In this email:

United Airlines Holdings (UAL) has got my attention.

They set strong guidance for Q2 and a target for the year of $10 EPS (earnings per share) & still slumped to recent lows?!

Is it because the stock is actually trash? 🗑️Or is the market missing something that we can cash in on?

Let’s take a look 🔎🕵️

Probably one of the most important things to look at for any company is “How are the financials?” The answer for UAL is “Pretty Damn Good!”

They’re sitting on $14 billion in cash and over $40 billion in property, plant, and equipment (PP&E). Their net debt is only $13 billion. That means they’ve got a pretty big cushion to ride out any unexpected downturns (looking at you Covid)

With all that cash, United Airlines’ stock is trading at just 4x its EPS target. To put that in perspective, Royal Caribbean (RCL) has a similar EPS target & trades at 12x it’s EPS target. That makes UAL 3x cheaper!

Now comparing cruise lines to airlines isn’t exactly apples to apples. But airlines and cruise lines are both part of the travel sector & affected by similar macroeconomic factors. The market can sometimes value one over the other so comparing the two can be a good way to sniff out the value.

And those numbers point to United being seriously undervalued right now.

CEO Scott Kirby hinted that UAL might start share buybacks after repaying $1.8 billion in high-cost debt. Share buybacks are usually signal that the company is confident about its future. (You probably heard all the big tech companies chucking that phrase around in the last earnings too.) Plus, buybacks can boost the stock price by reducing the number of shares available in the market. Supply & demand in action.

The buyback is probably even more tempting with the $14billion in cash they’re sitting on, I mentioned earlier. But how does an airline have so much cash in it’s pockets?

Last year, United generated $7 billion in operating cash flow. Even without any growth, they’re on track to generate a similar amount this year. This massive cash flow can be used to buy new aircraft, pay down debt or pile up like Scrooge McDuck. All of those will make the balance sheet look even healthier. That’ll mean more financial stability and potential growth in the future.

I think one of the main reasons for the drop is a bit of a market misunderstanding on United’s debt levels.

The total debt level is $27billion. That’s a big number & looks scary. But their net debt position is only $13 billion when you consider their cash position. And that doesn’t account for the $40billion in assets.

That’s super important because it’s show the airline is in a much better financial position than most of the market might think.

In short, they’re well positioned to cover & manage their debts.

I guess what I’m trying to say is, with their solid financial foundation, strong cash flow, and potential for significant upside with share buybacks on the horizon why would I not want to have at least a small part of my portfolio in for the ride? ✈️

Wells Fargo's Q2 is shaping up to be pretty similar to recent quarters. Modest lending performance (outside of credit cards), solid non-interest income, rising credit costs.

So why are they on my radar? 🤔

Non interest income is where the magic happens in banking. It includes investment advisory fees, trading revenue & card fees.

If you couldn’t take full advantage of this area as a bank, it’d make a pretty big dent in your earning potential. That’s exactly what’s been happening to Well’s Fargo…. since 2018 💀

They had an asset cap put on them by the Fed for being caught up in a bunch of scandals & compliance failures, including the infamous fake accounts scandal. It restricts the bank’s total assets to a level of $1.95 trillion.

Capped Assets = Capped Earnings

The bank has had to be very strategic about where it allocates its capital. This often involves syndicating loans (selling portions of their loans to other investors) to stay within the cap, which can limit their profitability.

It’s like running a lemonade stand & having to send your customers to the kid to the next street because you’ve been a naughty boy.

Rivals like JPMorgan, Bank of America, and Citigroup don't have these restrictions. They’ve been able to grow their assets and market share more freely.

And if you think about the indirect impacts of the cap like having to shift your focus on compliance & cleaning up you’re act instead of making money you can see how impressive growth hasn’t been at the forefront.

But this could all be about to change & I want to be invested if it does to cash in on the upside.

Making money from investing is about buying undervalued assets. Things that aren’t so sexy right now but we can see the glow-up coming when no one else can.

I think Wells Fargo’s glow up is right around the corner.

The asset cap is expected to be lifted after the 2024 elections (as long as they keep up their good behaviour).

Once the asset cap is lifted, Wells Fargo can expand its lending, investment, and trading activities more aggressively. They’ll be able to compete more effectively in core markets, regaining market share they’ve had to give away & leverage its strong deposit base and cost advantages to drive profitability.

There’s huge potential for growth and improved financial performance but once the news breaks that the cap is lifted, it’ll be too late.

“Buy the rumour, sell news” became a phrase for a reason.

Wells Fargo currently makes around 0.6% of my portfolio & I’ll looking to scale up this holding. I’ll keep an eye on things but my target is to double the position size.

That’s all! See you same time next week 👋

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️