Several weeks after the end of each quarter, hedge funds and other notable investors file 13Fs with the SEC to disclose many of their long equity positions in U.S. stocks as of the end of the previous quarter. We track these filings as a source of information to help us develop investing strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and also because we think that comparing filings over time can help provide initial investment ideas. Top managers’ market moves shouldn’t necessarily be imitated, but it can be useful to see how they are approaching the markets and investors can certainly further research any ideas which seem interesting. When we reviewed the most recent 13F from billionaire Ken Griffin’s Citadel Investment Group, we noticed that the fund had more than tripled its holdings of PNC Financial Services (NYSE:PNC) during the first quarter of the year, to a total of 3.7 million shares. See more of Griffin’s stock picks.
PNC Financial Services (NYSE:PNC) is a $38 billion market cap retail and commercial bank, which also owns a large stake in asset manager BlackRock. In the first quarter of 2013, its net income grew by over 25% versus a year earlier; however, this improved financial performance was primarily due to secondary business activities such as BlackRock. The retail banking unit experienced a decline in segment income, and while the largest division of PNC Financial Services (NYSE:PNC)- corporate and institutional banking- recorded higher income compared to Q1 2012 this figure was down on a q/q basis. As a result we wouldn’t take the headline figure on the bottom line as an indicator that high growth is likely going forward.
Currently PNC Financial Services (NYSE:PNC) trades right about at the book value of its equity, and a valuation equal to 13 times its trailing earnings. While arguably low in absolute terms, that P/E multiple isn’t that cheap for a bank and we don’t have much confidence in the business improving over the next couple years. Citadel had been the largest shareholder of PNC Financial Services (NYSE:PNC) at the end of Q1 out of the filers we track; Ric Dillon’s Diamond Hill Capital had also liked the stock, reporting a position of 2.5 million shares (find Dillon’s favorite stocks).
PNC Financial Services (NYSE:PNC)’s closest peers are U.S. Bancorp (NYSE:USB) and Fifth Third Bancorp (NASDAQ:FITB). These two stocks are valued at about the same levels as PNC in earnings terms, with trailing P/Es in the 11-12 range. Earnings numbers have been more modest at these two banks, and in fact Fifth Third Bancorp (NASDAQ:FITB) experienced a decline in net income in its most recent quarter compared to the same period in the previous year. That stock does trade at a small discount to PNC, but we still think that we would avoid it for now. U.S. Bancorp (NYSE:USB) has been managing slow growth, and given that the stock is trading in value territory as well as that factor we’d be interested in examining its recent reports more closely. All three of these banks offer dividend yields between 2% and 2.5%.
We can also compare PNC to Wells Fargo & Co (NYSE:WFC) and to JPMorgan Chase (NYSE:JPM). These two megabanks pay slightly higher yields, closer to 3% in each case. JPMorgan Chase actually looks quite interesting from a value perspective: it trades at 9 times earnings, whether we consider trailing results or forecasts for 2014, and couples this valuation with reported growth on both top and bottom lines last quarter compared to the first quarter of 2012. Wells Fargo & Co (NYSE:WFC) has also been recording decent performance, but it turns out to be valued at similar levels to the first three banks we discussed here, at a premium to JPM. We wouldn’t rule it out as an investment, but particularly with a P/B ratio of 1.4 it wouldn’t be as high a priority.
While earnings have risen at PNC from their levels a year ago, a closer look at the bank’s quarterly report suggests that investors shouldn’t count on further rises in net income. Given that the stock’s earnings multiples are about in line with its peers, then, we aren’t sure what Griffin and his team see in it. Of PNC’s peers, JPMorgan Chase appears to be the most worthy of further research given that a quick look shows it trading at a discount to other banks and with its business looking at least steady as well.
Disclosure: I own no shares of any stocks mentioned in this article.
