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One of the weirder things to realize about our inflationary economy is that America is leading the pack in getting it under control.
That might sound made up considering how much Jerome Powell insisted inflation was transitory and delayed on raising interest rates.
But the US definitely started tackling a worldwide problem better and faster than a lot of other countries. Meanwhile, economies like Europe are getting hit harder by supply-side inflation. While inflation is around the 8% range in the US, in Europe it's even higher with some countries well over 15%.
However, with all this global inflation, you may be surprised to hear, that it's actually led to the US dollar getting MUCH stronger over the past year -- up nearly 20%.
Maybe a strong dollar sounds cool, but for a consumer economy, a strong dollar tends to hurt a lot of our positions as they rely on international revenue.
One big area that gets really hurt by a strong dollar is banking -- specifically large financial institutions with a lot of foreign investment.
So this strengthening dollar is causing us to pre-emptively diversify the financials side of our portfolio to try and get ahead of any friction we'll see.
From our perspective, PNC Financial Group ($PNC) is poised to survive and thrive in this continuing period of uncertainty. Their stock is oversold (like a lot of banking) and their focus on domestic commercial clients has them poised to benefit from an ongoing reshoring trend as well as this strengthening dollar.
There are a lot of other factors bringing us back to Main Street-- so let’s get into it.👇
PNC Financial Group ($PNC) Overview:
So, PNC is a typical regional bank. Headquartered in Pittsburgh, they've pulled off some decent organic growth and have been some of the best acquirers in the business. Thanks to buying out the US branches of two international banks across the past few years, PNC now has footholds in 30 of the top US cities for economic growth.
Their retail banking pales in comparison to their commercial revenue, which is up big in Q2 2022.
This positioning has set them up to be essentially the perfect size in an environment that can get hostile to banks should a full-on recession hit.
First of all: it really sucks being a large bank right now. For one thing, you have a lot of international clients whose money is now valued less than what you report your revenue in.
For another, the US is imposing really hefty balance requirements that do not give a lot of room to lend out and generate revenue. Sure, rising rates can bring in more revenue, but it's still pretty difficult to move money around to go and make bigger risks to generate more revenue.
However, PNC doesn't have these restrictions, which is empowering a really attractive 3% dividend, along with giving them the breathing room they need to survive a bigger recession should the Fed push the economy off a cliff.
The main thing banks need to worry about is getting taken over during a big economic downturn.
PNC stock is depressed to the point where it's a good long-term buying opportunity. PNC has the capital necessary to whether a bigger recession and come out in a relatively strong position.
Furthermore, if there is no big recession, PNC can use its strong deposits and small size to make huge gains against a hobbled large banking sector. All of this is being supercharged by a strong dollar.
The last thing we're really bullish about is the ongoing reshoring trend we see in the US.
As more and more businesses and manufacturing move back to America, it's main street banks like PNC that benefit the most from regional investments. There will be no big, sexy moves here, just slow incremental wins that add up to sustainable gains with a ridiculous dividend to sweeten the pot.
We're honestly amazed to say this in 2022 but this decade is shaping up to be Main Street season.
We're really excited to see how PNC continues to take over regional growth across the country.
Price Target: $186 (20% upside)
Target Date: Q3 2023
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