Saber Capital: Interest Rate Fears And The Dreaded Yield Curve

Saber Capital Management’s commentary for the month of August 2019, titled, “Interest Rate Fears And The Dreaded Yield Curve and net interest income”

Dear Investment Partner,

Despite the general markets still near all time highs, I think there are some interesting values right now. I’m looking at a number of ideas, researching new companies as well as refining my valuation work on a few that have been on the Saber Capital watchlist for years.

This isn't always the case, but there are current opportunities to allocate capital if you have excess capital "on the sidelines", earning what is getting closer and closer to 0%. As I wrote back in December, I have no idea where the market goes in the next year, but I am excited about values in certain stocks. It appears some parts of the market are incredibly overpriced (certain software stocks, VC funded tech startups, "low beta" consumer stocks), while other parts of the market seem to be offering great value with significant margins of safety.

One simple example is our boring old Wells Fargo, which is now priced at nearly a 12% earnings yield, which includes a whopping 4.6% dividend (which is a dividend that is only around 40% of the total earnings and also one that has been growing each year and likely will continue to grow over time).

I received an email from a company that I've followed for years in the homebuilding industry. It's a small-cap homebuilder that just issued an unsecured 7 year note at 4% interest. I'm not sure why you'd want to lend at 4% to a cyclical business without collateral when you can get 4.6% by owning a stake in one of the most stable businesses in the S&P 500 and still have 60% of the earnings left over (which Wells is using to buy back its own stock... a nice investment with WFC trading at under 9 P/E).

I did some research on why the banks might be trading at such a large discount to assets like the loan I described above. I went back and looked at the last few decades to understand how profits have reacted to rising/falling interest rate environments. Here are some notes that I've compiled if you care to take a look (what could be a more fun or productive use of your time than reading about historical data on the US banking system?)

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