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Walt Bettinger, outgoing Charles Schwab CEO, and Rick Wurster, incoming Charles Schwab CEO, join ‘Money Movers’ to discuss the company’s quarterly earnings results, if the company can declare victory over its cash sorting issues, and much more.
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Walt Bettinger, outgoing Charles Schwab CEO, and Rick Wurster, incoming Charles Schwab CEO, join ‘Money Movers’ to discuss the company’s quarterly earnings results, if the company can declare victory over its cash sorting issues, and much more.
04:14
Tue, Oct 15 202411:32 AM EDT
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A view of the New York Stock Exchange building in the Financial District in New York City on Aug. 5, 2024.
Charly Triballeau | Afp | Getty Images
The good times are still rolling on Wall Street. An intensifying earnings season will put that momentum to the test.
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Traffic_analyzer | Digitalvision Vectors | Getty Images
Financial services companies and their digital technology suppliers are under intense pressure to achieve compliance with strict new rules from the EU that require them to boost their cyber resilience.
By the start of next year, financial services firms and their technology suppliers will have to make sure that they’re in compliance with a new incoming law from the European Union known as DORA, or the Digital Operational Resilience Act.
CNBC runs through what you need to know about DORA — including what it is, why it matters, and what banks are doing to make sure they’re prepared for it.
DORA requires banks, insurance companies and investment to strengthen their IT security. The EU regulation also seeks to ensure the financial services industry is resilient in the event of a severe disruption to operations.
Such disruptions could include a ransomware attack that causes a financial company’s computers to shut down, or a DDOS (distributed denial of service) attack that forces a firm’s website to go offline.
The regulation also seeks to help firms avoid major outage events, such as the historic IT meltdown last month caused by cyber firm CrowdStrike when a simple software update issued by the company forced Microsoft’s Windows operating system to crash.
Multiple banks, payment firms and investment companies — from JPMorgan Chase and Santander, to Visa and Charles Schwab — were unable to provide service due to the outage. It took these firms several hours to restore service to consumers.
In the future, such an event would fall under the type of service disruption that would face scrutiny under the EU’s incoming rules.
Mike Sleightholme, president of fintech firm Broadridge International, notes that a standout factor of DORA is that it doesn’t just focus on what banks do to ensure resiliency — it also takes a close look at firms’ tech suppliers.
Under DORA, banks will be required to undertake rigorous IT risk management, incident management, classification and reporting, digital operational resilience testing, information and intelligence sharing in relation to cyber threats and vulnerabilities, and measures to manage third-party risks.
Firms will be required to conduct assessments of “concentration risk” related to the outsourcing of critical or important operational functions to external companies.
These IT providers often deliver “critical digital services to customers,” said Joe Vaccaro, general manager of Cisco-owned internet quality monitoring firm ThousandEyes.
“These third-party providers must now be part of the testing and reporting process, meaning financial services companies need to adopt solutions that help them uncover and map these sometimes hidden dependencies with providers,” he told CNBC.
Banks will also have to “expand their ability to assure the delivery and performance of digital experiences across not just the infrastructure they own, but also the one they don’t,” Vaccaro added.
DORA entered into force on Jan. 16, 2023, but the rules won’t be enforced by EU member states until Jan. 17, 2025.
The EU has prioritised these reforms because of how the financial sector is increasingly dependent on technology and tech companies to deliver vital services. This has made banks and other financial services providers more vulnerable to cyberattacks and other incidents.
“There’s a lot of focus on third-party risk management” now, Sleightholme told CNBC. “Banks use third-party service providers for important parts of their technology infrastructure.”
“Enhanced recovery time objectives is an important part of it. It really is about security around technology, with a particular focus on cybersecurity recoveries from cyber events,” he added.
Many EU digital policy reforms from the last few years tend to focus on the obligations of companies themselves to make sure their systems and frameworks are robust enough to protect against damaging events like the loss of data to hackers or unauthorized individuals and entities.
The EU’s General Data Protection Regulation, or GDPR, for example, requires companies to ensure the way they process personally identifiable information is done with consent, and that it’s handled with sufficient protections to minimize the potential of such data being exposed in a breach or leak.
DORA will focus more on banks’ digital supply chain — which represents a new, potentially less comfortable legal dynamic for financial firms.
For financial firms that fall foul of the new rules, EU authorities will have the power to levy fines of up to 2% of their annual global revenues.
Individual managers can also be held responsible for breaches. Sanctions on individuals within financial entities could come in as high a 1 million euros ($1.1 million).
For IT providers, regulators can levy fines of as high as 1% of average daily global revenues in the previous business year. Firms can also be fined every day for up to six months until they achieve compliance.
Third-party IT firms deemed “critical” by EU regulators could face fines of up to 5 million euros — or, in the case of an individual manager, a maximum of 500,000 euros.
That’s slightly less severe than a law such as GDPR, under which firms can be fined up to 10 million euros ($10.9 million), or 4% of their annual global revenues — whichever is the higher amount.
Carl Leonard, EMEA cybersecurity strategist at security software firm Proofpoint, stresses that criminal sanctions may vary from member state to member state depending on how each EU country applies the rules in their respective markets.
DORA also calls for a “principle of proportionality” when it comes to penalties in response to breaches of the legislation, Leonard added.
That means any response to legal failings would have to balance the time, effort and money firms spend on enhancing their internal processes and security technologies against how critical the service they’re offering is and what data they’re trying to protect.
Stephen McDermid, EMEA chief security officer for cybersecurity firm Okta, told CNBC that many financial services firms have prioritized using existing internal operational resilience and third-party risk programs to get into compliance with DORA and “identify any gaps they may have.”
“This is the intention of DORA, to create alignment of many existing governance programs under a single supervisory authority and harmonise them across the EU,” he added.
Fredrik Forslund vice president and general manager of international at data sanitization firm Blancco, warned that though banks and tech vendors have been making progress toward compliance with DORA, there’s still “work to be done.”
On a scale from one to 10 — with a value of one representing noncompliance and 10 representing full compliance — Forslund said, “We’re at 6 and we’re scrambling to get to 7.”
“We know that we have to be at a 10 by January,” he said, adding that “not everyone will be there by January.”
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Real estate, with its large transaction sizes and frequent use of bank wires, has proven to be an especially lucrative target for cybercriminals.
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Warren Buffett tours the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.
David A. Grogan | CNBC
Berkshire Hathaway, led by legendary investor Warren Buffett, has been making a confidential wager on the financial industry since the third quarter of last year.
The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.
That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.
The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.
That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.
“When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”
Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.
Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.
Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.
Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.
While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.
That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.
At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.
If it were a classic Buffett bet — a big stake in a single company — that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.
Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.
Charles Schwab or Morgan Stanley could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.
“Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”
Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.
Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.
Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.
But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.
Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.
Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.
“The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”
Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.
It’s unclear how long regulators will allow Berkshire to shield its moves.
“I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”
— CNBC’s Yun Li contributed to this report.
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A man shops for fruit at a grocery store on February 01, 2023 in New York City.
Leonardo Munoz | Corbis News | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Stocks rally
Wall Street closed higher on Tuesday with the S&P 500 hitting a fresh record, up 1.1%. The blue-chip Dow gained over 200 points, while the Nasdaq added 1.5% as U.S. inflation data came in mildly higher than expected in February.
Record shareholder payouts
Shareholder payouts hit a record $1.7 trillion last year, according to a new report by British asset manager Janus Henderson. Nearly half of the world’s total dividend growth came from the banking sector, which delivered record payouts as rising borrowing costs lifted lenders’ margins, the report found.
Boeing crisis hurt airlines
CEOs from several airlines say Boeing’s delivery delays have forced the carriers to change their growth plans. Boeing’s crisis has deepened since a door plug blew out midflight from an Alaska Airlines Max 9 in January. Southwest Airlines, Alaska Airlines and United, are some of the top buyers of Boeing’s aircraft that have been impacted by its problems.
Citadel on rate cuts
Inflation tailwinds remain and the Fed shouldn’t cut rates too quickly, says Citadel founder and CEO Ken Griffin. “If I’m them, I don’t want to cut too quickly,” he noted, adding that it will be “more devastating” if they have to change direction after initially cutting rates. “I think they are going to be a bit slower than what people were expecting two months ago in cutting rates.”
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Once again, inflation came in hot for a second straight month.
February’s consumer prices data was a touch better than January’s troubling inflation print.
Still, core inflation — which excludes food and energy — was stronger than expected, up 0.4% last month, which reflects lingering stickiness in price pressures.
Investors don’t expect that latest data to move the needle on the Fed cutting rates in June. That could be why markets have had a more muted reaction to the news.
“We have the numbers we have and this wasn’t great news for the Fed but markets don’t see it as a big threat to rate cuts later in the year,” Kathy Jones, chief fixed income strategist at Charles Schwab, said on X.
Yet, the hot print poses a problem for the Fed and muddies the water for its deliberations on the coming rate cuts.
“The long-term disinflation trajectory probably has not changed, but the path to the Federal Reserve’s 2% target will be choppy,” noted LPL Financial chief economist Jeffrey Roach. “Expect to see markets struggle with what this means for Fed policy.”
There is a lot riding for Wall Street when the central bank meets next week. Investors’ main focus will be on whether the Fed will continue to pencil in three rates for this year or will officials decide to change course.
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Alex Fitch, Oakmark Funds portfolio manager, joins ‘Fast Money’ to explain why Charles Schwab is still one of his top picks in banking sector.
03:44
Wed, Jan 17 20246:23 PM EST
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Shares of Charles Schwab Corp.
SCHW,
fell 1.5% toward a five-month low in premarket trading Monday, after the financial services and discount brokerage giant beat third-quarter profit expectations but fell a bit shy on revenue. Net income dropped to $1.02 billion, or 56 cents a share, from $1.88 billion, or 99 cents a share, in the year-ago period. Excluding nonrecurring items, adjusted earnings per share of 77 cents beat the FactSet consensus of 74 cents. Revenue declined 16.3% to $4.606 billion, below the FactSet consensus of $4.615 billion. Net interest revenue fell 23.5% to $2.237 billion to beat the FactSet consensus of $2.218 billion, while asset management and administration fee revenue rose 16.9% to $1.224 billion, in line with expectations, and trading revenue was down 17.4% to $768 million to miss expectations of $804 million. New brokerage accounts were flat from a year ago but down 7% from the sequential second quarter. The stock has declined 12.3% over the past three months through Friday while the S&P 500
SPX,
has slipped 3.9%.
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Two things investors can be sure about: Nothing lasts forever and the stock market always overreacts. The spiking of yields on long-term U.S. Treasury securities has been breathtaking, and it has led to remarkable declines for some sectors and possible bargains for contrarian investors who can commit for the long term.
First we will show how the sectors of the S&P 500
have performed. Then we will look at price-to-earnings valuations for the sectors and compare them to long-term averages. Then we will screen the entire index for companies trading below their long-term forward P/E valuation averages and narrow the list to companies most favored by analysts.
Here are total returns, with dividends reinvested, for the 11 sectors of the S&P 500, with broad indexes below. The sectors are sorted by ascending total returns this year through Monday.
| Sector or index | 2023 return | 2022 return | Return since end of 2021 | 1 week return | 1 month return |
| Utilities | -18.4% | 1.6% | -17.2% | -11.1% | -9.6% |
| Real Estate | -7.1% | -26.1% | -31.4% | -3.0% | -8.8% |
| Consumer Staples | -5.4% | -0.6% | -6.0% | -2.2% | -4.4% |
| Healthcare | -4.2% | -2.0% | -6.1% | -1.7% | -3.3% |
| Financials | -2.5% | -10.5% | -12.7% | -2.5% | -4.7% |
| Materials | 1.3% | -12.3% | -11.2% | -1.9% | -7.0% |
| Industrials | 3.5% | -5.5% | -2.1% | -1.8% | -7.3% |
| Energy | 4.0% | 65.7% | 72.4% | -1.9% | -1.4% |
| Consumer Discretionary | 27.0% | -37.0% | -20.0% | -0.6% | -5.2% |
| Information Technology | 36.5% | -28.2% | -2.0% | 0.8% | -5.9% |
| Communication Services | 42.5% | -39.9% | -14.3% | 1.1% | -1.3% |
|
S&P 500 |
13.1% | -18.1% | -7.4% | -1.1% | -4.9% |
|
DJ Industrial Average |
2.5% | -6.9% | -4.5% | -1.7% | -4.0% |
|
Nasdaq Composite Index COMP |
28.0% | -32.5% | -13.7% | 0.3% | -5.1% |
|
Nasdaq-100 Index |
36.5% | -32.4% | -7.7% | 0.5% | -4.2% |
| Source: FactSet | |||||
Returns for 2022 are also included, along with those since the end of 2021. Last year’s weakest sector, communications services, has been this year’s strongest performer. This sector includes Alphabet Inc.
GOOGL
and Meta Platforms Inc.
META,
which have returned 52% and 155% this year, respectively, but are still down since the end of 2021. To the right are returns for the past week and month through Monday.
On Monday, the S&P 500 Utilities sector had its worst one-day performance since 2020, with a 4.7% decline. Investors were reacting to the jump in long-term interest rates.
Here is a link to the U.S. Treasury Department’s summary of the daily yield curve across maturities for Treasury securities.
The yield on 10-year U.S. Treasury notes
jumped 10 basis points in only one day to 4.69% on Monday. A month earlier the 10-year yield was only 4.27%. Also on Monday, the yield on 20-year Treasury bonds
rose to 5.00% from 4.92% on Friday. It was up from 4.56% a month earlier.
Market Extra: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007
The Treasury yield curve is still inverted, with 3-month T-bills
yielding 5.62% on Monday, but that was up only slightly from a month earlier. An inverted yield curve has traditionally signaled that bond investors expect a recession within a year and a lowering of interest rates by the Federal Reserve. Demand for bonds pushes their prices down. But the reverse has happened over recent days, with the selling of longer-term Treasury securities pushing yields up rapidly.
Another way to illustrate the phenomenon is to look at how the Federal Reserve has shifted the U.S. money supply. Odeon Capital analyst Dick Bove wrote in a note to clients on Friday that “the Federal Reserve has not deviated from its policy to defeat inflation by tightening monetary policy,” as it has shrunk its balance sheet (mostly Treasury securities) to $8.1 trillion from $9 trillion in March 2022. He added: “The M2 money supply was $21.8 trillion in March 2022; today it is $20.8 trillion. You cannot get tighter than these numbers indicate.”
Then on Tuesday, Bove illustrated the Fed’s tightening and the movement of the 10-year yield with two charts:
Bove said he believes the bond market has gotten it wrong, with the inverted yield curve reflecting expectations of rate cuts next year. If he is correct, investors can expect longer-term yields to keep shooting up and a normalization of the yield curve.
This has set up a brutal environment for utility stocks, which are typically desired by investors who are seeking dividend income. In a market in which you can receive a yield of 5.5% with little risk over the short term, and in which you can lock in a long-term yield of about 5%, why take a risk in the stock market? And if you believe that the core inflation rate of 3.7% makes a 5% yield seem paltry, keep in mind that not all investors think the same way. Many worry less about the inflation rate because large components of official inflation calculations, such as home prices and car prices, don’t affect everyone every year.
We cannot know when this current selloff of longer-term bonds will end, or how much of an effect it will have on the stock market. But sharp declines in the stock market can set up attractive price points for investors looking to go in for the long haul.
A combination of rising earnings estimates and price declines could shed light on potential buying opportunities, based on forward price-to-earnings ratios.
Let’s look at the sectors again, in the same order, this time to show their forward P/E ratios, based on weighted rolling 12-month consensus estimates for earnings per share among analysts polled by FactSet:
There is a limit to how many columns we can show in the table. The S&P 500’s forward P/E ratio is now 17.94, compared with 16.79 at the end of 2022 and 21.53 at the end of 2021. The benchmark index’s P/E is above its 10- and 15-year average levels but below the five-year average.
If we compare the current sector P/E numbers to 5-, 10- and 15-year averages, we can see that the current levels are below all three averages for four sectors: utilities, real estate, financials and communications services. The first three face obvious difficulties as they adjust to the rising-rate environment, while the real-estate sector reels from continuing low usage rates for office buildings, from the change in behavior brought about by the COVID-19 pandemic.
Your own opinions, along with the pricing for some sectors, might drive some investment choices.
A broader screen of the S&P 500 might point to companies for you to research further.
We narrowed the S&P 500 as follows:
Here are the 20 companies that passed the screen, for which analysts’ price targets imply the highest upside potential over the next 12 months.
There is too much data for one table, so first we will show the P/E information:
| Company | Ticker | Current P/E to 5-year average | Current P/E to 10-year average | Current P/E to 15-year average |
| SolarEdge Technologies Inc. | SEDG | 89% | N/A | N/A |
| AES Corp. | AES | 66% | 75% | 90% |
| Insulet Corp. | PODD | 18% | N/A | N/A |
| United Airlines Holdings Inc. | UAL | 42% | 50% | N/A |
| Alaska Air Group Inc. | ALK | 51% | 57% | N/A |
| Tapestry Inc. | TPR | 39% | 49% | 70% |
| Albemarle Corp. | ALB | 39% | 50% | 73% |
| Delta Air Lines Inc. | DAL | 60% | 63% | 21% |
| Alexandria Real Estate Equities Inc. | ARE | 59% | 68% | N/A |
| Las Vegas Sands Corp. | LVS | 96% | 78% | 53% |
| Paycom Software Inc. | PAYC | 61% | N/A | N/A |
| PayPal Holdings Inc. | PYPL | 33% | N/A | N/A |
| SBA Communications Corp. Class A | SBAC | 27% | N/A | N/A |
| Advanced Micro Devices Inc. | AMD | 58% | 39% | N/A |
| LKQ Corp. | LKQ | 92% | 44% | 78% |
| Charles Schwab Corp. | SCHW | 75% | 54% | 73% |
| PulteGroup Inc. | PHM | 94% | 47% | N/A |
| Lamb Weston Holdings Inc. | LW | 71% | N/A | N/A |
| News Corp Class A | NWSA | 93% | 73% | N/A |
| CVS Health Corp. | CVS | 75% | 61% | 67% |
| Source: FactSet | ||||
Click on the tickers for more about each company or index.
News Corp
NWSA
is on the list. The company owns Dow Jones, which in turn owns MarketWatch.
Here’s the list again, with ratings and consensus price-target information:
| Company | Ticker | Share “buy” ratings | Oct. 2 price | Consensus price target | Implied 12-month upside potential |
| SolarEdge Technologies Inc. | SEDG | 74% | $122.56 | $268.77 | 119% |
| AES Corp. | AES | 79% | $14.16 | $25.60 | 81% |
| Insulet Corp. | PODD | 68% | $165.04 | $279.00 | 69% |
| United Airlines Holdings Inc. | UAL | 71% | $41.62 | $69.52 | 67% |
| Alaska Air Group Inc. | ALK | 87% | $36.83 | $61.31 | 66% |
| Tapestry Inc. | TPR | 75% | $28.58 | $46.21 | 62% |
| Albemarle Corp. | ALB | 81% | $162.41 | $259.95 | 60% |
| Delta Air Lines Inc. | DAL | 95% | $36.45 | $58.11 | 59% |
| Alexandria Real Estate Equities Inc. | ARE | 100% | $98.18 | $149.45 | 52% |
| Las Vegas Sands Corp. | LVS | 72% | $45.70 | $68.15 | 49% |
| Paycom Software Inc. | PAYC | 77% | $260.04 | $384.89 | 48% |
| PayPal Holdings Inc. | PYPL | 69% | $58.56 | $86.38 | 48% |
| SBA Communications Corp. Class A | SBAC | 68% | $198.24 | $276.69 | 40% |
| Advanced Micro Devices Inc. | AMD | 74% | $103.27 | $143.07 | 39% |
| LKQ Corp. | LKQ | 82% | $49.13 | $67.13 | 37% |
| Charles Schwab Corp. | SCHW | 77% | $53.55 | $72.67 | 36% |
| PulteGroup Inc. | PHM | 81% | $73.22 | $98.60 | 35% |
| Lamb Weston Holdings Inc. | LW | 100% | $92.23 | $123.50 | 34% |
| News Corp Class A | NWSA | 78% | $20.00 | $26.42 | 32% |
| CVS Health Corp. | CVS | 77% | $69.69 | $90.88 | 30% |
| Source: FactSet | |||||
A year may actually be a short period for a long-term investor, but 12-month price targets are the norm for analysts working for brokerage companies.
Don’t miss: This fund shows that industry expertise can help you make a lot of money in the stock market
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As equities soared in 2020 and consumers flocked to trading apps like Robinhood, Apple and Goldman Sachs were working on an investing feature that would let consumers buy and sell stocks, according to three people familiar with the plans.
The project was shelved last year as the markets turned south, said the sources, who asked not to be named because they weren’t authorized to speak on the matter.
The effort, which has not been previously reported, would have added to Apple’s suite of financial products powered by Goldman. Apple first teamed up with the Wall Street bank to offer a credit card in 2019, and then added buy now, pay later (BNPL) loans and a high-yield savings account. The company said last month that the savings account offering had climbed past $10 billion in user deposits.
Representatives for Apple and Goldman declined to comment.
Apple CEO Tim Cook holds a new iPhone 15 Pro during the ‘Wonderlust’ event at the company’s headquarters in Cupertino, California, U.S. September 12, 2023.
Loren Elliott | Reuters
Apple was working on the investing feature at a time of zero interest rates during Covid, when consumers were stuck at home and spending more of their time and their record savings in trading shares, including meme stocks like GameStop and AMC, from their smartphones.
Apple’s conversations with Goldman began during that hype cycle in 2020, two sources said. Their work progressed, and an Apple investing feature was meant to roll out in 2022. One hypothetical use case pitched by executives involved the ability for iPhone users with extra cash to put money into Apple shares, one person said.
But as markets were roiled by higher rates and soaring inflation, the Apple team feared user backlash if people lost money in the stock market with the assistance of an Apple product, the sources said. That’s when the iPhone maker and Goldman switched directions and pushed the plan to launch savings accounts, which benefit from higher rates.
The status of the stock-trading project is unclear after Goldman CEO David Solomon bowed to internal and external pressure and decided to retrench from nearly all of the bank’s consumer efforts. One source said the infrastructure for an investing feature is mostly built and ready to go should Apple eventually decide to move forward with it.
The Apple Card launched with much fanfare three years ago, but the business brought regulatory heat and racked up losses as its user base expanded. Earlier this year, Goldman rolled out a high-interest savings account for Apple Card users, offering a 4.15% annual percentage yield.
Goldman was also central to Apple’s BNPL offering. The product, called Apple Pay Later, can be used for purchases of $50 to $100 “at most websites and apps that accept Apple Pay,” according to the support page. Borrowers can split a purchase into four payments over six weeks without incurring interest or fees.
Before Goldman’s pivot away from retail banking, the company examined ways to expand its partnership with Apple, sources said. More recently, Goldman was in discussions to offload both its card and savings account to American Express.
Had plans for the trading app progressed, Apple would have entered a market with stiff competition, featuring the likes of Robinhood, SoFi and Block’s Square, along with traditional brokerage firms such as Charles Schwab and Morgan Stanley’s E-Trade.
Stock trading has become another way for financial firms to keep customers and drive engagement on their platforms. Apple was pursuing the same approach, one source said. It’s a move that could capture the interest of regulators, who have scrutinized Apple for its App Store practices. Robinhood has also been grilled by regulators for what they described as “gamifying” markets.
Other tech companies have been pushing into the space. Elon Musk’s X, formerly known as Twitter, is working on a way to let users buy stocks and cryptocurrencies through a partnership with eToro. PayPal had plans to launch stock trading after hiring a key industry executive in 2021. But the company abandoned those plans, and said on an earnings call that it would cut spending and refocus on its core e-commerce business.
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U.S. banks and regional banks fell across the board on Tuesday, after S&P Global Ratings downgraded five smaller players after a review of risk related to funding, liquidity and asset quality with a focus on office commercial real estate.
Adding to the gloom, Republic First Bancorp. Inc.’s stock
FRBK,
tanked by 39%, after Nasdaq told the company that its stock would be delisted on Wednesday, after it failed to file its annual report in time.
S&P’s move comes just days after Fitch Ratings analyst Christopher Wolfe reduced his operating environment score for U.S. banks to aa- from aa due to the unknown path of interest rate hikes and regulatory changes facing the sector.
And Moody’s Investors Service just two weeks ago upset investors when it downgraded some lenders and said it was reviewing ratings on bigger banks, including Bank of New York Mellon
BK,
State Street
STT,
and Northern Trust
NTRS,
For more, see: Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession
The S&P 500 Financials Sector has fallen for seven consecutive days, and is on pace for its longest losing streak since April 7, 2022, when it also fell for seven straight trading days.
Individual bank names are also performing poorly, with Goldman Sachs Group Inc.
GS,
and Citigroup Inc.
C,
down for 10 of the past 11 days and Charles Schwab Corp.
SCHW,
down 11 straight days.
Goldman alone has fallen for seven straight days for a total loss of 6.3%. It’s the longest losing streak since Feb. 28, 2020, when it also fell for seven straight days as the pandemic was taking hold.
The KBW Nasdaq Regional Banking Index
KBWR
is down for 11 straight days. and the KBW Nasdaq Bank Index
BKX
is down for seven straight days.
S&P downgraded Associated Banc. Corp.
ASB,
Comerica Inc.
CMA,
KeyCorp
KEY,
UMB Financial Corp.
UMBF,
% and Valley National Bancorp.
VLY,
by one notch and said the outlook on all five is stable.
Read also: More challenges await U.S. banks but analysts think the worst may be over for the year
The rating agency affirmed ratings on Zions Bancorp
ZION,
and maintained a negative outlook, meaning it could downgrade them again in the near-term. And it affirmed ratings and a stable outlook on Synovus Financial Corp.
SNV,
and Truist Financial Corp.
TFC,
“We reviewed these 10 banks because we identified them as having potential risks in multiple areas that could make them less resilient than similarly rated peers ,” S&P said in a statement.
“For instance, some that have seen greater deterioration in funding—-as indicated by sharply higher costs or substantial dependence on wholesale funding and brokered deposits—-may also have below-peer profitability, high unrealized losses on their assets, or meaningful exposure to CRE.”
The steep rise in interest rates orchestrated by the Federal Reserve over the past year has raised deposit costs as banks are now competing for savers seeking higher returns and that’s forced some to pay up on deposits and discourage their clients from heading to other institutions and instruments.
The sector has been skittish this year following the collapse of Silicon Valley Bank and other lenders that led to a run on deposits at a number of regional lenders.
However, S&P said about 90% of the banks it rates have stable outlooks and just 10% have negative ones. None have positive outlooks.
The widespread stable outlooks shows that stability in the U.S. banking sector has improved significantly in recent months.
S&P is expecting FDIC-backed banks in aggregate to earn a relatively healthy ROE of about 11% in 2023.
KeyCorp. and Comerica both fell more than 3% on the news. Of the two, KeyCorp. has more outstanding debt and its 10-year bonds widened by about 5 to 10 basis points, according to data solutions provider BondCliq Media Services.
As the following chart shows, the bonds have seen better selling on Wednesday with buyers emerging around midmorning.
The next chart shows customer flow over the last 10 days.
The next chart shows the outstanding debt of the downgraded banks, with KeyCorp. clearly the leader with almost $16 billion of bonds.
Don’t miss: Capital One confirms roughly $900 million sale of office loans as property sector wobbles
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Nvidia headquarters in Santa Clara, California, US, on Monday, June 5, 2023.
Marlena Sloss | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Tech rebound
U.S. stocks started the week on a positive note, thanks to a rebound in chipmakers and technology stocks. European markets traded mixed. The regional Stoxx 600 index inched up 0.15%, buoyed by a 4.35% increase in Philips. However, the U.K.’s FTSE 100 slid 0.23% and Spain’s IBEX 35 dipped 0.05%.
Nvidia, again
Nvidia shares popped 7% to hit $437.43 after Morgan Stanley released a note reiterating the company’s strengths. “Nvidia remains our Top Pick, with a backdrop of the massive shift in spending towards AI, and a fairly exceptional supply demand imbalance that should persist for the next several quarters,” the bank wrote.
Back to golf, not banking
Goldman Sachs’ former CEO Lloyd Blankfein can’t imagine returning to his old firm, he told CNBC. Blankfein was disputing a New York Times article that “misquoted” him. “I never used the word ‘return’,” Blankfein said. “I think my days working 100-hour weeks are over.” He then ended the conversation and went back to his golf game.
The Russian ‘Goldilocks’ for China?
China’s been one of Russia’s staunchest supporters since Moscow’s unprovoked invasion of Ukraine. But analysts think China wants Russia in a “Goldilocks” situation: Neither so strong that it could challenge Beijing, nor too weak where it leaves China isolated against the West. Other observers, however, argue China’s already risking geopolitical capital to help Russia.
[PRO] Rate cuts next year?
Goldman Sachs thinks inflation will fall to a level that the Federal Reserve is comfortable with by the first half of next year. The Fed, in turn, will begin lowering interest rates before the end of June 2024, the bank forecast.
Technology stocks and chipmakers helped major U.S. indexes regain their footing after ending last week in the red. The S&P 500 gained 0.58%, the Dow Jones Industrial Average inched up 0.07% and the Nasdaq Composite advanced 1.05%.
While that’s just a single data point, yesterday’s positive market movement echoes Oppenheimer chief investment strategist John Stoltzfus’ argument that the last two week of losses didn’t signal the end of the bull market. Rather, it was “a pause that refreshes” — a healthy adjustment to “oversold market conditions,” Stoltzfus wrote.
Still, stocks face pressure from rising bond yields. The two-year U.S. Treasury yield is a hair’s breadth away from 5% while the 10-year yield is 4.2% — pretty healthy returns for a risk-free investment. “Fixed income just looks relatively attractive, especially [relative to] where [we] were just a couple of years ago,” said Kevin Gordon, senior investment strategist at Charles Schwab.
At the same time, higher yields mean lower prices. That “creates the opportunity to buy bonds at a real rate that we haven’t seen in well over a decade,” Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management, told CNBC.
The tussle between stocks and bonds, however, seems a pretty good problem to have. Recent data show both inflation receding and the U.S. economy expanding more than forecast. Whatever choice investors make, then, it’s made under a backdrop of heathy conditions — something rare since the pandemic.
Or, as Adam Crisafulli, founder of market intelligence firm Vital Knowledge, put it, “We don’t think investors should dive too far down rabbit holes of despair.”
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A man walks by the Bank of America headquarters on July 18, 2023 in New York.
Eduardo Munoz | View Press | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Market momentum
All major U.S. indexes advanced Tuesday. The Dow Jones Industrial Average had its seventh consecutive day of gains as investors digested better-than-expected corporate earnings. Asia-Pacific markets were mixed Wednesday. Hong Kong’s Hang Seng Index slid 1.2%, extending its losses of over 2% yesterday, while Japan’s Nikkei 225 rose 0.78% even as business sentiment in the country fell in July.
Microsoft 365 + $30
Microsoft shares popped around 4% to hit an all-time high after the company announced pricing for its new artificial intelligence service. Named Copilot, the service costs an additional $30 per month, on top of the base Microsoft 365 subscription for Office products. Microsoft also announced its Bing Chat can now respond to images.
Banking boom
Morgan Stanley’s shares jumped 6.45% after the bank reported better-than-expected second-quarter earnings and revenue. Revenue climbed 2% to $13.46 billion, boosted by a 16% increase in wealth management revenue. Meanwhile, investors pushed Bank of America shares up 4.42% on the bank’s earnings and revenue beat for the second quarter. Both figures were also higher year on year.
I’m feeling unlucky
Google is cutting internet access for some employees to reduce the risk of cyberattacks, CNBC has learned. Employees chosen to participate in the new pilot program will only be able to access Google-owned websites, and will also be restricted from administrative permissions like installing software. “Googlers are frequent targets of attacks,” one internal description viewed by CNBC stated.
[PRO] Predictions for the global market
The U.S. stock market has rallied this year, but the picture across the world is more varied. CNBC Pro asked 15 market strategists to predict how global stock markets will end the year. Find out which country has the best chance of beating its U.S. counterpart, according to strategists.
In another sign the U.S. economy is more resilient than anticipated, banks have had a good showing this earnings season.
Yes, big banks like JPMorgan Chase, Morgan Stanley and Bank of America are supposed to benefit from the higher interest rates that felled regional banks like Silicon Valley Bank and First Republic.
But investment banking activity — which slowed as higher rates first kicked in last year — is seeing signs of a revival.
JPMorgan’s investment banking revenue beat estimates. As Octavio Marenzi, CEO of consultancy Opimas, put it, “investment banking, which has been a problem child over the past year or so, is starting to show signs of life.”
Indeed, investment banking fees for Bank of America increased 7% to $1.2 billion.
And while Morgan Stanley didn’t do so well on the investment banking front, CEO James Gorman said he believes “we are very, very close” to the end of rate hikes. That would give the banking sector more stable ground on which to operate and rebuild.
Regional banks weren’t left out of the surge of optimism in the sector, either. Charles Schwab, which had struggled since the banking turmoil in March, also saw better-than-expected earnings and revenue last quarter. Investors cheered and gave the bank’s shares a 12.57% bump.
More tellingly, the SPDR Regional Banking ETF added 4.22% to hit $45.73, its best day of gains since June 6, and the most expensive it’s been since early March, prior to the failure of several regional banks.
Broader indexes closed higher as well. The S&P 500 rose 0.71%, the Dow Jones Industrial Average added 1.06% and the Nasdaq Composite climbed 0.76%.
Goldman Sachs reports later today, wrapping up earnings from big banks. Even if Goldman beats estimates, keep in mind that analysts aren’t expecting much from the investment bank for the second quarter because of several of its own missteps.
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A woman exits the Bank of America headquarters on July 18, 2023 in New York.
Eduardo Munoz Alvarez | View Press | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Positive market momentum
All major U.S. indexes advanced Tuesday. The Dow Jones Industrial Average had its seventh consecutive day of gains as investors digested better-than-expected corporate earnings. European markets traded higher as well. The benchmark Stoxx 600 index added 0.6% as British grocery delivery firm Ocado surged almost 20%.
Microsoft 365 + $30
Microsoft shares popped around 4% to hit an all-time high after the company announced pricing for its new artificial intelligence service. Named Copilot, the service costs an additional $30 per month, on top of the base Microsoft 365 subscription for Office products. Microsoft also announced its Bing Chat can now respond to images.
The other Morgan
Morgan Stanley’s shares jumped 6.45% after the bank reported better-than-expected second-quarter earnings and revenue. Revenue climbed 2% to $13.46 billion, boosted by a 16% increase in wealth management revenue. Profits declined 13% to $2.18 billion from a year earlier, but investors took comfort in CEO James Gorman’s comments that the upcoming quarter looks “more constructive.”
Banking on Bank of America
Investors pushed Bank of America shares up 4.42% on the bank’s earnings and revenue beat for the second quarter. Both figures were also higher year on year. Profit rose 19% to $7.41 billion while revenue increased 11% to $25.33 billion, helped by a 14% jump in net interest income.
[PRO] Cautious fund managers
In the past days, we’ve heard about how the S&P 500 may hit a record high this year amid a perpetually postponed recession. But fund managers are still cautious, according to the latest Bank of America Global Fund Manager Survey. This is how managers are allocating their investments, and the assets they are worried about.
In another sign the U.S. economy is more resilient than anticipated, banks have had a good showing this earnings season.
Yes, big banks like JPMorgan Chase, Morgan Stanley and Bank of America are supposed to benefit from the higher interest rates that felled regional banks like Silicon Valley Bank and First Republic.
But investment banking activity — which slowed as higher rates first kicked in last year — is seeing signs of a revival.
JPMorgan’s investment banking revenue beat estimates. As Octavio Marenzi, CEO of consultancy Opimas, put it, “investment banking, which has been a problem child over the past year or so, is starting to show signs of life.”
Indeed, investment banking fees for Bank of America increased 7% to $1.2 billion.
And while Morgan Stanley didn’t do so well on the investment banking front, CEO James Gorman said he believes “we are very, very close” to the end of rate hikes. That would give the banking sector more stable ground on which to operate and rebuild.
Regional banks weren’t left out of the surge of optimism in the sector, either. Charles Schwab, which had struggled since the banking turmoil in March, also saw better-than-expected earnings and revenue last quarter. Investors cheered and gave the bank’s shares a 12.57% bump.
More tellingly, the SPDR Regional Banking ETF added 4.22% to hit $45.73, its best day of gains since June 6, and the most expensive it’s been since early March, prior to the failure of several regional banks.
Broader indexes closed higher as well. The S&P 500 rose 0.71%, the Dow Jones Industrial Average added 1.06% and the Nasdaq Composite climbed 0.76%.
Goldman Sachs reports later today, wrapping up earnings from big banks.
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Charles Schwab Corp.’s stock soared 12% Tuesday to put it on track for its biggest one-day increase since March of 2020, after the discount brokerage’s second-quarter earnings fell from a year ago but still topped consensus estimates.
Chief Executive Walt Bettinger acknowledged a “somewhat unsettled backdrop,” but said Schwab gathered $52 billion in core net new assets in the quarter, bringing the year-to-date total to more than $180 billion.
“While we observed signs of typical tax seasonality, as well as softer investor sentiment at the beginning of the quarter, we still attracted nearly 1 million new brokerage accounts and finished the period serving $8.02 trillion in total client assets across 34 million accounts,” he said in a statement.
The company
SCHW,
posted net income of $1.294 billion, or 64 cents a share, for the quarter, down from $1.793 billion, or 87 cents a share, in the year-earlier period. Adjusted per-share earnings came to 75 cents, ahead of the 71-cent FactSet consensus.
Revenue fell 9% to $4.656 billion, ahead of the $4.610 billion FactSet consensus.
See now: Morgan Stanley’s profit drops but beats expectations as stock rises
Bank deposits fell to $304.4 billion from $442.0 billion a year ago. The company’s clients have been engaged in a practice called “sorting,” where they are moving cash out of sweep accounts and into higher-paying products. When that process exceeds cash on hand, the company has to borrow from other funding sources that can be more expensive.
Still, Chief Financial Officer Peter Crawford said the daily outflows that have hurt the company over the last year as clients react to higher interest rates by seeking out better-paying options, began to slow.
“While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months,” he said.
Also read: Bank of America’s stock rises after second-quarter earnings and revenue beat expectations
“The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet.”
On a call with analysts, Crawford said the company has not had to make any short-term borrowings from either CDs or Federal Home Loan Bank loans since late May and can now cover cash needs with organic sources.
“And as client cash realignment continues to slow and eventually reverses, we’d expect our supplemental funding balances to continue to decline over the next 18 months and be mostly paid off by the end of 2024,” he said, according to a FactSet transcript. “And this means that they should not really be a factor in our earnings picture in 2025 and beyond.”
Elsewhere, the company’s net interest income fell 10% to $2.3 billion as net interest margins fell 32 basis points from the first quarter to 1.87%.
Net interest revenue rose to $4.1 billion from $2.7 billion a year ago, while interest expenses jumped to $1.8 billion from $166 million.
The company also made progress with the conversion of client accounts from TD Ameritrade into Schwab accounts, with about 30% of accounts converted so far, said Bettinger. That comes after a major effort over the Memorial Day holiday weekend.
Schwab expects to move almost all of the rest over by year-end and to transition the final group in the first half of 2024, he said.
The stock has fallen 30% in the year to date, while the S&P 500
SPX,
has gained 17.8%.
Read now: JPMorgan Chase, Wells Fargo, Citi beat earnings targets but uncertainty clouds the economic outlook
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At a time when many investors seem euphoric, others are warning that stock valuations have once again turned frothy. It may pay to take a look back at valuation and performance and consider your own risk tolerance.
A value-based approach that offers lower volatility and good long-term returns can be expected to be less flashy than one focused on the hottest technology stocks. But depending on how much it bothers you when the stock market gyrates, it may be a better way for you to invest. Lower volatility might help you to avoid the type of emotional reaction that can lead to selling into a declining market or attempting to time the market, both of which tend to be losing strategies.
Aaron Dunn is a co-head of the value equity team at Eaton Vance, which is based in Boston and is a unit of Morgan Stanley. During an interview, he explained how he and Brad Galko, who co-heads the team, select stocks for the Eaton Vance Focused Value Opportunities Fund. The fund’s performance benchmark is the Russell 1000 Value Index
RLV,
First, let’s take a broad look at how aggregate forward price-to-earnings ratios have moved for exchange-traded funds tracking several broad indexes over the past 10 years:
The valuations are lower than their 2020 peaks. But for all but one, the valuations still appear to be high when compared with their 10-year averages:
| ETF | Ticker | Current forward P/E | 10-year average forward P/E | Current valuation to 10-year average |
| SPDR S&P 500 ETF Trust |
SPY, |
19.06 | 15.93 | 120% |
| iShares Russell 1000 ETF |
IWB, |
18.94 | 16.02 | 118% |
| iShares Russell 1000 Value ETF |
IWD, |
14.33 | 13.94 | 103% |
| iShares Russell 1000 Growth ETF |
IWF, |
26.63 | 19.00 | 140% |
| Source: FactSet | ||||
All of the listed ETFs listed here are trading well above their 10-year average P/E valuations except the iShares Russell 1000 Value ETF, which is only slightly higher. These numbers back the notion that the broad market is expensive and that a value approach may be more reasonable. It is also worth keeping in mind that during 2022, when the SPDR S&P 500 ETF Trust
SPY,
declined 18.2% and the iShares Russell 1000 ETF
IWB,
fell 19.2%, the iShares Russell 1000 Value ETF
IWD,
pulled back 7.7% and the Eaton Vance Focused Value Opportunity Fund’s Class I shares were down only 3.3%, all with dividends reinvested.
If we look at 10-year total returns, the nonvalue indexes, so heavily weighted to the largest technology-oriented companies, have been excellent performers for investors who could remain committed through thick and thin:
| Fund | Ticker | 3-year average annual return | 5-year average annual return | 10-year average annual return |
| SPDR S&P 500 ETF Trust |
SPY, |
13.2% | 11.4% | 12.3% |
| iShares Russell 1000 ETF |
IWB, |
12.5% | 11.0% | 12.1% |
| iShares Russell 1000 Growth ETF |
IWF, |
11.2% | 14.0% | 15.0% |
| iShares Russell 1000 Value ETF |
IWD, |
13.7% | 7.3% | 8.7% |
| Eaton Vance Value Opportunities Fund – Class I |
EIFVX, |
14.8% | 8.7% | 9.7% |
| Source: FactSet | ||||
For five and 10 years, the growth-oriented approaches have shined. But for three years, which includes the 2022 disruption, the Eaton Vance Value Opportunities Fund has fared best, even outperforming its benchmark.
The Eaton Vance Focused Value Opportunity Fund’s Class I
EIFVX,
shares are rated four stars (out of five) within Morningstar’s Large Value fund category. The fund’s Class A
EAFVX,
shares are rated three stars. The difference is that the Class I shares, which are typically distributed through investment advisers, have annual expenses of 0.74% of assets under management, while the Class A shares have an expense ratio of 0.99%. You can purchase Class I shares directly through brokerage platforms for a $50 fee.
Dunn said that when selecting stocks for the fund, he and Galko take a bottom-up approach to identify quality companies. The want to see high returns on invested capital (ROIC) over the long term, as well as a “good competitive position” for a company and a strong management team.
They also prefer companies with low debt. “We do not want to buy overlevered companies and be in a situation where we are diluting through equity raises and putting capital at risk,” he said.
Dunn added that he and Galko look closely at free cash flow generation. A company’s free cash flow is its remaining cash flow after capital expenditures. This is money that can be used to fund expansion, acquisitions, dividend increases or share buybacks, or for other corporate purposes.
“Philosophically, what this results in is that we hold up well in markets such as last year’s. And we find upside in stocks trading below intrinsic value,” he said.
“We focus on finding ideas where there is a good skew for upside relative to downside,” he added.
According to Morningstar, the fund’s active share when compared with IWD is high, at 91.45%. Active share is a measure of how much an actively managed fund differs in investment exposure from its benchmark index. If you are paying more for active management than you would to invest in an index fund, active share is something to consider. If it is low, you might be overpaying for a “closet indexer.” You can read about how Morningstar assesses active shares here.
The fund is concentrated, typically holding between 25 and 45 companies.
According to Morningstar’s most recent data, these were the fund’s top 10 holdings (out of 28 stocks) as of May 31:
| Company | Ticker | % of Eaton Vance Focused Value Opportunity Fund | Forward P/E | 2023 total return |
| Alphabet Inc. Class A |
GOOGL, |
5.0% | 19.6 | 32% |
| Micron Technology Inc. |
MU, |
4.8% | N/A | 25% |
| American International Group Inc. |
AIG, |
4.3% | 8.1 | -7% |
| Reinsurance Group of America Inc. |
RGA, |
4.2% | 8.0 | 1% |
| Bristol Myers Squibb Co. |
BMY, |
4.1% | 7.7 | -11% |
| Wells Fargo & Co. |
WFC, |
4.0% | 8.9 | 4% |
| ConocoPhillips |
COP, |
4.0% | 10.5 | -10% |
| Constellation Brands Inc. Class A |
STZ, |
3.9% | 20.4 | 9% |
| NextEra Energy Inc. |
NEE, |
3.8% | 21.9 | -13% |
| Charles Schwab Corp. |
SCHW, |
3.8% | 16.0 | -30% |
| Source: FactSet | ||||
Click the tickers for more about each company, fund or index.
There is no forward price-to-earnings ratio for Micron Technology Inc.
MU,
because the company’s combined EPS for the next 12 months are expected to be negative.
Micron is a company in transition, caught up in diplomatic conflict between the U.S. and China, whose government directed some manufacturers in May to stop purchasing memory chips made by the company. Then again, in June, Micron highlighted its “commitment to China” when announcing a new investment in its plant in Xi’an.
Read: Micron recovery debated by analysts as bottom is called in memory-chip market
Dunn said downside for Micron’s stock was “mitigated” because of the company’s relatively low debt. He also said that as companies continue to adopt more cloud services and deploy artificial-intelligence technology, demand for memory chips will increase.
While there is no current forward P/E for Micron, the stock always trades at low valuations relative to most other large tech companies. Dunn touted Micron’s strong cash flow and said the stock was “underappreciated” and remained “an interesting play on cloud and AI.”
While it is not among the top 10 holdings listed above, Dunn highlighted Dollar Tree Inc.
DLTR,
as an example of the type of value stock he favors. The company “was not well run” following its acquisition of Family Dollar in 2015. But he has been impressed with its more recent turnaround efforts, including improvements in how products are shipped to stores, better efficiency and “a lot of work going on with culture, how they operate, how they treat employees [and] adding some shelf space to move more product.”
It is interesting to see NextEra Energy Inc.
NEE,
among the fund’s largest holdings. This has been quite a strong grower over the past 10 years, with a total return of 346% as the owner of Florida Power & Light has grown along with its customer base and has become a leader in the build-out of solar-power generation.
Dunn said the company is “still growing in the mid-single digits. For a utility company, that is a strong profile.”
When discussing Alphabet Inc.
GOOGL,
the fund’s largest holding as of May 31, Dunn said that “it is really an advertising business with other businesses around it” and that its P/E valuation was “not extremely taxing.” He said Alphabet had been “less aggressive with cost cutting” than other technology giants and added that the company’s “targeted search” through Google and other properties, such as YouTube, “probably provides a better return on investment than broadcast advertising, and that really is the key.”
Don’t miss: This stock investing strategy has blown away the S&P 500. Here’s a way to refine it for quality.
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