Top Picks 2020: Comerica (CMA)

01/14/2020 5:00 am EST


Chris Quigley

Contributing Editor, The Prudent Speculator

Chris Quigley — contributing editor to The Prudent Speculator — selected Target (TGT) as his Top Pick for last year; he still considers the stock attractively valued, but given the 100%+ gain, he now looks to a regional bank for risk-oriented investors.

Shares of regional banking concern Comerica (CMA) trailed the S&P 500 Financials sector index in 2019, after the company struggled with charge-offs related to its energy portfolio and lower interest rates.

CMA CEO Curtis C. Farmer explained last quarter, “Throughout our 170-year history, we have managed through many different economic, credit and interest rate cycles. Our third quarter results demonstrate our ability to drive a strong return on equity of 16% and a return on assets of 1.6%, despite recent declines in interest rates."

Farmer continues, "Broad-based fee income growth, solid credit quality, the benefit of discrete tax adjustments and continued active capital management were positive contributors to our performance. In addition, our careful cost control helped keep our efficiency ratio low at under 52%. We remain focused on building relationships within our diverse footprint and maintaining our credit and expense discipline in order to continue to produce strong performance metrics.”

Despite having what we think is one of the most attractive deposit franchises, CMA continues to face operational headwinds as the potential for another interest rate cut by the Federal Reserve remains likely in the early part of 2020. CMA is more sensitive to falling rates than many banks due to a large portion of its loan portfolio being made up of adjustable rate loans.

We think that in a “Bear” case, shareholders will get a near-4.0% yield with consistent earnings around $7.00 per share, not bad for a $71 stock. On the other hand, continued macroeconomic strength that results in the Federal Reserve returning to a less accommodative monetary policy could send CMA soaring.

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