One of the core principles about technical analysis that was drilled into my head early in my investing career is that “the market is always right.”
It’s one of those idioms that is good as a sound bite. It’s also useful in building a disciplined investing mindset, because it’s designed to disconnect a person’s bias about a company from the investing decision and instead to learn to rely on the stock’s price action to drive a more objective approach to trade timing as well as what kind of trade to make – buy, sell, or stay away.
Early in my investing career, I put a lot of focus on understanding technical concepts like identifying short-term reversal points as support and resistance, trend formations over time, and how all of that information can be applied against a stock’s current price to recognize signals about a stock’s likely direction across multiple time periods in the future. Those principles put “the market is always right” into a clearer context and made it easier to separate whether or not I liked the company or their core business from a practical investing decision.
For some, the mindset I just outlined tends to dismiss the value argument, which relies on the company’s underlying fundamental strength to drive an evaluation about what the stock should be worth. Pure technicians operate on the basis that the market prices in all available information about a company into its stock at all times, no matter whether that information is qualitative, quantitative or otherwise. That means that whatever a stock’s price is today, that is where it probably should be. It’s why swing and momentum traders don’t care so much about what a stock’s price is right now as much as which way it’s going, and what that direction might say about where it is likely to go next.
In the years since I cut my teeth on those technical concepts, I’ve studied and learned more about fundamental and value-based principles. Along the way, I’ve learned to combine the best of both the technical and fundamental viewpoints into the system I use now. Understanding where a stock is right now in relation to its trends helps to shape my viewpoint about the probabilities of also identifying stocks at useful valuation levels. Sometimes, those principles work well in concert with each other and at other times they seem diametrically opposed. The longer a bull market lasts, for example, the harder it gets to find stocks with the ideal combination of a value and fundamental-driven discount with a trend that leads me to also believe potential downside could be limited.
The Financial sector is a good example of what I mean. From early in 2020 until the beginning of 2022, the sector was one of the biggest stars of the market. As interest rates have increased this year, however, the opposite has held true, as the sector dropped nearly -30% from its January high to its October low as measured by the U.S. Financials iShares ETF (IYF). In March, bearish pressure absolutely devastated the banking industry as specialized banks like Silicon Valley Bank (tech-focused venture capital), followed by Signature Bank (real estate and cryptocurrency payment systems) collapsed under the weight of overwhelming customer withdrawals, prompting regulators with the FDIC to take over both banks to protect depositors as well as the banking system in general. Those failures created a ripple effect that has most banking stocks at or very near historical lows, but hit regional banks the hardest, pushing many of them to levels not seen since early in 2020.
This week, pressure is picking up again amidst reports that First Republic Bank, which survived the initial scare with intervention via a $30 billion infusion of cash from eleven of the largest U.S. banks, lost roughly 40% of its deposits in the first quarter, raising concerns they’ll be the third failure in the U.S. since March.
One of the companies that I like to pay attention to in this industry is U.S. Bancorp (USB). While this company will usually not get mentioned on news media when talking heads start talking about the largest banking institutions in the U.S. because it is generally considered a “regional” bank, it is the 5th largest bank in the U.S. by deposits with a footprint that spans most of the Midwestern and Western United States. They boast a very healthy balance sheet with liquid reserves well in access of debt obligations and a healthy dividend that makes tempting fodder for income-seeking investors. The stock was already following a long-term downward trend from its early 2022 high at around $64 to a consolidation level last month at around $50. The industry’s sell-off pushed this stock down to a low at around $33 per share, from which it appeared to stabilize, however in the last week downward pressure has pushed the stock to a new 52-week low, with its current price a little above $31. With many of those critical fundamentals still in place, the question becomes whether there is a strong argument to be made that the industry’s big sell-off, and latest, new bearish push really just makes this stock an even bigger bargain than it was a month ago. Let’s dive in to the numbers.
Fundamental and Value Profile
U.S. Bancorp is a financial services holding company. The Company provides a range of financial services, including lending and depository services, cash management, capital markets, and trust and investment management services. It also engages in credit card services, merchant and automated teller machine (ATM) processing, mortgage banking, insurance, brokerage and leasing. Its banking subsidiary, U.S. Bank National Association, is engaged in the general banking business and offers commercial and consumer lending, lending services, depository services and ancillary services. Its non-banking subsidiaries offer investment and insurance products to the Company’s customers principally within its domestic markets, and fund administration services to a range of mutual and other funds. The Company’s bank and trust subsidiaries provide a range of asset management and fiduciary services for individuals, estates, foundations, business corporations and charitable organizations. USB’s market cap is about $48.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 17.17%, while sales were 62.9% higher. In the last quarter, earnings declined by -3.33% while sales were about 18.14% higher. USB’s margin profile is very healthy, but is tapering; Net Income as a percentage of Revenues was 18.76% over the last twelve months, and dropped in the last quarter to 17.93%.
Free Cash Flow: USB’s free cash flow was about $21.1 billion over the past twelve months and translates to a Free Cash Flow Yield of 42.05%. It has also increased over the past year, from $17.4 billion, and $14.9 billion in the quarter prior.
Dividend Yield: USB’s dividend is $1.92 per share, and translates to yield of 6.04% at its current price. It has also increased from $1.68 per share in the first quarter of 2021, which further confirms the company’s overall fundamental strength.
Debt to Equity: USB has a debt/equity ratio of .9. This is a manageable number. Their balance sheet shows $53.5 billion in cash and liquid assets against about $42 billion in long-term debt. It should be noted that while cash increased by nearly $12 billion in the last quarter, long-term debt also increased by about $10 billion over the last two quarters. Despite the increase in debt, the company is in an excellent financial position with very high liquidity.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $50 per share. That means the stock is extremely undervalued, with about 57% upside from the stock’s current price. It’s also worth noting that prior to the company last earnings announcement, this same analysis yielded a fair value target at around $54.50 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The diagonal red line traces the stock’s downward trend over the past year, from a high at around $53 in June of last year to its low, which is occurring right now as the stock picks up bearish momentum. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock was consolidating between $48 and $50 until the latter part of February, with the industrywide sell-off really starting in earnest in March and pushing the stock quickly to a new low at around $33. After consolidating between $34.50 and $37, the stock has picked up a fresh wave of downward momentum, putting immediate resistance at $34.50, with current support anticipated at around $31. A push above $34.50 should see the stock rally to about $37, while a drop below $31 could have additional downside to about $28.50.
Near-term Keys: USB offers a very tempting value-based opportunity at its current price. That said, the industry’s rising volatility – including the latest momentum in the stock itself – does suggest that the stock could keep moving lower for the foreseeable future. That means that if you do want to consider using this stock as a long-term investment, you need to also be willing to accept the chances that the stock’s downward trend could be far from complete. If you prefer to focus on short-term trading strategies, a push above $34.50 could provide an interesting, if speculative signal to buy the stock or work with call options, with $37 providing a practical bullish profit target. A drop below $31 could be a signal to short the stock or buy put options, using $28.50 as a practical profit target on a bearish trade.