ALERT: Bank Failure Puts Spotlight on Diversification
Last Friday marked the fifth U.S. bank to go into FDIC receivership this year, and its symbolism is a big deal.
However, it wasn’t publicized much. That’s probably because it was a privately-held small one in Sac City, Iowa, with little perceived impact on the overall industry — very much unlike the failure of Silicon Valley Bank earlier this year.
Some investors, though, took it very seriously and sold regional bank stocks. We should be taking it seriously, as well, even though we don’t own any related stocks in Weiss Intelligence Portfolio at the moment.
Here’s how a handful of them performed on Monday after last Friday’s big news:
- Truist Financial (TFC) -1.44%
- M&T Bank (MTB) -1.01%
- First Horizon (FHN) -2.28%
- Western Alliance (WAL) -2.71%
- Zions Bancorporation (ZION) -1.67%
Compared to the big, bold headlines when Silicon Valley Bankwent under in February — this hardly made a splash. So, I wanted to make sure to call the bank’s closure to your attention for two reasons.
One, because it illustrates perfectly why diversification is so important. And two, I wanted to shine the spotlight on yet another risk for banks — and potentially, the economy.
The Iowa Division of Banking closed state-chartered and privately-owned Citizens Bank due to a large number of bad loans focused on the commercial and industrial industries.
All of its deposits and $66 million in assets were assumed by Iowa Trust & Savings Bank, but not the bad loans. The FDIC estimated at the time of its closing that the bank had losses of $14.8 million due to these loans.
Take a look at Citizens Bank’s quarterly financial figures. As you can see, in all three quarters of 2023, its loans-to-total-assets ratio stood around 70%! I call that financial suicide.
During initial examinations, regulators didn’t discover who took out the loans because they were unreported by the bank. However, a third-party loan consultant identified the culprit in short order: the commercial trucking industry.
Makes perfect sense to me: A small bank — overextended by “out-of-territory and out-of-state loans” to one industry that’s in a cyclical decline — is seized by regulators.
That’s not so different than SVB and other regional banks that failed earlier in the year due to high exposure to technology startups, already flailing as borrowing costs rose. It’s one thing to be a niche provider of loans — it’s a whole different story to only provide loans to one industry.
That’s akin to property and casualty insurance providers only writing policies in hurricane-prone Florida. Or farmers only raising pigs when foot-and-mouth disease is running rampant. Or auto dealers only selling Rolls Royces in the poorest part of town.
Or, most importantly, investors putting all their money in one asset class.
Diversification, above all, is key to performance and managing risk.
Citizens Bank’s decision to loan to such a narrow swath makes me question why they did so … and if other banks may be at risk for doing the same thing.
Sac City’s population is just over 2,000 people. The population of Iowa is only about 3.2 million people. Citizen Bank’s assets were only $66 million.
Prices for new Class 8 trucks in 2023 vary by brand, as well as by the number and type of features and equipment. However, they are expensive — prices range between $150,000 for basic models to over $220,000 for models with custom features.
How — or why — a small state-charted bank in the very small town of Sac City, Iowa, was making loans on expensive trucks is unknown. But doing so seems highly speculative.
Banks and speculative don’t belong in the same sentence.
Of course, if they granted the loans during the COVID-19 pandemic, defaults were nearly non-existent. Interest rates were near zero, and the trucking industry flourished. However, the last two years have been brutal with too many trucks chasing too little freight. Plus, shipping rates are at or below 2019 levels.
You might recall a stalwart of trucking, Yellow, went out of business earlier this year. That was just one of many — both large and small companies — to do so in the industry. No surprise that brokerages that cater to funding the industry are experiencing layoffs and closures, too.
Not only does this make me wonder how many other banks are highly exposed to loans for commercial trucks (and car loan defaults, which are on the rise) … it makes me question what this means for the economy moving forward.
There’s a direct correlation with slowdowns in freight demand and recessions — as in it’s almost always a precursor to one.
It’s easy to connect the dots from the massive post-COVID-19 consumer spending to cracks in the economy’s armor today.
And just as my purpose of telling you about the latest bank failure was two-fold, so are my reasons for telling you not to worry.
One, our Weiss Bank Ratings will alert you if trouble is on the horizon for your bank, so be sure to frequent that section of our website.
Two, we pride ourselves in diversification when it comes to our Weiss Intelligence Portfolio.
And that continues today as we’ve got seven new trades to make.
Grab Gains, Cut Laggards
After this week’s model runs, we need to make seven new trades to adapt to our rankings and AI Stock Picking Booster.
We’re grabbing around a 3% gain on Hawkins (HWKN), cutting a small loss on Super Micro Computer (SMCI), cutting a loss on Caterpillar (CAT), and selling LSI Industries (LYTS), Saia (SAIA), Target Hospitality (TH) and Schlumberger (SLB).
I absolutely hate taking any loss, but we have to adhere to our rankings and adjust. In the long run, I’m extremely confident it will prove to be the smart decision. With so much data coming in — and with earnings rolling out in full force — we need to adapt.
7 New Buys
The first new buy is Dorian LPG (LPG). This is an elusive “A-”-rated name that I’ve had my eye on for quite some time … especially this past week as it re-ascended into “A-”-range. Shares are up a blistering 116% this year, and the company just reported another stellar earnings report. Buy.
Our next name is a name that All-Weather Portfolio Members should be familiar with, TORM (TRMD). The tanker company is well established in its industry and has very healthy financials. Shares are up 440% over the past three years. Buy.
Next is Novo Nordisk (NVO), a healthcare company with a major focus on diabetes care that’s been trading sideways since August and looks poised for a breakout. Buy.
Our fourth new buy is a name I am sure you are familiar with despite it turning into a distributor — Sunoco (SUN). We’ve been rating it as a “Buy” for two-and-a-half years now. Shares are up 52% since. Buy.
Next up is Medpace Holdings (MEDP), another healthcare name that just reported stellar earnings last week and is up 26% over the past year. Buy.
Our sixth name is CONSOL Energy (CEIX), a name All-Weather Portfolio Members were able to grab a nice double-digit gain on in August. Our system says it’s time for another helping. Buy.
Lastly, but certainly not least, we are buying The TJX Companies (TJX), an off-price apparel and home fashion retailer. You may have been to one of its stores such as TJ Maxx or Marshalls. The company is well-positioned in a large and rapidly-growing market segment. It reports earnings next week on the 15th. It will be a smart move getting in beforehand of what I expect to be excellent results. Buy.
Action Summary
1. Sells: Hawkins (HWKN), Super Micro Computer (SMCI), Caterpillar (CAT), LSI Industries (LYTS), Saia (SAIA), Target Hospitality (TH), Schlumberger (SLB)
2. Buys: Dorian LPG (LPG), TORM (TRMD), Novo Nordisk (NVO), Sunoco (SUN), Medpace Holdings (MEDP), CONSOL Energy (CEIX), The TJX Companies (TJX)
Below is a list of what our stock portfolio will look like after today’s trades …
- TORM plc (TRMD)
- Sterling Infrastructure Inc. (STRL)
- Nvidia Corp. (NVDA)
- Kinsale Capital Group Inc. (KNSL)
- Sunoco (SUN)
- Comfort Systems (FIX)
- Novo Nordisk (NVO)
- Frontline plc (FRO)
- PACCAR Inc. (PCAR)
- Dorian LPG (LPG)
- Arista Networks Inc. (ANET)
- The TJX Companies (TJX)
- BellRing Brands Inc. (BRBR)
- Broadcom Inc. (AVGO)
- Consolidated Water Co. Ltd. (CWCO)
- CONSOL Energy (CEIX)
- Medpace Holdings (MEDP)
- nVent electric plc (NVT)
- Vista Energy, S. A. B. de C.V. (VIST)
- Arch Capital Group Ltd. (ACGL)
These 20 stocks comprise 60% of our total portfolio allocation. (That’s 20 stocks x a 3% allocation each).
We’re firmly still in Neutral Mode, so no changes to our two exchange-traded funds at a 15% allocation to each.
Be sure to get those trades in right away. I’ll see you again next week.
Cheers!
Gavin Magor
