I received a call from Dale Ennis, Editor of Canadian MoneySaver. "Would you be interested in writing a quarterly article about U.S. companies that could be of interest to our readers?" My reply was, "Dale, you know that I follow mostly overlooked stocks that many of your readers may not be familiar with. The companies I focus on are usually mid or small-caps. I believe it is easy to write about the likes of Johnson and Johnson (JNJ), or General Electric (GE), but there is an entire universe out there of well-managed, established U.S. companies offering excellent opportunities for the astute investor. For example, I currently like Hawaiian Electric (HE), Investors Financial Services (IFIN), and Popular, Inc.(BPOP)." Dale replied, "Well, lets see what happens." This was the birth of my column, "Overlooked Stocks".
First, to understand where I am coming from, lets lay some ground rules. I am a fundamentalist; diversification is the key to not only portfolio protection in the bad times, but allows an investor to easily choose undervalued investments. I mainly use DRIPs as my preferred stock purchase tool (but when not available, I go through a broker and always enroll in their synthetic DRIP program). If the companies I write about offer DRIPs, they must permit non-U.S. residents to enroll. Diversification allows not only portfolio protection in bear markets, but makes it easier for investors to find economic sectors offering the best value.
Hawaiian Electric (HE, DRIP, $250 minimum, direct investment) is the electric utility for the Hawaiian Islands. Serving the electrical needs of 95 percent of the Islands population, HE also owns American Savings bank, the third largest savings bank in Hawaii. In the late 1990s HE attempted to expand into international markets with investments in the Philippines and China. However, these did not work out and HE eventually wrote off their investments in 2000. This write-off caused a one-time reduction in their earnings and in response their share price fell. As HE regained their focus on their primary businesses, earnings rebounded, along with their share prices.
As with many regulated utilities, HE offers a steady dividend and consistent earnings. HEs management has outperformed the average utility in generating profits. HEs 5-year average return on capital is 5.71 percent, 38 percent higher than the industry average of 4.11. Long-term debt to equity is 1.09 versus an industry average of 1.43 and their 5-year return on investment is 4.91 percent vs an industry average of 3.98 percent. EPS (Earnings Per Share) this year is estimated at $3.27 a share and is anticipated to be $3.50 in 2003. As their service area is 3000 miles out to sea, I dont anticipate competitive deregulation to negatively impact earnings anytime soon. For investors seeking a high 5.4 percent current yield, HE should be seriously considered.
Investors Financial Services (IFIN, DRIP, $250 minimum, direct investment) provides back office services to mutual funds and money managers. Most mutual fund investors dont realize how expensive annual management fees can be. One method of offsetting mutual fund fees is to own stock in money managers and companies, such as IFIN, that provide services to the mutual fund industry.
IFIN offers complex multicurrency accounting, custodian services and asset administrative services. As the assets under management grow in the mutual fund industry, so will the opportunities for IFIN. In the U.S., the Securities and Exchange Commission has announced new regulations concerning settlement of trades. Currently, mutual funds have three days to settle trades (T+3). By 2004, settlement must be made within one day (T+1), and will be real time by 2007. This fundamental change is creating broader market opportunities for IFIN as they are the leaders in offering technology-backed solutions to money mangers.
IFIN has experienced strong earnings growth since going public in 1997. IFINs history dates back to the late 1970s, but has been a public company for only the past 5 years. Earnings growth going forward is expected at an average rate of 25 percent a year. With a low pay ratio (4.7 percent vs. an industry average of 19.3 percent) dividend growth should outstrip earnings growth. Earnings in 2002 are estimated at $1.02 and should grow to $1.27 in 2003. Investors seeking exposure to the financial services sector should closely review IFIN.
Popular Inc (BPOP, DRIP, $100 minimum, direct investment) is currently Puerto Ricos largest bank, with over $30 billion in assets. BPOPs expertise has led it to expand into adjacent Caribbean countries and to focus on the Hispanic community in the U.S. BPOP operates 196 branches in Puerto Rico, 96 branches in the U.S. and 8 in the U.S. Virgin Islands.
BPOP is well entrenched in the Hispanic communities in Illinois, New York, New Jersey, California, Florida, and Texas. Within the U.S., the Hispanic community is the fastest growing population sub-sector and this trend is showing no signs of abatement. As the Hispanic population expands, so does the opportunity for the Hispanic bank of choice, BPOP.
BPOP is currently trading at a huge discount to its peers in the financial services industry. The current PE ratio represents a 16 percent discount to its peers, price to sale ratio is at a 45 percent discount and price to free cash flow is at a 46 percent discount. Due to the current recession, BPOPs loan loss provisions are increasing. However, this is a trend that is prevalent within the banking industry. Earnings per share for 2002 are estimated at $2.66 and should grow to $2.90 next year. Most regional banks focus on a specific geographic region of the U.S. BPOP, on the other hand, is focused on a specific sub-sector of the population. This makes BPOP unique among its regional bank competitors. Investors seeking diversification within the regional banking industry should look closely at BPOP.
© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published November 2002
Copywrite North Shore Associates 2002