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Silicon Valley Bank: What Happened and Where Can Investors Hide
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As most everyone has heard by now, Silicon Valley Bank has been shuttered and depositors have been backed by the Federal Reserve and its new “Bank Term Funding Program.” But what exactly happened, and what stocks can investors buy to avoid the fallout?
One way to avoid more carnage is to focus on quality defensive stocks.
Silicon Valley Bank
As the name suggests, Silicon Valley Bank was an institution that catered primarily to start-ups and venture capitalists, although not exclusively. With the explosion of tech and venture funding that followed the Covid-19 pandemic so too did the growth of Silicon Valley Bank. Between 2019 and 2022 deposits at the bank grew from $60 billion to $190 billion.
In response to this massive influx of new deposits, SVIB began to load up on “safe” assets. It bought $80 billion of Mortgage-backed securities and long-term Treasury bonds. While these are typically nearly risk-less assets, the bank unfortunately bought the top of the bond market. As interest rates climbed thoughout all of 2022, bond prices fell in response, creating paper losses on the banks portfolio. Additionally, SVIB did very little to try and hedge its interest rate risk.
Compounding the issues, deposits started falling rapidly. With the cycle coming to an end, many of the venture backed businesses banking with SVB were losing money or outright failing, drawing down deposits from the bank.
To protect against these drops in deposits, the bank began selling some of its bonds at a loss. To manage the losses, SVB attempted a stock offering to raise $2.25 billion. This is where it all went wrong. This unconventional means of filling a liquidity gap spoked investors and eventually depositors.
In a single day, on March 9, $42 billion of deposits withdrew and induced a run on the bank. This came primarily in the form of venture investments, as many well-known investors pushed companies to withdraw as soon as possible. Panic ensued and before the end of the day, Friday, the bank had closed preventing further withdrawals.
Thankfully, the Fed and Treasury had the whole weekend to figure out a solution. First there were whispers of an auction occurring for the banks’ assets, but on Sunday evening the emergency action from the Fed was announced. They would open the Bank Term Funding Program to save the failing institution.
The BTFP is an emergency solution allowing banks to borrow funds against their current bond positions. Most importantly, it allows them to borrow against the par value of the bonds, allowing the institutions to avoid realizing any more losses on their bond portfolios.
The failure of Silicon Valley Bank marks the second largest bank failure in U.S. history.
What Now?
This is a tremendous event the full effect of which is still unknown. The situation is still extremely fluid, and although it seems like the largest banks such as J.P. Morgan JPM, and Bank of America BAC are likely safe from contagion they are still selling off. Furthermore, the Regional Bank ETF (KRE - Free Report) is down -11% just today.
Image Source: Zacks Investment Research
As tempting as it is for some investors to start scooping up shares of beaten down banks, I am not so confident. While the big banks, and even regional bank stocks may well recover from here it feels too risky to jump in now. I would much prefer to focus on buying defensive stocks in case this issue has legs.
Safety Stocks
In looking for stocks I think may perform well in a more challenging economic environment I focus on stocks with a high Zacks Rank, an established business, a low P/E, and a decent dividend yield.
Marathon Petroleum(MPC - Free Report) is a leading independent refiner, transporter and marketer of petroleum products. MPC currently boasts a Zacks Rank #2 (Buy), indicating upward trending earnings revisions, and a reasonable valuation.
Trading at 7x one-year forward earnings, Marathon Petroleum is well below its five-year median of 11x and just slightly above the industry average of 6x. It also offers a dividend yield of 2.3%, which has increased by an average of 7% annually over the last five years.
Image Source: Zacks Investment Research
Archer Daniels Midland (ADM - Free Report) , one of the leading producers of food and beverage ingredients is another stock that should provide a safe and steady return. ADM has a long history of continual dividend increases, and currently has a Zacks Rank of #1 (Strong Buy) indicating upward trending earnings revisions. Earnings expectations have been revised higher across all timeframes by as much as 25% over the last 90 days.
Image Source: Zacks Investment Research
Additionally, ADM is trading at a very reasonable 11x one-year forward earnings, below its five-year median of 14x, and under the industry average 14x.
ASE Technology (ASX - Free Report) is a provider of semiconductor manufacturing services for assembly and testing. ASX may not be the most exciting growth stock out there, but it has steady returns, consistent revenue growth, and a dividend yield of 4.9%.
Image Source: Zacks Investment Research
ASX is trading at 9x one-year forward earnings, which is below its 10-year median of 13x and well below the industry average 19x.
Image Source: Zacks Investment Research
ASE Technology also has a Zacks Rank #1 (Strong Buy), indicating strongly upward trending earnings revisions.
Conclusion
The failure of Silicon Valley Bank is a significant event with unknown and potentially very far-reaching effects. The rising rate environment has begun to show that points of weakness developed during the boom, and this may not be the last case. To remain risk-averse, identifying defensive stocks may be one safe way to trade through this challenging period.
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Silicon Valley Bank: What Happened and Where Can Investors Hide
As most everyone has heard by now, Silicon Valley Bank has been shuttered and depositors have been backed by the Federal Reserve and its new “Bank Term Funding Program.” But what exactly happened, and what stocks can investors buy to avoid the fallout?
One way to avoid more carnage is to focus on quality defensive stocks.
Silicon Valley Bank
As the name suggests, Silicon Valley Bank was an institution that catered primarily to start-ups and venture capitalists, although not exclusively. With the explosion of tech and venture funding that followed the Covid-19 pandemic so too did the growth of Silicon Valley Bank. Between 2019 and 2022 deposits at the bank grew from $60 billion to $190 billion.
In response to this massive influx of new deposits, SVIB began to load up on “safe” assets. It bought $80 billion of Mortgage-backed securities and long-term Treasury bonds. While these are typically nearly risk-less assets, the bank unfortunately bought the top of the bond market. As interest rates climbed thoughout all of 2022, bond prices fell in response, creating paper losses on the banks portfolio. Additionally, SVIB did very little to try and hedge its interest rate risk.
Compounding the issues, deposits started falling rapidly. With the cycle coming to an end, many of the venture backed businesses banking with SVB were losing money or outright failing, drawing down deposits from the bank.
To protect against these drops in deposits, the bank began selling some of its bonds at a loss. To manage the losses, SVB attempted a stock offering to raise $2.25 billion. This is where it all went wrong. This unconventional means of filling a liquidity gap spoked investors and eventually depositors.
In a single day, on March 9, $42 billion of deposits withdrew and induced a run on the bank. This came primarily in the form of venture investments, as many well-known investors pushed companies to withdraw as soon as possible. Panic ensued and before the end of the day, Friday, the bank had closed preventing further withdrawals.
Thankfully, the Fed and Treasury had the whole weekend to figure out a solution. First there were whispers of an auction occurring for the banks’ assets, but on Sunday evening the emergency action from the Fed was announced. They would open the Bank Term Funding Program to save the failing institution.
The BTFP is an emergency solution allowing banks to borrow funds against their current bond positions. Most importantly, it allows them to borrow against the par value of the bonds, allowing the institutions to avoid realizing any more losses on their bond portfolios.
The failure of Silicon Valley Bank marks the second largest bank failure in U.S. history.
What Now?
This is a tremendous event the full effect of which is still unknown. The situation is still extremely fluid, and although it seems like the largest banks such as J.P. Morgan JPM, and Bank of America BAC are likely safe from contagion they are still selling off. Furthermore, the Regional Bank ETF (KRE - Free Report) is down -11% just today.
Image Source: Zacks Investment Research
As tempting as it is for some investors to start scooping up shares of beaten down banks, I am not so confident. While the big banks, and even regional bank stocks may well recover from here it feels too risky to jump in now. I would much prefer to focus on buying defensive stocks in case this issue has legs.
Safety Stocks
In looking for stocks I think may perform well in a more challenging economic environment I focus on stocks with a high Zacks Rank, an established business, a low P/E, and a decent dividend yield.
Marathon Petroleum (MPC - Free Report) is a leading independent refiner, transporter and marketer of petroleum products. MPC currently boasts a Zacks Rank #2 (Buy), indicating upward trending earnings revisions, and a reasonable valuation.
Trading at 7x one-year forward earnings, Marathon Petroleum is well below its five-year median of 11x and just slightly above the industry average of 6x. It also offers a dividend yield of 2.3%, which has increased by an average of 7% annually over the last five years.
Image Source: Zacks Investment Research
Archer Daniels Midland (ADM - Free Report) , one of the leading producers of food and beverage ingredients is another stock that should provide a safe and steady return. ADM has a long history of continual dividend increases, and currently has a Zacks Rank of #1 (Strong Buy) indicating upward trending earnings revisions. Earnings expectations have been revised higher across all timeframes by as much as 25% over the last 90 days.
Image Source: Zacks Investment Research
Additionally, ADM is trading at a very reasonable 11x one-year forward earnings, below its five-year median of 14x, and under the industry average 14x.
ASE Technology (ASX - Free Report) is a provider of semiconductor manufacturing services for assembly and testing. ASX may not be the most exciting growth stock out there, but it has steady returns, consistent revenue growth, and a dividend yield of 4.9%.
Image Source: Zacks Investment Research
ASX is trading at 9x one-year forward earnings, which is below its 10-year median of 13x and well below the industry average 19x.
Image Source: Zacks Investment Research
ASE Technology also has a Zacks Rank #1 (Strong Buy), indicating strongly upward trending earnings revisions.
Conclusion
The failure of Silicon Valley Bank is a significant event with unknown and potentially very far-reaching effects. The rising rate environment has begun to show that points of weakness developed during the boom, and this may not be the last case. To remain risk-averse, identifying defensive stocks may be one safe way to trade through this challenging period.