Recent Investments for April 10, 2023

Good Morning,

I added to two existing positions in the portfolio this morning. These are both banking institutions in the United States. Both of these companies look cheap at prior year and forward earnings. Both of these companies have managed to increase dividends for at least five years in a row. One of them even didn't cut dividends during the Global Financial Crisis.

I believe they are well run, though the share prices are getting pummeled. The rising interest rate environment is going to be a hard time for lending, as it makes borrowing money more expensive. On the other hand, depositors are expecting higher rates on their deposits, which could lead to an increase in expenses without a corresponding increase in income, even if net interest margins stay roughly the same. In other words, those are cyclical companies that could and would suffer during a tough economy. If they persevere, they would likely do well on the next upswing in the economy. 

The big risk we saw last month is some banking institutions buying long-term bonds with long maturities in an effort to beef up their interest income. The issue is that these bonds go down in price as interest rates skyrocket, causing a loss. Given that banks are highly leveraged, it is hard to keep an asset to maturity at par, if you are losing money and in effect have to cover a margin call. I do not believe that the companies I am investing in today have this mismatch. As I gather more information after their reports are announced over the next 2 weeks to a few months, I may change my opinion. 

These companies appear like good values today to me and offer good starting yields. It is possible that they are value traps, so that's the risk I am taking. I am also trying to build up my existing positions in them, as I had less than $500 invested there on cost. So I am taking advantage of these "low prices".