The markets continue to perform well. And the economy is moving forward, with employment steadily increasing (it seems every business has a “for hire” sign in its window!).
We’re once again adding to our Financial holdings with our Feature recommendation this month--a regional bank that has strong fundamentals and looks like a promising takeover target. The bank is a survivor of more than 90 years, scooping up its competitors who haven’t been as well-capitalized. Lastly, it pays an attractive dividend yield and is undervalued.
We hope to see you on our July Platinum Club webinar; it’s scheduled for July 7 at 2pm. In the meantime, don’t hesitate to contact us with any questions or comments.
Happy Investing!
Nancy Zambell and Kate Stalter
P.S. We hope you can join us August 17-19 for our 9th Annual Smarter Investing, Greater Profits Online Conference.
State of the Markets | WSBS 721
June winds down ahead of the long July 4 holiday weekend with the S&P 500 and Nasdaq Composite posting monthly gains, while the Dow Industrials are down less than 1%.
Economic activity in the U.S. picked up faster than expected as the remaining states with more rigorous Covid restrictions approached full reopening. In fact, Beth Ann Bovino, chief U.S. economist at S&P Global Ratings, characterized the domestic economy as “sizzling.” She credited an improved outlook due to the full reopenings, the effectiveness of Covid vaccines, and economic stimulus packages from Washington.
In a note published Thursday, S&P Global Economics says it now expects the U.S. economy to grow 6.7% this year and 3.7% next year, upticks from March forecasts of 6.5% and 3.1%, respectively.
Hurdles remain, however, despite equities racing higher in anticipation of continued strong corporate earnings in the second half of the year. One challenge is hiring, along with supply-chain bottlenecks throughout various sectors and industries.
In a good development, more S&P companies are issuing earnings guidance again, after postponing forward-looking statements in 2020 amid uncertainty during the pandemic.
Dow Jones Industrial Average
S&P 500
Nasdaq Composite Index
Feature Recommendation | WSBS 721
Finally … financial stocks are starting to track higher, as you can see by the following graph of the Financial Select Sector SPDR Fund (XLF) ETF. That ETF is up an average of 23.9% so far this year—the second highest return after the energy sector.
As the economy heats up, the financial sector should continue to shine. That’s why we’re adding one more financial company to our portfolio this month.
This bank has been in business for more than 90 years and serves individuals and businesses in New Jersey and New York. Investors Bancorp, Inc. (ISBC) has more than $25 billion in assets and 145 retail branches.
The bank’s roots are deep. In 1926, a group of fellows who wanted to promote home ownership founded the Washington Rock Building and Loan Association of Millburn, Investor’s predecessor company. It was the first savings and loan in New Jersey to open a branch office. That was in 1945. Since then, the company has gone through a few name changes, and has acquired or merged with 17 other institutions (8 in the immediate years after the 2007-2009 recession) to become one of New Jersey and New York’s top regional banks.
I’ve always loved regional banks. In fact, when I graduated from Ohio State, my first job was in the banking industry. I spent eight years running branches and operations, as well as developing business and funding loans. That began my love affair with bank stocks.
Possible Acquisition Candidate
There are several reasons why I love regional bank stocks, but the main one is because they are prime bait for bigger banks to come along and acquire them—usually at a premium.
There are a few criteria that are essential for that to happen:
- Insiders can’t own the majority of shares of the bank. After all, if your family owns most of a profitable bank, why would you sell—they are usually cash cows!
- The shares must be trading at a reasonable level.
- The banks should be in strong financial shape.
Fortunately, Investors Bancorp passes all those tests!
First, insiders only own 8.52% of the shares. Second, the shares of ISBC are trading at a forward price-earnings ratio of 11.27, compared to the industry’s 14.26. And its price to tangible book value (P/TBV) is around 1.37—that’s one of the ratios that is followed closely in bank mergers, as banks with higher P/TBV go after those with lower ratios. And lastly, the bank’s Tier 1 capital ratio (a measure of capital adequacy) is in the top 1,000 banks worldwide.
And I believe now is the time to jump on these shares, as regional bank consolidation began gathering steam in the last quarter of 2020, with several major deals announced since then, including:
- Huntington Bancshares and TCF Financial just merged in an all-stock $22 billion deal.
- PNC Financial Services Group, Inc. acquired BBVA USA Bancshares, Inc., making PNC the number five bank, in terms of asset size, in the United States.
- First Citizens BancShares, Inc. and CIT Group Inc. will merge in an all-stock deal that will create the 19th largest bank in the United States based on assets.
- M&T Bank Corp. agreed to buy People’s United Financial Inc. in an all-stock deal valued at about $7.6 billion.
- BancorpSouth Bank and Cadence Bancorp will merge in a $6 billion deal.
This M&A trend is expected to continue this year and next in order to give regional banks the scale they need to compete in the digital marketing space with larger competitors.
Attractive Dividend
And you have to love the dividend that Investors Bancorp pays—3.79%—compared to the average bank yield of 2.27%. That’s a nice addition to the bank’s expected price appreciation.
Solid Earnings
Investors Bancorp earned record EPS of $0.31 per share last quarter, beating analysts’ estimates by $0.03, and far surpassing last year’s same-quarter earnings of $0.17. The bank has surpassed consensus EPS estimates four times in the past year. Wall Street is forecasting earnings growth of 35.6% this year, with an EPS of $1.22 for 2021.
The bank’s credit quality continues to be strong while its cost of deposits continue to fall.
Change in Institutional Holdings
And Investors Bancorp has some pretty deep institutional interest, which helps bring momentum to the shares.
| Owner Name | Shares Held | Change (shares) | Change (%) | Value (in $1,000’s) |
| Blackrock Inc. | 36,585,251 | 16,968,006 | 86.50 | 523,901 |
| Vanguard Group Inc. | 24,299,970 | 3,619,756 | 17.50 | 347,976 |
| Fuller & Thaler Asset Management, Inc. | 17,651,706 | -5,853,195 | -24.90 | 252,772 |
| State Street Corp. | 15,399,081 | 8,273,141 | 116.10 | 220,515 |
| Dimensional Fund Advisors LP | 12,472,804 | -445,112 | -3.446 | 178,611 |
The shares of Investors Bancorp look attractive at this level, and if the bank should get a takeover offer, all bets are off—the shares could easily climb 35-50%.
Investors Bancorp, Inc. (ISBC) 52-Week Low/High: $ 6.74 - 15.71 Shares Outstanding: 247.67 million Institutionally Owned: 80.77% Market Capitalization: $3.532 billion Dividend yield: 3.79%, paid quarterly Website: myinvestorsbank.com | Why Investors Bancorp: Takeover potential Track record of beating earnings estimates Solid Financial Strength Undervalued
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Technical Analysis
by Kate Stalter
Investors Bancorp (ISBC)
Investors Bancorp is forming a flat base below an April 26 high of 15.71, which was also an all-time high. It’s corrected just 12% from peak to trough since April. That could be a constructive pattern to set the stock up for further gains.
Weekly trading volume has been below average since early March, with the exception of the week ended June 18, when the stock skidded 5.88% in trading volume 36% heavier than normal.
For investors interested in adding more shares to their position, the current buy point would be that prior high of 15.71. Ideally, you’d like to see it pass that point in heavier than normal turnover.
Price Target:$18.50
Stop Loss: $12.25
Sector Round-Up | WSBS 721
This month’s featured stock, Investors Bancorp, hails from the S&P 600 Small Cap financials sector. As such, it’s a component of the Invesco S&P SmallCap Financials ETF (PSCF).
The fund is up 19.27% year to date, lagging the performance of the large-cap Financial Select Sector SPDR ETF (XLF), which is up 25.50% year to date.
Over the past month, the large-cap financials sector fell 3.42%, the second biggest laggard among the S&P sectors. The sector was led lower by Berkshire Hathaway (BRKA), the sector’s largest component, constituting 12% of sector weight. Berkshire Hathaway was down nearly 4% for the month.
The materials sector fell further to the tune 5.67%. The top holdings, specialty chemicals maker Linde (LIN), Sherwin Williams (SHW) and Air Products & Chemicals (APD) and Freeport-McMoRan (FCX) were all down for the month of June.
On the plus side, the tech sector advanced 6.69% in June, largely on the strength of an 8.5% gain in Microsoft (MSFT), the sector’s second-largest component.
Portfolio Updates | WSBS 721
Conservative Stocks
As a conservative investor, you are less willing to accept market swings and significant changes in the value of your portfolio in the short or long term. Capital preservation is your primary goal, and you may plan on using the principal from your investments in the near term, preferably as a steady income stream. The average level of return you expect to see is 5%-10%, annually.
Sun Life Financial (SLF)
Sun Life Financial is a diversified financial services company, headquartered in Toronto, Canada. It is the third largest insurer in Canada. The company provides insurance, wealth, and asset management solutions to individuals and corporate clients worldwide.
The stock is currently forming a flat base, which can be a very constructive type of consolidation. The current base has corrected 9% from peak to trough. It’s not surprising to see profit-taking in a strong stock at this point, following gains of 18.15% year-to-date and 49.87% in the past 12 months.
Analysts expect earnings per share of $4.87 this year, rising to $5.27 in 2022.
The Coca-Cola Company (KO)
Coca-Cola rode the “reopening” train for the past several months, but pulled back in June, and may be etching a new base. Earnings declined in 2020, as out-of-home venues were shuttered. The company derives about half its revenue through sales of soft drinks at public venues, such as sporting events, restaurants, bars, theme parks and many others.
Year-over-year sales and earnings bounced back in the first quarter of this year, and analysts expect full-year earnings growth of 12%.
TC Energy Corporation (TRP)
In early June, shares of the natural gas transportation and storage company broke out of a cup base above a 49.95 buy point. The stock rallied for the next two weeks, hitting resistance between 53 and 54 and pulling back.
It may be forming another base, with shares slipping below that prior buy point. Analysts see earnings growth slowing this year, but returning in 2022, with expectations calling for net income of $3.58 per share. Of course, much can—and will—happen between now and the end of 2022, but Wall Street is cognizant of the company’s significant capital investments in the past five years. As we noted last month, investors may need a little patience before realizing the full potential of this stock.
Moderate Stocks
As a moderate investor, you seek longer-term investment gains. You are comfortable with some swings in your portfolio’s performance, but generally seek to invest in more conservative stocks that build wealth over a substantial period of time. The average level of return you expect to see is 10%-25% annually.
National Storage Affiliates Trust (NSA)
The self-storage REIT is on a tear. Shares had a strong month in June, with a price rise of 9.67%, following gains in the previous eight months. On May 31, the company increased its quarterly dividend by 8.6%, to $0.38 per share.
The company reported its second quarter on May 4, earning $0.49 per share, up 23% from the year-earlier quarter, and topping estimates of $0.45 per share. Revenue was $123 million, a gain of 18%, beating views of $117.62 million. The company has been growing through acquisition, in addition to increasing same-store sales.
In the earnings call, CEO Tamara Fischer noted the company faces some challenging year-over-year comparisons for the second half of 2021, given the strength in the latter part of 2020.
Orange ADS (ORAN) — SELL
While the longer-term prospects for this stock remain attractive, recent performance was lacking. We’ve chosen to cut losses on this stock, which is a “sell.”
Conagra Brands, Inc. (CAG)
The packaged foods company has been consolidating since September. It hit resistance at 39 before retreating again in early June.
Analysts believe packaged foods, which were in high demand during the stay-home days of the pandemic, still have room to run. Analysts have a “hold” rating on the stock, with a price target of 38.50, a 6.77% upside. Conagra is among a slew of food producers and restaurants warning that higher commodity prices could result in higher prices for consumers. Conagra owns a number of familiar brands, including Duncan Hines, Hunt’s, Marie Callender’s and Healthy Choice.
Its dividend yield stands at 2.85%.
The Toronto-Dominion Bank (TD)
This multinational bank stock rallied to a high of 73.85 on May 27, then retreated into its current consolidation. It’s holding just above its 10-day moving average and slightly below its 50-day line.
Toronto-Dominion is currently paying out an annual dividend of $2.62 per share, down from $3.11 per share in 2020. Dividends are historically a reason investors hold large-cap stocks that may not appreciate as quickly as small caps. However, the price appreciation on this stock has been excellent. Its one-year return is 62.47% and its year-to-date return is 26.37%.
Spirit Realty Capital (SRC)
This real estate investment trust is forming a shallow consolidation below its June 10 high of 51.17.
Spirit is a net-lease REIT, which means that its tenants are responsible for the payment of most, if not all, operating expenses, including property taxes, insurance and maintenance. Most of Spirit’s investments are in single-tenant, operationally essential real estate assets, subject to long-term leases (usually 10-20 years). The current dividend yield is 5.23%. Analysts see full-year earnings per share of $3.08, an increase of 4%.
Aggressive Stocks
As an aggressive investor, you primarily seek capital appreciation and are open to more risk. Swings in the market, whether short term or long term do not impact your investment decisions and you have confidence that volatility is necessary to achieve the high return on investment you are looking for. You typically expect a 25%+ return, annually, though you do not need your principal investment immediately.
OneMain Holdings, Inc. (OMF)
The personal lending company, which specializes in customers with subprime credit, pulled back from its June 25 high of 61.90 and is finding support at its 10-day moving average. The stock advanced 3.58% in June, as monthly trading volume was 10% lower than average.
The stock is up 122% since being added to the portfolio, bolstered by growing institutional buying. At the end of the first quarter, 43 hedge funds reported ownership of the stock, up from 39 in the prior quarter. The number of mutual fund owners grew from 554 to 644 in the most recent quarter.
Textainer (TGH)
Textainer is a Bermuda-based container leasing company, with a one-year price gain of 312.84% and a year-to-date return of 76.07%. The stock has been trading in a sideways holding pattern in recent weeks.
The company reported its first quarter on May 17. Earnings per share came in at $1.16, handily beating estimates of $0.98. That marked a year-over-year gain of 582%. Revenue was $169.2 million, missing views, but representing a 16% increase.
Primoris Services (PRIM)
Primoris provides maintenance services for power plants, refineries and other facilities. Yearly earnings per share accelerated over the past four years, and analysts expect that trend to continue this year, with earnings per share of $2.46, a 13% year-over-year gain. That outlook was boosted recently.
The company reported its first quarter on May 5. Wall Street expected a loss of $0.09 per share on revenue of $764.72 million. However, the company reported earnings of $0.12 per share on revenue of $818.3 million, exceeding views on the top and bottom lines, and marking year-over-year gains on both.
The stock is currently in a consolidation, finding support at its 200-day moving average. With the outlook still bright for infrastructure plays, we’re continuing to hold.
Current Portfolio | WSBS 721
| Wall Street’s Best Stocks Portfolio | ||||||||
| Conservative Stocks | Date Bought | Symbol | Price Bought | Price on 7/6/2021 | Dividends YTD | Div Freq. | Gain/ Loss % | Rating |
| The Coca-Cola Company | First Issue | KO | $41.90 | $53.87 | 0.84 | Quarterly | 31% | Hold |
| Orange S.A. | 5/4/21 | ORAN | $12.61 | $11.31 | 0.61 | Semi Annually | -6% | Sell |
| Sun Life Financial Inc. | 6/2/21 | SLF | $54.08 | $50.85 | 0.00 | Quarterly | -6% | Buy |
| TC Energy Corporation | First Issue | TRP | $42.73 | $49.52 | 1.40 | Quarterly | 19% | Hold |
| Moderate Stocks | Date Bought | Symbol | Price Bought | Price on 7/6/2021 | Dividends YTD | Div Freq. | Gain/ Loss % | Rating |
| Conagra Brands, Inc. | First Issue | CAG | $29.87 | $35.82 | 0.28 | Quarterly | 21% | Hold |
| National Storage Affiliates Trust | First Issue | NSA | $27.39 | $51.65 | 0.73 | Quarterly | 91% | Hold |
| Spirit Realty Capital | First Issue | SRC | $42.27 | $47.63 | 0.63 | Quarterly | 14% | Hold |
| The Toronto-Dominion Bank | First Issue | TD | $40.82 | $70.03 | 1.25 | Quarterly | 75% | Hold |
| Aggressive Stocks | Date Bought | Symbol | Price Bought | Price on 7/6/2021 | Dividends YTD | Div Freq. | Gain/ Loss % | Rating |
| OneMain Holdings, Inc. | First Issue | OMF | $29.49 | $59.37 | 4.65 | Quarterly | 117% | Hold |
| Primoris Services | 3/2/21 | PRIM | $34.98 | $28.58 | 0.12 | Quarterly | -18% | Hold |
| Textainer Group Holdings | 4/1/21 | TGH | $28.77 | $32.24 | 0.00 | — | 12% | Hold |
| Sold Positions | ||||||||
| Conservative Stocks | Symbol | Date Bought | Date Sold | Price Bought | Price Sold | Gain/ Loss % | Dividends YTD | Div Freq. |
| Unilever PLC | UL | First Issue | 5/3/21 | $42.84 | 59.12 | 39% | 0.51 | Quarterly |
| Clean Ener-gy Fuels Corp. | CLNE | First Issue | 3/2/21 | $2.63 | 13.66 | 419% | 0.00 | — |
| Aggressive Stocks | Symbol | Date Bought | Date Sold | Price Bought | Price Sold | Gain/ Loss % | Dividends YTD | Div Freq. |
| cbdMD, Inc. | YCBD | First Issue | 3/31/21 | $2.25 | 4.06 | 80% | 0.00 | — |
The More You Know | WSBS 721
Dividend Reinvestment Plans
Last month, I covered the ins and outs of Dividend Investing in this column. Today, I’d like to discuss Dividend Reinvestment Plans (DRIPs), an easy strategy for accumulating long-term cash flow (and reinvestment), especially for stable, long-term investments.
Dividend Reinvesting
Another advantage of buying stocks that pay dividends is their compounding effect if you reinvest the dividends, rather than cashing them out as they are paid.
Chloe Lutts Jensen, former Chief Investment Analyst of Cabot Dividend Investor, wrote about dividend compounding, with this example:
“Let’s say you own 100 shares of a $40 stock with a 2.5% yield. That means the company pays $1.00 per share in dividends each year, or 25 cents per quarter. This table shows how your dividend income and the size of your investment will change over the first year.
“As you can see, reinvesting that first $25 increases your second dividend payment by 16 cents, because you now own another $25 worth of dividend-paying stock. By the end of the year, your quarterly dividends have increased to $25.47, and the value of your investment has increased by $100.94—that $100 is simply the dividend payments, which you would have earned whether or not you chose to reinvest. But the extra 94 cents is “dividends on dividends,” which you earned thanks to reinvesting.”
That’s just a small example of the effects of dividend reinvesting. It’s like “free money!” And often, companies increase their dividends, which puts even more money in your pocket. In the third quarter of this year. 60 companies in the S&P 500 Index boosted their dividends to the tune of $19.2 billion—not a paltry sum.
According to DividendInvestor.com, more than 1,100 companies and closed-end funds offer Dividend Reinvestment Plans (DRIPs). A DRIP allows you to automatically reinvest cash dividends by purchasing additional shares or fractional shares on the dividend payment date.
Companies who operate their own DRIPs will often let you buy additional shares of their stock commission-free, and sometimes even at a discount to the current share price. In my Wall Street’s Best Digest, I follow two investment pros who keep a close eye on dividend reinvestment plans—Charles A. Carlson, editor of DRIP Investor and Vita Nelson, editor of DirectInvesting.com. Each month, they offer great insight into the DRIP industry, as well as a selection of recommended stocks.
DRIPs are often recommended for long-term investors. Buying and selling shares in a DRIP is not as easy as picking up the phone and calling your broker. Most companies buy and sell shares in a DRIP in bulk (to reduce transaction fees), so you are most likely not going to get current market prices. It may take a few days to get in or out, so if you tend to trade stocks, a DRIP would not be your best investing vehicle.
But DRIPs are a great way to invest in well-managed, financially stable companies—for the long term. When my nieces and nephew were born, I set up DRIPs for them, buying stock in McDonald’s. They didn’t get rich from the DRIP, but when they set off for college, they had a tidy little sum to use for buying some of the extras they needed. My hope was that discussing their shares with them through the years would turn them on to investing for life. But, alas, that didn’t exactly happen. However, I can report that they were thrilled with the McDonald’s coupons that came with the annual company report each year!
The next Wall Street’s Best Stocks issue will be published on August 3, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com
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