutionary capabilities of large model AI to deliver outcomes-focused healthcare applications at scale.”

Indeed, if done correctly, Nuance and Microsoft have a lot to gain. More than just capturing market share, the companies have the potential to win the hearts and loyalty of millions of physicians that have to dedicate a significant portion of their day solely to cumbersome documentation practices.

Pundits are vivaciously expressing that with the introduction of generative AI, the next era of healthcare innovation is just around the corner. Undoubtedly, Microsoft has a massive opportunity with this technology, and has the potential to significantly improve healthcare delivery in a meaningful and tangible way.

KBWP – KBWP: Insurance ETFs Remain Resilient But Definitely Not Invincible

Written by William Morton on March 25, 2023. Posted in KBWP, Stock Report.

I rate the Invesco Exchange-Traded Fund Trust II – Invesco KBW Property & Casualty Insurance ETF (NASDAQ:KBWP) a hold. However, I plan to follow this ETF during the coming periods as the high-strung emotions surrounding the financial sector begin to die down. I have before addressed how insurance ETFs may have a silver lining amid unfavorable economic conditions. KBWP is high-quality in many respects and could offer a lot to investors, but I don’t believe now is this to make any transactions.

The insurance industry has been quite profitable historically and could be attractive to investors seeking exposure to financials without dealing with the possible drawbacks of significant procyclicality. This might give insurance a unique edge over banking. However, the insurance industry is by no means invincible to macroeconomic headwinds created by speculative crises like bank runs. In specific respects to property and casualty (P&C) insurance, profits are somewhat dependent on the performance of certain industries like real estate, which are also quite procyclical. The effects on the real estate industry tend to be amplified proportional to market changes. This could alter both the demand for homeowners insurance by residents and the demand for other types of P&C coverage by construction companies.

In the long term, insurance ETFs like KBWP could offer investors quality returns while possibly sparing them of larger fluctuations associated with excessive procyclicality. However, this ETF still saw a sharp drop similar to that of banks after the recent collapse of several regional banks. I don’t believe the financial sector is quite yet in the clear, and investors might want to just play it safe for now.

Businessman hand clicks insurance icons to car, travel, family and life, financial and health insurance. Insurance online buy concept. — Khanchit Khirisutchalual

Strategy

KBWP tracks the KBW Nasdaq Property & Casualty Index and uses a full replication technique. With this method, investors can remain confident that this fund effectively mirrors the trajectory of its designated benchmark. This ETF also invests in both growth and value stocks of different market capitalizations.

Holdings Analysis

KBWP’s holdings are primarily centered on financial institutions that provide P&C insurance services. These same companies reside solely in the United States. Investors should therefore recognize that though this ETF is capable of delivering quality returns, it might not be an effective source of sector and geographical diversification.

KBWP allocates 59% to the top 10 holdings in a fund of just 27 holdings, making this ETF somewhat top heavy, but lesser than many other ETFs I’ve covered. Therefore, concentration risk is unlikely to be a meaningful drawback in owning this ETF.

Strengths

The property and casualty insurance industry has decently strong growth forecasts. This industry is currently worth $873B in 2023, could grow to over $1.3T by 2030 at a CAGR of 6%. Strong growth forecasts could attract investors and eventually manifest in profits within companies held in KBWP.

This ETF has also outperformed the financial sector and the broader market within the past year. This could indicate a performative edge and ability to hedge against high inflation compared to other financial ETFs like those focused on banking.

The outperformance gap seemingly began widening during last October, and has grown since. Interest rate hikes happened to become especially aggressive in October 2022. Therefore, KBWP might have a greater ability to hedge against inflation and transcend its peers when economic conditions worsen.

Reduced economic activity in the past year could have reduced risky activities whose consequences might require one to file an insurance claim. Continuation of this trend could result in fewer losses and accidents like those typically covered by P&C insurance, reducing claims costs for P&C insurance companies.

Weaknesses

Insurance ETFs like KBWP are somewhat able to hedge against high inflation, however the insurance industry has caveats of its own. Insurance fraud has risen in recent years, which creates a potentially threatening pitfall for this ETF. Insurance fraud becoming more prevalent could cut into certain companies’ profits and reputation alike. Ultimately, this puts many holdings in KBWP at risk.

This ETF is currently trading higher than other financial ETFs like XLF, however, KBWP is by no means immune to financial crises. As seen in the chart below, KBWP experienced a decline after recent bank runs despite coming out higher than the rest of the financial sector. Therefore investors should still be attentive to this ETF’s procyclicality even if it’s generally lesser than that of banking ETFs.

Opportunities

Construction and infrastructure spending could increase in the coming years, potentially driving profits in P&C insurance companies like the ones held in this ETF. Some have forecasted a decline in construction costs in 2023. Cheaper construction could catalyze the emergence of new construction companies. Construction is one of the most accident-prone industries, meaning construction companies are required to have P&C insurance.

P&C insurance providers could also profit from the increasing prevalence and future growth of companies like Uber (UBER) and Airbnb (ABNB). Companies like those held in KBWP could provide specialized coverage to drivers and hosts alike as both services gain popularity. This could result in increased buying volume of insurance services by said companies as they seek to enhance employee and consumer confidence as well as profits.

Threats

Climate change and the natural disasters it elicits are likely to only become more threatening to property and human lives in the future. For example, United Property & Casualty Insurance Co. was placed into receivership recently as many in Florida bore heavy losses from Hurricane Ian in September of last year. Many Florida homeowners were left without property insurance as claims expenses became overbearing and reinsurance coverage levels were also inadequate. Debacles like these could escalate in the long-term as climate change-related natural disasters increase in both frequency and severity. This could cut into the profits of companies held in this ETF and eventually chip away at investors’ returns.

The housing market is also bearing a significant brunt of the current market downturn. Mortgage rates have receded recently and overall the sentiment for the housing market may be getting better. However, I do not believe the housing market to be in the clear just yet. Furthermore, the recent bank runs and rate hikes could have further implications for the housing market. Until the housing market recovers significantly, the demand for homeowners insurance could be in danger, which could hurt the sales of companies in KBWP.

Conclusions

ETF Quality Opinion

It will be interesting to see how this ETF performs against intensifying macroeconomic conditions and other events that could place industries like banking in hot water. KBWP is definitely a notable fund that I plan to follow in the long-term.

ETF Investment Opinion

I give KBWP a hold. I am balancing my expectations for this ETF in considering both a price rebound as well as any further decline in the near future. I believe KBWP’s short-term returns could be somewhat erratic as investors recuperate from recent shocks and also re-evaluate their long term expectations. That being said, investors might want to consider playing it safe for now and waiting for the financial sector to cool down.

UNVR – SHAREHOLDER ALERT: Kaskela Law LLC Announces Investigation of Univar Solutions Inc. (NYSE: UNVR) and Encourages Investors to Contact the Firm

Written by admin on March 25, 2023. Posted in Stock Report, UNVR.

PHILADELPHIA, March 25, 2023 /PRNewswire/ — Kaskela Law LLC announces that it is investigating Univar Solutions Inc. (NYSE: UNVR) (“Univar”) on behalf of the company’s investors.

On March 14, 2023, Univar announced that it would be acquired by private equity firm Apollo at a price of $36.15 per share. Following the closing of the proposed transaction, Univar investors will be cashed out of their investment position, and Univar’s shares will no longer be publicly traded.

The investigation seeks to determine whether $36.15 per share provides UNVR shareholders with sufficient consideration for their shares, and whether Univar’s officers and/or directors breached their fiduciary duties in agreeing to sell the company at that price.

Univar shareholders are encouraged to contact Kaskela Law LLC (D. Seamus Kaskela, Esq. or Adrienne Bell, Esq.) at (484) 229 – 0750, or by email ([email protected] / [email protected]) or online at https://kaskelalaw.com/cases/univar-solutions/ , to receive additional information about this investigation and their legal rights and options.

Kaskela Law LLC represents investors in securities fraud, corporate governance, and merger & acquisition litigation. For additional information about Kaskela Law LLC please visit www.kaskelalaw.com. This notice may constitute attorney advertising in certain jurisdictions.

CONTACT:

D. Seamus Kaskela, Esq.
Adrienne Bell, Esq.
KASKELA LAW LLC
18 Campus Blvd., Suite 100
Newtown Square, PA 19073
(484) 229 – 0750
(888) 715 – 1740
www.kaskelalaw.com

SOURCE Kaskela Law LLC

CVT – SHAREHOLDER ALERT: Kaskela Law LLC Announces Investigation of Cvent Holding Corp. (NASDAQ: CVT) and Encourages Investors to Contact the Firm

Written by admin on March 25, 2023. Posted in CVT, Stock Report.

PHILADELPHIA, March 25, 2023 /PRNewswire/ — Kaskela Law LLC announces that it is investigating Cvent Holding Corp. (NASDAQ: CVT) (“Cvent”) on behalf of the company’s investors.

On March 14, 2023, Cvent reported that it would be acquired by private equity funds managed by Blackstone at a price of $8.50 per share. Following the closing of the proposed transaction, Cvent investors will be cashed out of their investment position, and Cvent’s shares will no longer be publicly traded.

The investigation seeks to determine whether $8.50 per share provides CVT shareholders with sufficient consideration for their shares, and whether Cvent’s officers and/or directors breached their fiduciary duties in agreeing to sell the company at that price.

Cvent shareholders are encouraged to contact Kaskela Law LLC (D. Seamus Kaskela, Esq. or Adrienne Bell, Esq.) at (484) 229 – 0750, or by email ([email protected] / [email protected]) or online at https://kaskelalaw.com/cases/cvent-holding-corp/ , to receive additional information about this investigation and their legal rights and options.

Kaskela Law LLC exclusively represents investors in securities fraud, corporate governance, and merger & acquisition litigation. For additional information about Kaskela Law LLC please visit www.kaskelalaw.com. This notice may constitute attorney advertising in certain jurisdictions.

CONTACT:

D. Seamus Kaskela, Esq.
Adrienne Bell, Esq.
KASKELA LAW LLC
18 Campus Blvd., Suite 100
Newtown Square, PA 19073
(484) 229 – 0750
(888) 715 – 1740
www.kaskelalaw.com

SOURCE Kaskela Law LLC

Category: Stock Report

The Events

Diversification, Regional Banks, and Risks

Targeted QE as a Workaround Amid Volatility

Calm Down, It Is Not Looking that Bad, for Now

Investment Portfolio Discipline Summary

Description of Primary Investment Candidate

Risk and Reward Balances Among INSP Competitors

Comparing features of Alternative Investment Stocks

Why do all this math?

Price range forecast trends for ISPN

Conclusion

Investment Thesis

Financial Performance Review

Near-term Outlook

Medium and Long-term growth prospects

Balance Sheet & Cash Flow Analysis

Valuation

Conclusion

ETF Overview

Fund Analysis

Investor Takeaway

Investment thesis

Company information

Financials

The stock is massively undervalued

Risks to consider

Bottom line

Risk control and asymmetric upside potential

Liquidity update, estimated deposit outflows and 8K disclosures

FRC’s business banking business and recent news about deposit outflows

A potential solution to the crisis

First Republic: Deposit losses and impact on valuation

Risks with First Republic Bank

Final thoughts

Strategy

Holdings Analysis

Strengths

Weaknesses

Opportunities

Threats

Conclusions

ETF Quality Opinion

ETF Investment Opinion