1. Comerica Inc (NYSE:CMA)
Number of Hedge Fund Investors: 45
Jim Cramer said in his latest program that many believe Comerica Inc (NYSE:CMA) is the “worst mid-sized bank in the country.”
Cramer highlighted that this stock sells for just 10 times earnings and has a 5.4% dividend yield. He said the company recently reported a “very weak quarter.”
“You don’t want it.”
Comerica Inc (NYSE:CMA) is a Texas-based banking company. The stock suffered as the company saw noninterest-bearing deposit (NIB) outflows, which caused a decline in net income. The company lost its contract for Direct Express debit card contract with the U.S. Treasury, expiring in early 2025. About 86% of its loans are generated in commercial banking. Amid the regional banking crisis, Comerica Inc (NYSE:CMA) took several steps which caused a spike in deposit costs, negatively impacting the bank’s fundamentals. Despite some hedging through interest-rate swaps, Comerica Inc (NYSE:CMA) remains sensitive to rate changes, and expected rate cuts could pressure net interest income by late 2024 or 2025.
Third Avenue Value Fund stated the following regarding Comerica Incorporated (NYSE:CMA) in its fourth quarter 2023 investor letter:
“Apparently, Ms. West never ran a bank. For many financial firms, interest rates are a lot like medicine in that the proper dosage can be salubrious, while too much of the same medicine can prove fatal. Similarly, the way interest rates impact the health of industries and companies can shift meaningfully over time. There are few better examples of this principle than the U.S. regional bank sector and Comerica Incorporated (NYSE:CMA), in particular.
Comerica, a long-time Fund holding, is an unusual super-regional bank due to the extent of corporate exposure in its loan book, as compared to many other U.S. regional banks with much larger exposures to residential mortgages. Because much of this corporate lending is done on a floating-rate basis, Comerica’s asset yields respond unusually rapidly to interest rate movements. As interest rates rose over the last few years, Comerica’s asset yields did indeed rise sharply as well, a very positive development. In this way, Comerica, along with many U.S. regional banks, were rightly perceived as beneficiaries of U.S. interest rates rising from historically low levels. Something similar can be said of our European banking investments where Bank of Ireland and Deutsche Bank have also been aided by rising European rates. However, higher rates were helpful for most U.S. regional banks, until they weren’t. By early 2023, rates had risen high enough, and rapidly enough, to expose a lot of duration risk (the risk associated with the value of longer-dated bonds bearing higher sensitivity to interest rate movements than shorter-dated bonds) present within the huge fixed-income portfolios comprising large portions of many regional bank balance sheets. Ultimately, accelerating deposit withdrawals at a few banks caused high-profile manifestations of this risk, leading to a couple of bank insolvencies, heightened fear, more withdrawals, and a spiral which had to be arrested by the U.S. Federal Reserve, Treasury and FDIC. U.S. regional bank stocks were punished severely during the first half of the year…
While we acknowledge the potential of Comerica Inc (NYSE:CMA), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CMA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below. You can also look at the 10 Best Health Insurance Stocks to Buy and the 8 Best Robotics Stocks Under $10.
