There are a few metrics that make People's United Financial stick out like a sore thumb compared with other bank stocks.
For one thing, analysts are united in their stance on People's United: They don't like it. The stock has zero ratings of "buy" or the equivalent among a dozen analysts who rate it; there are seven holds and five sells. That makes it the least-loved stock in the KBW Bank Index, according to a tally of ratings tracked by Bloomberg. The average 12-month price target implies the shares are expected to drop 9 percent.
The Connecticut-based lender is also the most-shorted stock in the KBW index by a long shot. About 12 percent of its free float has been borrowed and sold, almost double the next most-shorted stock in the index (Zions Bancorporation) and about five times the average of the 24 banks in the gauge, according to data from Markit. It would take almost seven and a half days to cover the short positions based on volume trends, also the most among the 24 banks.
A succinct rationale for the shorts can probably best be summed up by the Moody's release announcing that the bank's long-term ratings had been cut last month:
The downgrade reflects People's below-average profitability, weaker capital position and sizeable commercial real estate (CRE) concentration. Moody's said that People's below-average capital is a function of its constrained profitability as the bank attempts to support its capital return metrics. Meanwhile, People's below-average capital ratios underscore the challenge of its CRE concentration, says Moody's.
So how is this stock doing? Not so bad, actually. Much credit probably goes to its 4.2 percent dividend yield, which is the second highest in the KBW index. People's United was flat for the year through last week on a total return basis, compared with a return of -3.5 percent for the index as a whole. Since the end of 2014, it has outperformed the index by 11 percentage points.
While its short interest is still high relative to its peers, it has come down drastically recently, reaching a two-year low last week after peaking near 18 percent of free float:
Why would the shorts be jumping ship? It's impossible to say for sure, but here are a few theories:
For one, as Bloomberg Intelligence has pointed out, the bank may stand to gain more than most of its peers in an environment of rising interest rates. Its own estimates show that net interest income may increase 4 percent for a 100 basis point rate increase and 7 percent for a 200 basis point jump. While the disappointing jobs report for May released on Friday called into question the timing of any move by the Federal Reserve, the chance that the report was an anomaly may be too much for some shorts to stomach.
Also, as the returns above show, it may just be frustrating to keep shorting People's United. In the age of index investing and exchange-traded funds, it often takes a real scandal to score big on a short -- something akin to accusations of putting too much formaldehyde in the floor boards or swapping lower-grade diamonds in engagement rings.
A look at shareholders of People's United highlights how much it's benefited from being a member of the S&P 500, a perk that means it's bought by all the passive index funds and ETFs that track the benchmark: State Street, Vanguard and BlackRock own more than 28 percent of the shares.
Still, membership in the S&P 500 is not guaranteed for life. Three banks in S&P's midcap index are bigger than People's United, and one is roughly the same size. The methodology of S&P Dow Jones Indices suggests that the index overlords may at least take a look at its membership, though the bank escaped exile when a change was made to the S&P 500 in May.
So while the index-trackers might be frustrating shorts now, they could end up delivering a payday to the suffering bears somewhere down the road.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Michael P. Regan in New York at firstname.lastname@example.org
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