I’m sure you remember all-to-well the nearly complete meltdown of the financial system back in 2008-2009. Credit markets seized up (meaning loans were very hard to come by); depositors were asking for their money; investors were suing for lax actions in complicated transactions involving derivatives and conflicts of interest; and the auction market for credit paper of all durations was drying up. To make things even worse, there were several high profile instances of outright fraud like those infamous Ponzi Schemes we heard about.
Because the banking industry came dangerously close to collapsing, regulations became much, much tighter. New programs and laws were implemented and banking institutions were basically forced to slow down in order to comply. The implementation of these different programs were costly, time consuming, distracting (from core responsibilities), and made it more difficult for banks to move forward in meeting revenue goals as well as growing key areas of their business.
The companies that can’t handle all of the new rules and regulations will continue to falter or possibly even fail. But the flipside is also true: Companies that adapt and smartly navigate the new regulatory landscape will fare the best.
How do you know which companies are in best position to survive and thrive? Let me help you with that. I’ve been following the financial industry closely for the last five years, and here are five companies that have been able to weather the “regulation storm” and are poised to come out on top.
1. Itau Unibanco Holding SA (NYSE:ITUB) is a huge bank. It has a $70 billion+ market cap that is a result of the two smartest and most powerful banking families in Brazil joining forces and merging their companies together.
Regulation has increased everywhere in the world, but a powerful and well-managed bank, such as Itau, has the potential to prosper as Brazil’s economy recovers, thanks to the nation’s rich supply of important commodities. Investors are flocking to this company because it is “best of breed’ and pays a 4.84% dividend yield.
2. Goldman Sachs (NYSE: GS) appears more right-sized in its staffing levels, while competitors are still shrinking. The company is in position to capitalize if congressional leaders and the White House reach a deficit-reduction agreement to avert the “fiscal cliff” of automatic tax increases and spending cuts. A positive resolution could lead to higher interest rates, which should enable Goldman Sachs to improve its competitive position as a clearinghouse for bond traders.
3. Fortress Investment Group (NYSE:FIG) has done better than many other hedge funds so far this year. FIG’s total assets under management (AUM) is $51.5 billion, including the addition of $3.5 billion in third quarter. Fortress shares have appreciated by 24% year to date — mainly because FIG’s business model allows it to avoid being bogged down with new regulations like many of its competitors.
4. BlackRock (NYSE:BLK) is the world’s largest asset management firm. In the last year, BLK has gone up 10%. I look for BlackRock stock to continue to rise, as earnings projections have increased over the past few months. They already have very strict compliance procedures given their role as a consistent and globally secure money manager and banker/advisor on corporate client’s financing and deals.
5. People’s United Financial (NASDAQ:PBCT) Regulation is bogging down many smaller banks that pay the same for compliance systems as banks that are ten times their size. This leads to big fish eating the smaller ones, so they can enjoy economies of scale and cost-saving synergies, as well as gain access into various communities that have a loyal following around the local bank. This makes Peoples a strong takeover candidate.
As the financial industry continues to adjust to the new landscape, it is important to stay away from companies that are unable to keep up with the regulations. Their failure to comply can result in litigation, financial penalties, regulatory constraints, and reputational damage that can strategically affect an organization.
This is bad news for any investor, because such breakdowns in regulation and compliance can hit a stock sharply. You’re much better off stocking with companies like the ones we’ve just talked about — that have smartly adapted to the new rules and regulations and are in a strong position to now reap the benefits.