As investors, we’re probably familiar with the FANGs of the tech industry – Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google/Alphabet (GOOG). These are often the “go to” names if anyone wishes to expose their portfolio to technology. There is a parallel concept in the financial industry too, with anyone wanting exposure to the S&P Finance Sector Index buying JPMorgan Chase (JPM), Bank of America Corporation (BAC), Citigroup Inc (C) and Wells Fargo (WFC). These are what I like to call the “financial Fang’s”.
Head to Head
The Financial FANGs typically form a component of any vehicle that seeks to track the S&P 500 Financial Sector Index, a broad basket of shares representing the financial sector. So, lets see how this broad basket (using the iShares S&P 500 Financials Sector UCITS ETF) would have performed over the past 120-days of so (approximately 4 months) – a period where there was a lot of “new normal” activity like post interest rate hike activity and Trade war anxieties.
Had you held UCITS, which counts JPM, BAC, C and WFC among its top-5 holdings, during that period, it would have yielded just above 4% return to your portfolio. Now, consider what you could have accomplished had you directly owned the Financial FANG stocks instead.
Over that same time horizon, your portfolio would have been up by an average of 5.65%. Just 1.51% higher than the ETF representing the Financial sector – but still, not what you might call a Home Run either! And given that interest-rate volatility, and trade tariff-related instabilities are expected to prevail over the financial sector moving forward (at least for the foreseeable future), this is likely the best possible outcome you can expect from holding these stocks in your portfolio.
But is there a better alternate to owning the Financial FANGs, or the entire broad basket of Financial names? Let’s explore that thought a bit deeper, shall we?
What could be an alternate to a broad basket owning strategy, or simply buying the Financial FANGs, would be picking the following:
STORE Capital Corporation (NYSE:STOR)
While STOR does participate in the leasing and financing business, it isn’t a true financial institution – but it’s close! This is a Real Estate Investment TRUST (REIT) that, according to the prevailing rules, distributes nearly 90% of their income to their unit/shareholders. The company acquires, invests, finances and manages Single Tenant Operational Real Estate – which is where the name STORE comes from. Its assets are located across 49 states, and the portfolio includes a diverse set of 2,084 properties.
And if all of that isn’t getting your juices flowing to own a piece of this company, consider this: in 2017, Warren Buffett invested $377 million to get 9.8% of STOR. A word of advice: Never bet against Mr. Buffett!
Triumph Bancorp, Inc. (NASDAQ:TBK)
If its traditional banking and financing operations that whet your appetite, then TBK is right up your alley. This financial holding company specializes in servicing both commercial and retail clients, by offering a full suit of financial services, including Savings and Checking accounts, Money market accounts, Debit/Credit card transactions, Electronic banking, Insurance, Brokerage, Asset leasing/purchasing, commercial mortgages, lending and factoring.
What’s great about TBK is that it has embarked on a strategic plan to grow its business, which is always a welcome sign for investors. In early April of this year, the company announced it was acquiring a number of attractive financial entities, including First Bancorp of Durango, Inc., Southern Colorado Corp. and Interstate Capital Corporation. This bodes well for future revenue and earnings growth.
Broadridge Financial Solutions, Inc. (NYSE:BR)
Like our first pick, STOR, this final name isn’t directly a bank, insurance company or REIT, but it provides a niche service to many businesses in the financial industry. BR delivers leading-edge technological solutions to its clients in the investor communications arena. It uses technology to help clients distribute proxy materials and other regulatory materials/notices, as well as to securely aid in processing votes and ballots.
But this is just a fraction of it’s service offering. The company is also involved in storing and processing of retirement and mutual fund transactions, investor education and seminar delivery, data aggregation, securities transactions clearance and settlement…and a whole lot more. This diversity of its operations makes BR an almost “recession proof” and “tariff proof” addition to any portfolio.
So, how well would you have done with this Play, as opposed to holding the Financial FANGs (5.65%)?
Well, as you can see above, this Play would have delivered a neat average yield of over 14% – more than 8.4% higher than the Financial FANGs. A word of caution though: While the Financial FANGs are trading at PE’s of between 14 and 15 times, the Play stocks have much higher valuations – between 21 and 40x. However, given that they have healthy growth profiles, they will likely grow into their valuations in the coming quarters.
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Author owns BAC and JPM stock discussed in this article.