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What a difference a year makes. The Finance sector is down 47% for the year ending October, 2008. Prices have fallen because earnings have fallen, transforming the characteristics of this sector in the process. To see this transformation we examine the fate of the 46 stocks that made up the large company finance sector one year ago, in October 2007. Details of these companies, then and now, are provided below. Good chance you’ll find your own companies in this list. How have these stocks changed in the past 12 months? Some companies, 18 to be exact, have remained about the same, apparently unaffected by the crisis. These immune companies could come through this crisis as winners. 15 companies remain in the large cap category but their style has changed, generally moving from value to growth. 8 of these formerly large cap companies have moved into the mid cap range, and 2 – Freddie and Fannie – have become small cap. And 3 companies have ceased to exist.

The next exhibit show the style make-up and aggregate characteristics of the October, 2007 large cap Finance sector as it existed a year ago, and compares these to today’s profiles for the same stocks. As you can see, 80% of the dollars in the 2007 Finance sector were classified as large value, whereas today only a third are large value, with much of the former value dollars moving to growth. Growth, at 38%, is now a larger component of the 2007 large Finance sector than value. Also, the total market value of this sector has declined by almost $1 Trillion, from $2.6 Trillion to $1.7 Trillion. Average capitalization has declined from $56.4 Billion to $48.8 Billion, while P/Es have increased from 12.3 to 20.2. Earnings have fallen faster than prices, with some firms posting negative earnings for the trailing 12 months.

In a nutshell, the decimation of the Finance sector has caused it to take on a smaller company, more growth orientation. You’d think the decrease in prices would have made these companies even deeper value, but earnings deterioration has more than offset the price erosion effect. In style space, these companies are priced to grow their way out of the current dilemma. This has significant implications for style specific portfolio managers and their evaluators. Most view Finance as a value play, but this is simply not the rule anymore, and may not be for some time. The game has changed, and the sooner we realize it the better. Index providers with annual June resets will ignore these changes for another 8 months, so the reader is forewarned.   

  Large Finance Companies Then and Now    Source: PPCA Inc. 
 
               ---- ----- -----  ---- ----- -----
                October 2007       October 2008      
               ----------------  ----------------
               Styl Capzn  P/E   Styl Capzn  P/E 
               ---- ----- -----  ---- ----- -----
 ACE LTD       Valu  19.9   7.6        18.0  10.4
 BANK OF AME   Valu 223.0  11.3       159.7  30.2
 BB&T          Valu  22.2  14.0        20.9  12.8
 FRANKLN RES   Core  31.3  17.9        20.7  13.1
 BLACKROCK     Grow  20.1  26.5        22.8  23.8
 BERKSHIRE A   Grow 183.3  15.1       202.3  17.9
 CHUBB CORP    Valu  20.6   7.8        19.5  10.0
 CME GROUP I   Grow  20.5  41.3        20.3  24.1
 CAPITAL ONE   Valu  25.6   9.6        19.8  10.6
 GOLDMAN SAC   Valu  86.2   8.4        50.5   7.3
 METLIFE INC   Valu  51.8  13.8        39.8  11.5
 MANULIFE      Valu  62.7  17.5        54.8  13.1
 SUN LIFE FN   Valu  29.7  14.4        19.8  16.7
 SUNTRUST      Valu  26.3  12.6        15.9  13.9
 STATE ST CP   Core  26.2  17.6        24.5  12.9
 TRAVELERS C   Valu  32.5   7.1        26.5   8.7
 U S BANCORP   Valu  56.1  12.3        63.2  17.9
 VORNADO RLT   Core  16.6  32.7        14.0  26.9

 Style Changes – Large

 AFLAC INC     Core  27.8  17.7  Lgro  28.0  19.5   
 ALLSTATE CP   Valu  32.8   6.8  Lgro  24.7 121.4    
 AM EXPRESS    Core  69.4  17.0  Lval  41.1  12.1
 BROOKFIELD    Core  22.5  19.1  Lgro  16.0  23.1   
 BANK OF NY    Valu  50.3  18.4  Lcor  37.4  18.0   
 CITIGRP       Valu 232.5  12.4  Lgro 111.8  -4.8   
 JPMORGAN CH   Valu 153.9   9.6  Lcor 174.1  22.6   
 MERRIL LYNC   Valu  61.3  14.7  Lgro  40.5  -1.0   
 MORGAN STAN   Valu  66.9   7.8  Lgro  25.5 104.6   
 PNC FINL SV   Valu  23.0  13.1  Lcor  26.0  19.5   
 PRUDNTL FIN   Valu  45.0  11.9  Lgro  30.7  23.3   
 SCHWAB (CH)   Valu  27.0  25.7  Lgro  29.9  24.3   
 SIMON PPTY    Core  22.3  42.0  Lgro  21.8  46.0   
 UBS AG        Valu 102.8   9.1  Lgro  49.7  -1.6   
 WELLS FAR     Valu 118.4  13.3  Lcor 124.5  18.4  

Style Changes -- MidCap

 AM INTL GRP   Valu 174.5  11.0  Mgro   8.9   -.6   
 FIFTH THIRD   Valu  18.0  15.6  Mval   6.9 250.0   
 FANNIE MAE    Valu  59.1  16.7  Sgro   1.6   -.2   
 FREDDIE MAC   Grow  39.0 -40.4  Sgro   1.1   -.2   
 HARTFRD FNL   Valu  29.0   9.4  Mgro  12.3  -9.3   
 LINC NATL     Valu  17.9  11.9  Mval  11.0  13.8   
 NYSE EURONE   Grow  20.9  43.5  Mval  10.4  12.4   
 REGIONS FIN   Valu  20.6  12.1  Mval   6.6   9.5   
 SLM CORP      Grow  20.6  28.4  Mgro   5.8  -3.0   
 WACHOVIA      Valu  95.3  11.0  Mgro   7.5   -.2  
 
 Gone
 
 LEHMAN BROS   Valu  32.7   7.8
 LOEWS CORP    Valu  25.9  11.9
 WASH MUTUAL   Valu  30.7  12.8
                 46  56.4  12.3    43  38.8  20.2  
 

  

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