U.S. energy stocks on the raise
On Thursday, Smead said that his firm “couldn’t be more bullish” on the energy sector.
According to Smead, major oil and gas companies’ balance sheets, cash flows, and earnings were frighteningly weak last spring. He now claims that political and macroeconomic factors are convergent in their favor.
As a result, Smead’s portfolio is currently “five or six times” overweight in S&P 500 energy stocks versus the index average.
Continental Resources, the fund’s largest holding, as well as ConocoPhillips and Chevron, are Smead’s three favorite stocks, which he believes are entering “such a strong era.”
“Imagine Matthew McConoughey squawking and pounding his chest on the subject, only I’m staring at Continental Resources,” he explained.
According to Smead, the growing political focus on climate change is putting pressure on these businesses to refocus on green alternatives in order to survive.
BP, for example, is attempting a business transformation in order to achieve net zero carbon emissions by 2050. According to Bloomberg News, BHP, the world’s largest miner, is considering a multibillion-dollar exit from its oil and gas business in favor of clean alternatives due to shareholder pressure.
Cole Smead describes this as one of the “oddest phenomena” of his career.
Smead is excited about the potential for companies with such a large presence to dominate the future energy landscape. Furthermore, he believes that markets are overestimating the rate of decline in the oil industry.
“The nice thing that remains… is that there is no new competition, and people believe the business will decline much faster,” he added.
“Oil is currently trading at $70 per barrel. People did not expect us to be here, just as they did not expect us to be discussing [monetary] tightening 60 days ago.”
The combination of a historic undersupply of oil, OPEC+ decisions to cut production during the pandemic, and the green energy revolution puts the industry in a favorable position, according to Smead.
Oil prices rose again this week before leveling off slightly on Thursday. Around lunchtime Thursday, international benchmark Brent Crude was trading around $71 per barrel, and West Texas Intermediate crude futures were trading above $67.50.
Smead went on to say that investors had a once-in-a-lifetime opportunity to buy asset-related stocks like oil and gas companies, which could end up serving as a hedge against macroeconomic downturns.
“If inflation or other problems arise, you still have these assets and no competition in these spaces, and you’re waking up to higher prices to replace those assets,” Smead explained.
In a December 2013, Shay said, “I think bitcoin is interesting.” According to CoinDesk, the cryptocurrency was trading around $900 on that day.
“I think the transaction methods that it uses are very interesting,” he said. “However, I don’t think we’re there yet in terms of a cyber currency on which people can rely.”
Bitcoin is now worth more than $48,000, and Signature provides banking services to some of the largest institutional investors in digital assets. In January 2019, Signature became the first FDIC-insured bank to launch Signet, a real-time blockchain-based digital payments platform.
Signature has carved out a niche in the digital assets ecosystem as Wall Street titans like JPMorgan Chase develop their own cryptocurrency initiatives — and hopes that its first-mover advantage will keep it as an industry leader.
“In comparison to the big banks, we are a small bank. That has the advantage of allowing us to really dive into something,” Shay said in an interview in August 2021. “We noticed this early on. We banded together and resolved to construct an infrastructure.”
While other banks have struggled to grow, Signature’s total deposits increased by a record $11.6 billion in the second quarter, a 70 percent increase year over year.
The crypto business is driving much of Signature’s rapid growth, with digital assets banking bringing in $6.3 billion in deposits last quarter.
Investors are taking note. As of Wednesday afternoon, shares of Signature were up more than 93 percent this year, while the iShares U.S. Regional Banks ETF was up 30 percent, and the Russell 1000 was up nearly 19 percent.
All but one of the 15 Wall Street analysts who cover Signature have a buy rating on the stock, and analysts on average believe it will reach $315.67 in the next year, a 22.5 percent increase from Tuesday’s closing price.
“Think of Signature as two businesses in one. “There is the traditional company that provides all types of banking services to business owners and their principals… and then there is this digital asset play,” said Mark Fitzgibbon, head of financial services research at Piper Sandler.
As an introduction to cryptocurrency, consider using a digital payment platform.
Signature was founded in 2001 and has spent the majority of its time focusing on commercial real estate and multifamily banking. The firm now provides digital asset, fund, and venture banking services and is expanding on the West Coast.
According to executives on Signature’s second-quarter earnings call, the bank’s digital asset clients include cryptocurrency exchanges, stablecoin developers, over-the-counter desk and institutional traders, and blockchain miners. In the second quarter, the bank had 812 institutional customers, up from 741 in the previous quarter.
Signature’s success in attracting crypto players is dependent on the Signet digital payments platform. According to JPMorgan senior equity analyst Steven Alexopoulos in a July note, the proprietary platform is a “on and off ramp for institutional customers looking to engage in the crypto economy.”
Unlike traditional bank payment processes, which take time to settle, Signet’s ethereum blockchain-based technology allows transactions to take place in real time. Because cryptocurrencies are traded all over the world at all times, clients can use Signature to transfer money instantly.
“This was not a one-time event for us. “We actually wanted to be a part of the infrastructure of the cryptocurrency world — the legitimate cryptocurrency world,” Shay of Signature explained.
The platform attracts new customers to Signature and encourages them to deposit more money, which the bank can then use to make loans or invest in its securities portfolio.
“These guys had the foresight to develop this amazing network a couple of years ago, and it’s proven to be a really nice way for them to collect assets and drive deposit growth,” said Matthew Gershuny, lead portfolio manager of the five-star-rated Parnassus Mid Cap fund. As of February, the fund had $127 million in Signature stock.
Non-crypto clients are also showing interest in Signet’s real-time payment mechanisms, according to the bank.
“They would never have guessed they’d be talking about blockchain. “It’s the ability to close something late at night and de-risk from credit,” Shay explained.
Beating the rest of the pack to the space
Silvergate Bank, based in San Diego, is Signature’s main competitor in digital asset banking. Silvergate also provides clients with a real-time, 24-hour money transfer system known as the Silvergate Exchange Network. Signature, on the other hand, is a much larger bank. Silvergate reported total assets of approximately $12.2 billion.
Analysts and money managers compare Signature to other high-growth banks such as Silicon Valley Bank and First Republic, noting that the stock still trades at a discount to those stocks in terms of valuation.
Analysts believe Signature’s head start in both technology and regulation will propel it far. According to Signature, Signet is the first service of its kind to be approved by the New York State Department of Financial Services.
“A lot of banks would like to do this type of business, but haven’t really figured out how to do it yet, and haven’t built the technology that commercial customers find valuable,” Fitzgibbon of Piper Sandler said.
To be sure, cryptocurrencies are still risky. Token prices can fluctuate wildly, and investors face regulatory uncertainty.
Signature, on the other hand, has seen no correlation between crypto asset prices and deposit flows, according to executives on the bank’s most recent quarterly earnings call. Signature’s digital asset deposit growth is being driven primarily by cryptocurrency adoption, according to the bank.
Signature’s crypto exposure is currently limited to its deposit side, according to Chris Fortune, financial analyst at T. Rowe Price, which owns Signature in a number of its funds.
“The worst that can happen is a downtrend in deposits, but that doesn’t appear to be happening anytime soon,” Fortune said.
Signature announced earlier this year that it plans to introduce crypto-backed lending to a small number of clients gradually. “We want to crawl before we walk, and just walk — not walk to run,” Signature president and CEO Joseph DePaolo said during the company’s most recent earnings call. “We want this to be a no-loss operation.”
According to Fortune, the size and pace of Signature’s experimentation with crypto-backed lending should not be “concerning from a capital standpoint.”
While crypto is an important part of Signature’s growth story, analysts and money managers are quick to point out the company’s overall strength. Signature’s single point-of-contact approach with clients, flat structure, and compensation model are highlighted as differentiators.
“It’s not just a bet on digital assets,” said Ian Sexsmith, portfolio manager of the Parnassus Mid Cap Growth Fund, which also owns Signature. “The bank as a whole has this one-of-a-kind mousetrap that they built, and they’re just looking for new ways to grow.”