To The Moon

Summary

This is a repost of an article provided to our investment community at Seeking Alpha.

This is an order alert for the Financial Select Sector SPDR® Fund ETF (XLF).

We have set a limit buy order for its shares at $31.9.

The financial sector is only SLIGHTLY discounted. Although under the current market condition, it is the better option comparatively.

To me, Berkshire’s recent disclosure also shows that Buffett could not find too many good ideas besides the financial sector.

Front matters and welcome new members!

This is a very brief order alert for the Financial Select Sector SPDR® Fund ETF (XLF).

We have set a limit buy order for it at $31.9. It is about 2.5% below its current market price, about the magnitude of its weekly price volatility. You will be the first one to know when/if there are further updates. The remainder of this article details our thinking process.

As always, do not hesitate to reach out with questions and your thoughts. Besides the SA messages and chatroom, you can also Directly email us too if that works easier for you.

Berkshire disclosure and the financial sector

Overall, we view the current market condition as pretty expensive. And as a result, there are not too many good investment opportunities. In relative terms, energy, real estate, and the financial sectors are among the top three most attractive sectors in terms of their valuation relative to risk-free rates. But as shown by our monthly dashboard below (welcome to download it here)., their yield spread relative to risk-free rates is still close to or below historical averages.

All things considered, the financial sector is the better option comparatively. We expect the interest rates to stabilize around their current levels. And the recent banking turbulence did compress the sector’s valuation a bit and made it attractive (as reflected in our dashboard above).

And I interpret Berkshire’s recent disclosure as a confirmation of this view. In case you have not had a just to look at it, definitely take a look (e.g., following this link). A very brief recap of Buffett's major actions in the past quarter. Warren Buffett's Berkshire Hathaway was a net seller of equities in Q1. And among the few positions he added and initiated, many of them are financial stocks. For example, he initiated a position in Capital One Financial (COF). He maintained a major position in Bank of America (BAC) and added a bit more. He also added to his Citigroup (C) positions. He kept holding other financial sectors stocks such as American Express (AXP), Mastercard (MA), and Visa (V). These actions closely overlap with the top holdings in XLF as seen below.

As such, if you are really aggressive and have a strong view of any of these stocks, you could certainly bet on them with more concentration. Some of the individual stocks (such as BAC, C, and COF) indeed have suffered larger corrections than the overall sector amid the recent banking turmoil.

However, for us, we feel buying the whole sector is good enough. The valuation of the sector is not THAT attractive. Although it does offer a small discount. As seen in the chart below, in terms of dividend yields, XLF would be obviously undervalued in our view when its DY is close to 2.5% (and obviously overvalued when it’s close to 1.5%). Currently, its TTM DY is 2.14%, about 7% above its historical average yield of ~2.0%, signally a small undervaluation.

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