So what’s a good example of a financial company that meets those criteria?
Jones Lang LaSalle (JLL) is one name that we like. It’s a Chicago real estate brokerage, management, and investment firm. We know the company and its executive team quite well–their headquarters are in the same building where Ariel is based, so we get to see their work as property managers firsthand. The company has a global reach with 30,000 employees in 750 locations in 60 countries and it runs a lucrative business based on high-end properties. It’s not a real estate investment trust or REIT, but it does generate revenues of leasing and selling properties, as well as managing office buildings. JLL has a strong balance sheet and a very low debt to cash flow number, which means management can sidestep the credit crunch. They simply don’t have to borrow in order to withstand declines in revenues. The thing that jumps out at us is that at the end of February, the stock was trading at below six times its forward earnings projection for 2009, which is very cheap.
We think profits can rebound to $3 to $3.50 a share from just under $2.50 last year. Here’s a sign of how strong Jones Lang Lasalle’s reputation is: The day the company reported earnings and a drop in revenue this past February, the stock still managed to jump 18% simply because management met Wall Street expectations and didn’t surprise investors with negative news.
Are there any conventional banks that fit your profile?
A local bank, Private Bancorp Inc. (PVTB) is a stock we own and like right now. It’s a Chicago-based commercial bank with an interesting story. Most of its senior managers–the CEO, chairman and about 100 other top-level bankers–came over from a very reputable outfit, LaSalle, when that bank was bought out by Bank of America in late 2007. I’d say it’s an upper-echelon story, much like Jones Lang Management has set out to replicate the success and reputation that made LaSalle such a strong institution. Commercial banking is a relationship-based business, too, and PVTB has benefited from the deep ties its new management had with clients. PVTB is conservatively run and while management avoided the type of poisonous derivatives that hurt the nation’s biggest banks, the firm still had to take its medicine and write off a lot of bad loans in the fourth quarter of 2008. And while that’s now behind them, the stock is selling at 60% of the company’s book value, or the price management could fetch in a fire sale of its assets like deposits and office equipment.
Is steering clear of consumers, checking accounts, and deposits the only safe way to go when investing in banks?
No. In fact my third pick, City National Corp. (CYN) is a very conservative bank with what you could call a traditional line of business. It’s based in Hollywood, and many investors call it the bank of the stars. It has a great deposit base, arguably the best in the country–the very type of capital many banks would die to have. City has taken a drubbing, however, because of concerns about real estate lending in California. By some measures, however, the value of City’s mortgage loan portfolio as a percentage of the worth of the real estate property is very low, which should provide the bank an adequate cushion to any further decreases in home values. We think the company could earn $2.50 a share in 2010, which would help its share price jump from current levels, particularly if some of the bigger companies like J.P. Morgan Chase and Wells Fargo turn the corner by then.
This story originally appeared in the May 2009 issue of Black Enterprise magazine.