PacWest Plummets 25% As Deposit Outflows Surge

JOIN OUR LIVE SESSIONS! Our LIVE session starts when the big institutions and elite traders do before the opening bell. We'll look at real-time dark pool data as the market movers position themselves for the trading day in secret off-market exchanges. [JOIN OUR LIVE TRADING SESSION @ 6am PT / 9am ET]( [Shadow] Hello investor, The old, stodgy business of banking couldn’t escape the effects of modern technologies. PacWest’s stock plunged 25% yesterday after the company revealed another round of massive deposit outflow with a loss of 9.5% in deposits last week. Wait, what? A loss of 9.5% last week?! Well, welcome to the world with Twitter. PacWest said the majority of its deposit outflows happened on May 4 and 5 after news reports speculated about a potential sale. - “The news headlines increased our customers’ fears of the safety of their deposits,” the company said in a regulatory filing Thursday. JPMorgan Chase CEO Jamie Dimon didn’t directly address PacWest, but he hinted at his frustrations with short sellers, encouraging the SEC to look for any “unscrupulous” tactics. Dimon said his team didn’t think short selling is directly responsible for the fall in stock prices for regional banks, but he speculated that short-sellers could be spreading rumors about banks that could cause deposit ouflows. - “If people are in collusion or people are going short and making a tweet about a bank, they should go after them, and vigorously,'' Dimon said. “They should be punished to the fullest extent as the law allows it.” Regional banks continued to struggle since March 8 when the collapse began to happen. Investors are now demanding higher yields to own the bonds of regional banks, squeezing the lenders’ ability to make profits on the spread. First Citizens, who acquired Silicon Valley Bank’s assets, was the only notable regional bank that jumped since the crisis. Many other regional banks are still trading close to their lows. (Source: WSJ) Initial jobless claims jumped to the highest level since October 2021 while producer prices increased 0.2% in April which was below economists’ estimates of a 0.3% jump. These data points were promising. The central bank’s rate hikes may be finally biting into the economy. Inflation is falling slowly while growth has weakened. Meaning? A pause in rate hikes may be likely during its next meeting. - “Inflation has peaked and is trending lower as growth weakens,” according to Don Rissmiller, chief economist at Strategas. - “While the US does not appear to be in recession right now, there are some signs of cracks starting to appear, and global pressures remain,” he wrote. Swap traders are pricing in more than 75 basis points of rate cuts in 2023. The first rate cut could happen as soon as this July. Meaning? Traders believe the economy would get worse enough for the central bank to reverse rapidly. Will it happen? We will see. - “Today’s data is a step in the right direction from the Fed’s perspective,” Kara Murphy, chief investment officer of Kestra Investment Management, said. “But these numbers are really volatile week-to-week and we’re coming off of extraordinarily strong levels. There’s a lot more that has to happen.” You Can’t Go Wrong With Owning This Stock Today’s Stock Pick: Core & Main ([CNM]( Have you ever heard of Core & Main? Unlikely. However, the company has been indispensable to the communities of America. It is the leading specialty distrutor with a focus on water, wastewater, storm drainage and fire protection products, and related services. In other words, these are key items that nearly every town needs to be fully functional. For a visual aid, look at the graphic below for some products that Core & Main offers: (Source: Core & Main) The #1 investment thesis: Core & Main operates in a highly fragmentated market with a $40 billion addressable market. And guess what? It is one of just two national distributors in an industry that scale matters. (Source: Core & Main) Can you guess the best growth playbook for a company operating in a fragmented market? Yep, acquisitions. By simply picking up local providers, Core & Main has a clear growth path. As you can see from the graphic above, the company owns just 17% of the market. And it has a proven history of growing through acquisitions over the years. According to CEO Steve LeClair, the company typically adds 2% to 5% of sales growth annually through acquisitions. - “We have a robust pipeline and a proven playbook we utilize in pursuing and executing acquisitions. Our acquisitions have historically delivered 2 percentage points to 5 percentage points of sales growth annually and we are confident in our ability to deliver similar results over the long-term.” (Source: Core & Main) Robust cash flow: Core & Main saw its EBITDA boom in the last two years. Sure, the growth may slow down a little bit. This pace is unsustainable, as you can see growth accelerating far above its typical growth rate in 2018 to 2020: (Source: Core & Main) But the biggest key is its cash flow conversion. The company sets a target of converting about half of its adjusted EBITDA into cash flow. Sure enough, 42% of its adjusted EBITDA turned into operating cash flow for the fiscal year of 2022. That’s a huge number. I will tell you why – its operating cash flow was $401 million last year. The stock is trading at about $6 billion market cap. Meaning? The company is yielding about 6.6% through cash flow only. That is an incredible yield. (Source: Core & Main) Bottom line: Core & Main doesn’t need to pull a miracle to become a sensational stock. All it has to do is to follow its playbook of acquiring companies in a highly fragmented market. And grow sales organically. As a bonus, it is yielding about 6% from operating cash flow alone. 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