Well, the Federal Reserve decided not to raise rates.But it’s really a moot point for these 7 F-rated financials: Weyerhauser (WY), Rayonier (RYN), Government Properties Income Trust (GOV), Shinhan Financial Group (SHG), Itau Unibanco (ITUB), Bank of Montreal (BMO), and Santander Mexico (BSMX).
Chairman Janet Yellen said that the domestic data was encouraging, but inflation wasn’t high enough and the labor market wasn’t strong enough to support a move at this time.
The weakness in China and the chaotic emerging markets also played a role, as did statements by the International Monetary Fund and the World Bank advising the Fed to hold off.
This is likely only a temporary reprieve since the Federal Open Market Committee will meet again in October and December.
It’s unlikely that three more weeks worth of data will change the Fed’s mind in October. But if things continue as they have been, expect a Fed move in December.
Unfortunately, that won’t matter much to these financials, because their troubles are much too complicated to be solved by a simple rate bump. Most of these firms are suffering from macro problems beyond their control, and the light at the end of the tunnel is likely an oncoming train.
F-Rated Financials: Weyerhauser (WY)
Year-to-Date Return: -20%
Weyerhauser (WY) is well-know as “the tree company.” But actually it’s a real estate investment trust (REIT) that hold trees instead of apartments or shopping malls or server farms.
REITs are “pass-through” companies, meaning profits must be passed on to shareholders. This structure can be a good thing when times are good. But they’re not good right now. WY stock is off 20% year-to-date, so even its 4.3% dividend doesn’t make it look any more attractive.
The problem with WY stock is its exposure to China. A lot of its holdings are forests in the U.S. West. When China was booming, Weyerhauser was a leveraged winner.
But now China has slowed considerably and the U.S. housing market isn’t recovering as quickly as many hoped. Even Canada has ended up in recession. And the strong dollar doesn’t help exports either.
Will WY stock weather the storm? The company has been around through plenty of market cycles, so it will endure. But there’s no point in buying in right now and having to endure turbulence when there are much better opportunities to put your investment dollars to work.
F-Rated Financial Stocks: Rayonier (RYN)
Year-to-Date Return: -17%
Rayonier’s (RYN) sad tale is similar to Weyerhauser’s. It’s a timber REIT with operations in the U.S. South and Pacific Northwest, as well as New Zealand.
So, China demand is weak and RYN’s other big potential market — Australia — is a commodity-based economy and commodities are in the cellar, so Australia is a dead market right now. Meanwhile, the U.S. is barely getting back to pre-financial crisis expansion, and credit remains tight.
That’s not a bright picture. But it gets even worse for Rayonier.
In Q2, RYN stock missed both earnings and revenue targets. Revenue was off 29% year-over-year. That’s a significant miss. Also, its spinoff company Rayonier Advanced Materials (RYAM) was dealt a significant blow in August when one of it major customers — representing 31% of revenue — walked out on a contract for cellulose.
RYN supplies RYAM with the pulp to manufacture the specialty cellulose-based materials. This problem is hitting both RYN and RYAM. Don’t make it your problem, too.
F-Rated Financials: Government Properties Income Trust (GOV)
Year-to-Date Return: -30%
Government Properties Income Trust (GOV) is a more typical REIT. It owns office space in 31 states that it primarily leases to government tenants.
This would seem to be a pretty solid business without too much excitement. But given the state of the U.S. economy and the baleful growth that comes with a zero-interest rate environment, GOV’s business has become a bit more exciting than many want.
Granted, GOV stock throws off a massive 10% dividend. But it’s also off 30% for the year. And there’s a good chance that dividend isn’t too safe.
Governments are downsizing, using telecommuting and staying put. There are few states or local governments that buying more office space; if anything, they’re moving to save money now, not buy big for the future.
Now the question is whether GOV has bottomed. If it has, now would be a good time to grab this big yielder with limited downside. But there’s no real guarantee that we’re going to be in a better economic place next year than we are right now. And if the REIT cuts its dividend or suspends it, there’s a lot more downside to play out.
It’s not worth the risk when there is much better total return stocks on the rise out there.
F-Rated Financial Stocks: Shinhan Financial Group (SHG)
Year-to-Date Return: -10%
Shinhan Financial Group (SHG) is suffering from the problems of it geographical location more than anything. The South Korean economy is driven by commodities, and when your biggest clients are floundering and commodities are barely registering a pulse, there’s little you can do.
South Korea also has its crazy neighbor to the north that has increased its saber-rattling, keeping the country on high alert. That kind of cold war can be even more debilitating than a hot war.
At the same time, Japan is trying to get its economy out of a decades long slumber. And the fact that Asia’s emerging markets are barely staying afloat doesn’t help.
Even the domestic economy’s tourism was hit earlier in the year when the Middle East Respiratory Syndrome hit. That event decimated the tourism sector that usually provides the nation with a nice boost in the summer. Growth is barely positive, although things may improve coming quarters.
But until China and Japan begin recoveries in earnest, it’s going to be a very hard slog for SHG to show any signs of sustainable improvement.
F-Rated Financial Stocks: Itau Unibanco (ITUB)
Year-to-Date Return: -44%
South Korea’s problems look like a walk in the park compared to what’s happening now in Brazil. And Itau Unibanco (ITUB) is the poster child for those troubles.
Brazil’s government is under siege, its economy is in shambles, and investors are running for the exits.
ITUB is off 53% in the past year, and like most of the major banks, there is no reason to think that it has found a bottom yet.
When things are good in Brazil, they are very good. And when they’re bad, they’re very, very bad. Right now, they’re quite bad.
The massive scandal involving state-owned oil company Petrobras (PBR) was the tip of the iceberg. Now the country is in a recession, the government has implemented austerity measures, and the economy is seizing up.
As a chief commodities exporter to Europe and China, it has very few options to work itself out of the hole it’s in. Plus, the decline in oil prices has left little in the way of salvation for its economy.
Any investment here is like trying to catch a falling knife. Don’t do it.
F-Rated Financial Stocks: Bank of Montreal (BMO)
Year-to-Date Return: -24%
Bank of Montreal (BMO) is the No. 4 bank in Canada. And it’s a good thing that ranking isn’t any higher.
Canada is another commodity based economy that relies on Europe, China and the U.S. to buy its goods.
BMO actually has a U.S. division but, since it handles a fair amount of personal loans, that sector isn’t going so well at the moment. Although, it’s certainly not the worst news the bank has — as the Canadian dollar has declined relative to the U.S. dollar, its U.S. revenues have been a help to the beleaguered bank.
BMO’s Q3 numbers weren’t bad, and with the stock off nearly 30% in the past year, some can argue that there’s more upside than downside here. And that 4.6% dividend is certainly tempting.
But Canada is in an election cycle, and there’s no telling what new leadership may decide to do when it arrives in Ottawa. What’s more, not much is going to change as long as Europe and China are on the mend. And given the continued low prices on oil, there could be a lot more short-term pain if Canada’s energy sector unravels.
F-Rated Financials: Santander Mexico (BSMX)
Year-to-Date Return: 25%
Santander Mexico (BSMX) is the southern corollary to BOM. Mexico is major energy producer. Now that oil prices sit at multi-year lows, the cracks that can usually be plastered during good economic times are widening and deepening.
A country’s financial system is usually the first to crack.
Domestically spending and growth are hamstrung. Banks live off the velocity of money moving in and out; if that velocity slows, so does growth.
What’s more, Asia was beginning to look to Mexico as the gateway to the U.S. market as well as Latin America. But as Asian economies swoon, their expansionary optimism has fallen away as well. And the emerging markets of Latin America look far less attractive now than they did a year or two ago.
BSMX stock is off 43% in the past year. The Mexican economy, once pegged for 3% growth in 2015, is now going to be thrilled if it can muster 2.5%. Lowered expectations don’t make for a good growth prospect.
As goes the price of oil so goes BSMX.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
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