So what do you like in those sectors now?
Banking has been challenged over the last year. We’ve seen several banks that have bounced back dramatically. Some of the most distressed, poorly capitalized, and lowest credit quality banks have bounced back demonstrating ability to raise capital, etc. So, banks have done very well. By contrast we are recommending a bank that has done well throughout. People’s United Financial Inc. (PBCT)—formerly a mutual bank, owned by depositors—converted in 2007 to being publicly owned. That’s one of the reasons they have such a strong balance sheet. Last year, it was one of the best-performing banks because of high loan quality and the strength of its balance sheet. It had no capital inadequacies. Two things that drove banks to problems were lack of capital and poor quality capital. This year, as investors have gotten more interested in the banks that were troubled, People’s stock has underperformed—because it was stable.
People’s made an acquisition of Vermont-based Chittenden Bank in 2008, demonstrating an ability to pursue a strategy of growing in their market. It was a successful transaction. They are pretty conservative—and that’s a good thing for a bank. Some investors are impatient with their failure to acquire, but they are likely to do so in the future—possibly buying larger banks outside of their New England region or smaller banks in their area. We think they’re waiting to pick from banks that aren’t strong enough to make it. People’s is a conservative, quality bank with a big cash war chest. For people who have concerns about banks this is one to consider. We see their shares trading at around $22 in a year.
You’re clearly hot on financials. Does anything else in the sector excite you?
Definitely. We think financials are going to be important to a recovery. Fiserv Inc. (FISV) is a company that provides core data processing for banks and financial services companies. They also own CheckFree, an online banking and bill payment service. Fiserv’s primary customers are banks, credit unions, savings and loans, and other financial service institutions, and they have a large market share in the data processing area. Banks are loyal customers. They tend to have three- to five-year contracts. There’s not a lot of switching of vendors. In general, they tend to have sticky client relationships. While Fiserv’s clients are banks, this is really a data management company, dependent on bank customers—one of the reasons their stock got beaten up last year: guilt by association. But we see this as a strong business model. Fiserv has been a very acquisitive company, growing through acquisition. In fact, CheckFree was one of their acquisitions. We have a 12-month share price target of $61 for Fiserv.
How about the consumer discretionary space? Do you like anything there?
Hanesbrands Inc. (HBI) is a company that suffered during the market downturn from having a highly leveraged balance sheet. They have a lot of debt. In 2006, Hanes spun out from Sara Lee. While they were part of Sara Lee, they didn’t get the capital and investment in the brand that they should have. Now, as a separate company, they are getting the attention they deserve. They are reducing indebtedness. With Hanes products—underwear and activewear—you don’t have the fashion-sensitive issues of other clothing brands. You make a T-shirt this year, and it’s not out of fashion next year. With brands like Champion, their clothes are more like staple products. In addition, the company is operating more efficiently, moving operations offshore. They are doing the right things to improve margins. We think Hanes is positioned to deliver double-digit earnings growth over the next five years. In a price-to-earnings sense, the stock is cheap [trading at around $15 in mid-July]. We believe the share price could go to $23 over the next 12 months.
This article originally appeared in the September 2009 issue of Black Enterprise magazine.