Booked to Rise
In this edition of the Smart Investor newsletter, we spotlight a super-regional bank rewriting its playbook. But first, let’s review the latest Smart Portfolio developments.
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Portfolio News and Updates
❖❖ Cisco (CSCO) saw its stock drop post-earnings despite the strong quarterly results, as investors – already nervous amid tech-stock volatility – were alarmed by its warning about margin pressures due to surging memory prices. However, the stock strongly rebounded after analysts reiterated their Buy ratings and raised price targets, while dismissing the memory costs as no more than a short-term hiccup on the company’s robust long-term trajectory.
The networking specialist’s fiscal Q2 2026 revenue rose 10% year-over-year to a record $15.3 billion, while non-GAAP EPS of $1.04 was up 11%, both exceeding the high end of guidance and analyst estimates. Products revenue was up 14%, compensating for a 1.5% decline in Services’ top line. In Products, Networking saw growth of 21% – its sixth straight quarter of double-digit growth – driven by AI infrastructure and data centers, along with campus refresh cycle and networking gear demand growth. Robust demand across all regions and customer types resulted in total product orders rising 18% year-over-year. Meanwhile, hyperscaler AI infrastructure orders surged by 62% from FQ1 2026 and arrived at $2.1 billion, equal to the entire total from FY 2025.
Stronger growth in hardware and infrastructure lines increased their share of the revenue mix and temporarily weighed on margins. The triple-digit year-over-year jump in memory chip prices played a large role in this dynamic. This is expected to continue depressing margins in fiscal Q3, driving an in-line adjusted EPS outlook despite the above-consensus revenue guidance. However, fiscal 2026 is expected to break the company’s records as its formidable industry position allows price increases, revising contractual terms, and negotiating better terms with suppliers while securing its supply chain.
CSCO’s raised FY 2026 guidance now calls for revenue of $61.45 billion and EPS of $4.15, with both midpoints well above analyst consensus. Given the strong demand for its newly released Silicon One systems, the company expects to clock in over $5 billion in total AI orders during the current fiscal year, while recognized AI infrastructure revenue from hyperscalers is slated to exceed $3 billion.
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❖❖ Vertiv (VRT) soared after the earnings release, driven by the blowout results and guidance, with at least a dozen significant price-target hikes following the Q4 report that wrapped up an exceptional year. Analysts view AI-driven demand as a multi-year tailwind for VRT.
The data-center infrastructure leader’s quarterly net sales jumped 23% year-over-year to $2.9 billion – slightly above the consensus – driven by organic growth of 19%, while adjusted EPS flew past estimates, surging over 37% to $1.36. Adjusted operating margin expanded to 23.2%, driven by operational leverage on higher volume, productivity and favorable price-costs, partially offset by tariff impact. Q4 adjusted free cash flow jumped by 151% to $910 million; VRT exited Q4 at 0.5x net leverage. Full-year 2025 organic net sales rose 26% to $10.2 billion and adjusted EPS soared 47% to $4.20, with both figures surging past company guidance and analyst projections.
Orders momentum accelerated significantly, with Q4 organic orders up approximately 252% year-over-year; TTM organic orders grew 81%. While hyperscale/colocation data centers in the Americas were the primary drivers of order strength, order growth was broad-based across regions, technologies and customers. Q4 book-to-bill ratio was ~2.9x and backlog increased to $15.0 billion, more than double from the prior year and up 57% sequentially.
The soaring orders and expanding backlog signal continued growth acceleration, driven by hyperscaler capex flowing into AI and cloud infrastructure buildout. This supported much stronger 2026 outlook than previously communicated. VRT is now guiding 2026 adjusted diluted EPS to $6.02 at the midpoint, implying 43% growth; organic sales are expected to rise 28% at the midpoint to $13.5 billion. Operating margin is seen expanding by 210 bps to 22.5%, while adjusted FCF is expected to come in at around $2.2 billion at the end of 2026.
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❖❖ Arista (ANET) reported its Q4 and full-year 2025 on February 12, with analysts praising the record performance, AI-driven momentum, and guidance raise. An avalanche of price-target raises has expanded the stock’s potential upside to almost 30% after a similar gain over the past year.
Q4 revenue rose nearly 29% year-over-year to $2.5 billion and adjusted EPS jumped by over 26% to $0.82, both significantly above the consensus. Non-GAAP net income crossed $1 billion for the first time. Full-year 2025 revenue surged 28.6% to $9 billion, while adjusted EPS rose by 28.5% to $2.98. Arista has also reported margin pressures from memory prices, but its margins held up better than Cisco’s. While Q4 non-GAAP gross margin compressed by 80 bps year-over-year to 63.4% – still within its historical range – full-year margins remained unchanged from 64.6% in 2024. 2025 operating margin expanded by 70 bps to 48.2%.
Growth continued to be distinctively led by the U.S. hyperscaler AI and cloud demand, along with surging sales to neocloud providers. However, the powerful surge in international revenue – with year-over-year growth in EMEA at 80% and APAC at 37% – has increased its share in the mix to 21% in Q4.
The cloud networking solutions leader raised its full-year 2026 guidance, with revenue growth expected to reach about 25% (implying $11.25 billion in total revenue) versus the previous 20% projection. ANET also raised its AI networking revenue target for 2026 to $3.25 billion from the previous $2.75 billion, while the campus revenue goal remains $1.25 billion for 2026. Non-GAAP gross margin guidance was unchanged at 62-64%, inclusive of mix and supply cost pressures, while non-GAAP operating margin target was raised from 44% at midpoint to around 46%. The guidance raise was driven by stronger visibility into AI and cloud demand, as well as a surge in deferred revenue to $5.4 billion at the end of Q4 2025, clocking in an increase of more than 16% from Q3.
The company initiated a guidance for Q1 2026, envisioning approximately $2.6 billion in revenue (with non-GAAP gross margin of 62-63% and operating margin close to 46%). This came well ahead of Wall Street’s $2.46 billion target.
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❖❖ Vertex Pharmaceuticals (VRTX) surpassed Wall Street revenue estimates in Q4, with the sales growing by 10% year-over-year and reaching $3.19 billion. Growth was primarily driven by the continued performance of cystic fibrosis (CF) therapies and additional growth from diversification into additional disease areas. Meanwhile, adjusted EPS jumped by over 26% to $5.03, but still slightly missed consensus expectations due to increased R&D and SG&A investments in the pipeline and launch support for new products. This is common in biotech where pipeline spending can create quarterly variability.
Analysts viewed it as a “quality miss” – as EPS pressures were tactical and temporary rather than structural – awarding the company with multiple price-target raises. Oppenheimer upgraded VRTX from Hold to Buy, saying that its new therapies for autoimmune and genetic kidney diseases have the potential to create a dominant franchise and diversify the company’s long-term revenue streams.
Total full-year 2025 revenue of $12.0 billion increased 9% from the previous year, driven by U.S. demand and higher realized prices for CF therapies. Non-GAAP net income was $4.7 billion, with adjusted EPS of $18.40 – up significantly from 2024, when VRTX’s bottom line was impacted by one-time charges. The biotech leader guided to continued growth in 2026, forecasting revenue at $12.95-13.10 billion (8-9% growth), driven by continued growth in its CF franchise and supported by at least $500 million in revenue from non-CF products. Q1 2026 revenue is slated to increase by about 7% year‑over‑year with growth accelerating thereafter as new products scale.
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❖❖ Howmet Aerospace (HWM) delivered another stellar quarter in Q4, easily beating both top- and bottom-line expectations. Revenue rose 15% year-over-year to record $2.17 billion, with EBITDA of $653 million (up 29%), achieving 30.1% EBITDA margin (up 330 bps). Adjusted operating income jumped 34% to $580 million (26.8% margin, up 380 bps), while adjusted EPS surged 42% year-over-year to $1.05. Commercial Aerospace, Howmet’s largest segment, posted a solid 13% revenue growth, while the fastest expansion rates were registered in Defense Aerospace (revenue up 20%) and Gas Turbines (up 32% year-over-year). Management expects Gas Turbine business to double from approximately $1 billion to $2 billion over the next 3-5 years, driven by electricity generation demand for data centers.
Full-year 2025 results were equally impressive, with revenue up 11%, EBITDA increasing by 26%, operating income expanding by 30%, and EPS rising by 40%. The company ended the year with a record-high free cash flow of $1.43 billion and conversion rate of 93%. HWM’s net debt-to-LTM EBITDA improved to a record low 1.0x as it repaid $265 million in debt, saving $22 million a year in interest expenses.
Howmet Aerospace posted a Q1 and full-year 2026 guidance that points to continued strong performance. In the current quarter, revenue is expected to come in at $2.24 billion at the midpoint (up 15% year-over-year) and adjusted EPS at $1.10 (up 28%), both above analyst consensus. For the full year, the company guides to the following midpoints of corresponding ranges: revenue at $9.1 billion (~10% growth), adjusted EBITDA of $2.76 billion (up ~14%), and adjusted EPS of $4.45 (up ~18%). Free cash flow is seen at around $1.6 billion with a 90% conversion rate.
Analysts and investors alike were impressed by the results and outlook, with over a dozen price-target increases post-earnings and a two-day rally of over 12%.
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❖❖ Credo Technology (CRDO) has experienced strong volatility lately, pulled down by several company-specific concerns amid broad AI sector jitters.
The recent decline does not stem from weak fundamentals – on the contrary: on February 10, Credo pre-announced a major fiscal Q3 2026 revenue beat, guiding to $404-408 million versus prior guidance of $335-345 million and consensus near $340 million – a year-over-year surge of 151%. Management also lifted full-year revenue expectations to more than 200% growth, implying roughly $1.3 billion in fiscal 2026 sales.
The subsequent pullback appears driven more by sentiment than fundamentals. A wave of insider selling – approximately 918,000 shares worth about $137 million by senior executives and directors – weighed on investor confidence. While not unusual after a strong rally, the timing intensified scrutiny.
At the same time, concerns resurfaced about the industry’s shift from copper-based Active Electrical Cables (AECs), where Credo has a ~90% market share, toward optical interconnects supplied by competitors such as Broadcom and Coherent. However, the narrative that optics will broadly displace copper oversimplifies the architecture of AI data centers. Most AI cluster connections – often 80% or more – are short-reach links within or between adjacent racks. In these environments, copper AECs remain more cost-efficient, consume less power, and offer lower latency and high reliability. Optics dominate longer-reach connections, but the industry increasingly operates on a hybrid model rather than a full replacement dynamic. Besides, Credo is also expanding its own optical portfolio, with DSPs and retimers contributing a fast-growing share of revenue that’s already at over 20% of the total.
Valuation remains elevated at roughly 14x forward sales, and inventory levels and potential margin compression have added caution. Still, with hyperscaler demand intact and potentially blowout earnings scheduled for March 2, the current volatility appears driven by positioning and sentiment, and not by deterioration in the growth story.
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❖❖ Jones Lang Lasalle (JLL) dropped last week, along with several other real-estate services stocks. Multiple industries – from software to insurance brokers to trucking and logistics – were hit by what Bloomberg called “the AI scare trade,” as investors continued to question whether fast-improving AI tools can chip away at business models through the deployment of reliable automation that creates downward pricing pressures. However, analysts from Keefe Bruyette, Morningstar, and others view these fears as overblown, as the immediate risk to complex deal-making from AI tools appears minimal, while long-term risks are unclear. Jefferies said it doesn’t see AI as a meaningful threat to JLL and its peers, whose position as intermediaries for large leases and transactions is unlikely to be impacted. If anything, the automation tools can help these firms’ margins, decreasing the need for large teams to perform routine work and speeding up deal closure times.
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❖❖ Labcorp Holdings (LH) slipped after its Q4 release. Even though earnings and margins came in strong and 2026 guidance was solid, the market turned its focus on a modest revenue miss.
The diagnostics leader reported Q4 revenue of $3.52 billion, up 5.6% year-over-year, which was slightly below consensus. Adjusted EPS rose 18% to $4.07, beating estimates, while adjusted operating margin expanded 120 basis points to 13.9%. For full-year 2025, revenue grew over 7% to $13.95 billion and adjusted EPS climbed 13% to $16.44, with enterprise margins improving more than 50 basis points.
Diagnostics revenue increased 5.5% to $2.73 billion in Q4, including 4.1% organic growth, and segment margin expanded to 15.4%. Organic volume was pressured by lower referrals from a financially challenged consumer-genetics client and weather disruptions – both described as temporary. Excluding those factors, growth would have been in line with full-year trends. Biopharma Laboratory Services revenue rose 3.4% to $793 million, supported by 11.1% growth in Central Labs, while Early Development declined double digits as the company continues to streamline its efforts. Central Labs momentum remains healthy, with a quarterly book-to-bill of 1.16 and backlog of $8.7 billion at year-end.
Strategically, LH is shifting toward higher-value specialty testing. Esoteric testing now represents 41.5% of total testing revenue, up from 37.5% in early 2023. The company launched more than 130 new tests in 2025 across oncology, women’s health, neurology, and autoimmune disease, and continued integrating Invitae to strengthen genetic testing capabilities.
For 2026, Labcorp guides enterprise revenue growth of 4.7-6%, or 5.4% at midpoint, with Diagnostics up 5-6% and Biopharma up 3-5%. Adjusted EPS of $17.55-18.25 implies roughly 9% growth at midpoint, with margin expansion expected in both segments. Free cash flow is projected at $1.24-1.36 billion.
Morgan Stanley noted LH’s Q4 EPS topped its $3.96 estimate and believes 2026 guidance “should be well received.” The firm highlighted LH’s valuation discount to some peers and maintained a Buy rating with a $308 price target, viewing the lab services space as a relative safe-haven within healthcare services. This view is supported by Labcorp’s expanding margins, specialty mix gains, and strong backlog visibility, which position it for steady earnings growth and disciplined capital return.
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❖❖ Leidos (LDOS) slid after reporting Q4 results, as a conservative 2026 outlook and a sharp increase in capital spending overshadowed strong earnings, margin expansion, and record cash generation.
Fourth-quarter revenue declined 3.6% year-over-year to $4.21 billion, missing consensus, though management said an extra workweek in the prior year and a six-week government shutdown reduced reported growth by roughly seven percentage points. Supporting the continued-growth thesis, adjusted EPS rose 16% to $2.76, easily beating estimates. The earnings outperformance, despite softer revenue, was driven by significant margin expansion and disciplined capital deployment. Adjusted EBITDA margin improved 160 basis points to 13.2%, while net income margin expanded 150 basis points to 8.0%. For the full year, adjusted EBITDA margin reached 14.1%, up 120 basis points, and non-GAAP EPS grew 17% to $11.99, aided by a 4.4% reduction in diluted share count.
Cash generation was exceptionally strong. Q4 operating cash flow reached a record $495 million, with free cash flow of $452 million, which represented a 127% conversion of non-GAAP net income. Full-year free cash flow totaled $1.63 billion, up 26%. Meanwhile, bookings and backlog signals signaled operational health. Q4 net bookings were $5.6 billion, producing a 1.3x book-to-bill ratio for the second straight quarter. Total backlog rose to $49 billion, with funded backlog up 15%. Management noted that $7 billion in awards slipped into 2026, suggesting timing rather than demand weakness.
For 2026, LDOS guided revenue to $17.5-17.9 billion, implying up to 4% growth, with acceleration expected in the back half of the year. Adjusted EBITDA margin is projected in the mid-13% range, reflecting normalization from 2025’s peak levels. Non-GAAP EPS is expected at $12.05-12.45, roughly in line with consensus at midpoint. This outlook was seen as too cautious, weighing on sentiment.
However, the bigger investor focus was capital intensity. Leidos invested $312 million in R&D and capex in 2025. In 2026, capex alone is slated to increase to about $350 million, roughly triple prior annual levels, as the company expands production capacity and upgrades classified facilities. As a result, free cash flow is expected to decline year-over-year, while the planned acquisition of Entrust is expected to raise LDOS’ gross leverage.
LDOS continues to demonstrate operational strength and durable positioning across defense, intelligence, health, and energy infrastructure. That said, the combination of a conservative outlook, sharply higher capex, and increased leverage could pressure sentiment in the near term. The long-term story remains intact, but execution on these growth investments will be critical – and we’ll be watching closely.
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Portfolio Stocks Under Review
❖ We are keeping Oracle (ORCL) in our “Under Review” bracket as we head toward its next earnings report on March 9. Our long-term conviction in Oracle’s strategic positioning remains intact, but the near-term setup is still dominated by execution risk and capital intensity. ORCL’s AI-driven opportunity is real, but so is the strain it places on the balance sheet – making this a good problem to have, and a difficult one to solve.
The company’s announcement that it plans to raise up to $45-50 billion in a mix of debt and equity addressed the market’s biggest concern – how Oracle intends to fund its aggressive OCI buildout without jeopardizing its investment-grade profile. The surging demand for its $25 billion bond issuance – which reportedly drew about $127 billion in orders – coupled with a sizable equity component including mandatory convertibles and an at-the-market (ATM) program, reduces near-term refinancing and liquidity fears. This financing structure prioritizes balance-sheet resilience and rating stability, reassuring creditors while buying time for AI infrastructure investments to scale. As a result, Oracle’s five-year credit default swaps – the risk premium on its debt – have plummeted, arriving close to historical norms.
With a newfound clarity on funding, the question of backlog monetization timelines still remains open, as investors continue to wonder whether ORCL can turn record RPO levels – still heavily skewed toward OpenAI – into sustainable free cash flow over the next 12-24 months. Elevated capital expenditures and negative free cash flow remain central to the debate.
Meanwhile, ORCL saw its stock surge after D.A. Davidson upgraded it from Hold to Buy, citing renewed confidence in OpenAI’s ability to meet its huge cloud infrastructure spending commitments, including the massive Oracle deal. Analysts also said they are positive on the potential from Oracle’s role as a joint-venture operator of TikTok U.S. The deal locks in a significant client for OCI while also offering upside through the stake in the popular app.
Additionally, the recent capex announcements from the U.S. tech leaders both change the optics on Oracle’s planned investments – making them appear much more modest – and strengthen the company’s monetization setup. Microsoft and Meta have already locked in large OCI deals, and with hyperscalers looking to secure incremental capacity quickly, Oracle’s cloud offerings are likely making it one of the biggest third-party beneficiaries of their massive spend. Bloomberg estimates that hyperscalers’ cumulative AI capex in 2026-2029 will be around $3 trillion. ORCL – one of the “picks and shovels” in the current AI infrastructure cycle – is well-positioned to capitalize on this surge.
Meanwhile, Oracle’s OCI revenue engine is starting to drive meaningful value in the applications layer. The company’s recent introduction of 12 new AI agents embedded within Oracle Fusion Cloud Applications to automate supply chain workflows – an incremental step in monetizing the broader AI opportunity – further reduces the “GPU-reseller” narrative risk, supporting the long-term bull case of higher cloud margins and stickier customers.
Still, for now, investor sentiment remains fragile due to the time gap between future earnings and current investments. Oracle’s reliance on a small number of capital-hungry customers, and the sheer scale of infrastructure spending required to serve them, keeps execution risk high. This is why 2026 is a “show me the money” year, and why the upcoming earnings report will be critical in assessing early progress on RPO monetization and cash flow trajectory.
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Portfolio Earnings and Dividend Calendar
❖ The Q4 2025 earnings season is past its peak, but several Smart Portfolio holdings are scheduled to reveal their results in the coming days. Jones Lang Lasalle (JLL) is reporting today, while Keysight Technologies (KEYS) is expected to publish its quarterly data on February 23, and APi Group (APG) on February 25.
❖ The ex-dividend dates for Microsoft (MSFT) and RTX (RTX) are coming on February 19 and 20, respectively.
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New Buy: Citizens Financial (CFG)
Citizens Financial Group, Inc. is one of the leading regional banking franchises in the United States, serving as a core financial partner to consumers, small businesses, and middle-market companies across its footprint. Operating through a broad retail branch network alongside a growing digital platform, Citizens provides everyday banking services, residential lending, credit cards, and wealth management, while also supporting commercial clients with corporate lending, treasury solutions, capital markets access, and advisory services. The bank occupies a strategic middle ground in the industry – large enough to offer sophisticated capabilities typically associated with national institutions, yet regionally focused enough to maintain local relationships and underwriting discipline. By combining consumer banking, commercial finance, and capital markets expertise under one umbrella, Citizens functions as a diversified, relationship-driven lender positioned at the center of local economic activity.
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Deposits To Dominance
Citizens Financial Group traces its roots to 1828, when High Street Bank was founded in Providence, Rhode Island. Over nearly two centuries, a series of mergers and regional expansions transformed that local institution into a broader Northeast banking franchise. By the late 20th century, Citizens had developed into a sizable regional player, shaped by consolidation and disciplined balance sheet management rather than rapid national expansion.
The modern era began in 2014, when Citizens completed its separation and initial public offering, re-establishing itself as an independent U.S. bank. Independence brought strategic clarity. Management prioritized strengthening core deposit franchises, improving underwriting discipline, and diversifying revenue streams beyond traditional spread lending. The years that followed were defined by methodical repositioning – building scale in attractive metropolitan markets while expanding fee-based capabilities.
The acceleration came in the current decade. In 2021 and 2022, Citizens executed a series of transformative transactions that materially expanded both footprint and earnings mix. The acquisition of HSBC’s East Coast branches added scale in affluent, deposit-rich markets such as New York and Washington, D.C., reshaping the bank’s funding profile. The purchase of Investors Bancorp deepened its presence in the New York and New Jersey corridor, increasing density in one of the most competitive banking regions in the country. At the same time, the acquisitions of JMP Group and DH Capital strengthened capital markets and advisory capabilities, broadening Citizens’ ability to serve middle-market and growth-oriented companies.
Rather than pursue expansion for its own sake, management used this period to reposition the franchise toward higher-value relationships. The launch and build-out of Citizens Private Bank targeted high-net-worth clients in major metro markets, while continued investment in digital platforms modernized customer acquisition and servicing. Technology upgrades were not cosmetic – they aimed to simplify processes, reduce operating friction, and improve cross-selling across consumer and commercial clients.
More recently, Citizens introduced its enterprise-wide “Reimagine the Bank” initiative, a multi-year transformation focused on operational efficiency, technology integration, and structural cost improvements. The program reflects a recognition that scale alone is insufficient in today’s banking environment – sustainable growth requires sharper execution, disciplined capital allocation, and productivity gains.
What emerged out of the past decade is a bank that deliberately shifted from regional stability to metropolitan scale – expanding market share, deepening client relationships, and reshaping its earnings mix to compete more effectively in a consolidating U.S. banking landscape.
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Scaling The Spread
Citizens has steadily reshaped itself from a traditional lender into a product-complete banking franchise. Its model now rests on three pillars – Consumer Banking, Private Banking and Wealth, and Commercial Banking – designed to balance spread income with fee-driven revenue and deepen client relationships across the balance sheet.
Consumer Banking remains the funding backbone. Through more than 1,000 branches across 14 states and digital channels nationwide, CFG gathers a stable retail deposit base accounting for roughly two-thirds of total deposits. Home lending, home equity, cards, and everyday banking provide scale, but the strategy is less about volume and more about deposit quality and cross-sell. The mortgage platform – spanning origination and servicing – alongside payments activity adds fee income to what would otherwise be a purely spread-driven retail business, while digital investments and AI-enabled service tools aim to improve efficiency and client retention without expanding physical infrastructure.
Private Banking and Wealth are the fastest-scaling engines. The Private Bank has reached roughly $14.5 billion in deposits and $7.2 billion in loans, contributing about 7% of total earnings while generating returns near 25% on allocated capital. In other words, it remains a modest share of total profit today, but an exceptionally efficient one – which is why management continues to prioritize its expansion. Wealth fees rose more than 20% last year, supported by branch-based advisors and integrated referrals from commercial clients. The long-term objective is clear – expand affluent relationships, lift fee income, and reduce reliance on net interest spreads.
Commercial Banking is where the franchise has broadened most meaningfully, with CFG now combining lending, advisory, capital markets, and treasury capabilities under one roof. Instead of competing only on loan pricing, the bank increasingly competes on completeness – offering companies credit, cash management, debt underwriting, and M&A advisory in a coordinated model that deepens client relationships and diversifies revenue streams.
Treasury services – the cash management and payment systems that businesses use to run daily operations – have become a central differentiator. When Citizens wins those relationships, it often becomes the client’s primary operating bank, holding working capital deposits and generating recurring service fees alongside lending income. In newer expansion markets such as Florida, California, and NYC, the vast majority of new commercial clients now use Citizens for most of their treasury needs, deepening relationships and stabilizing funding.
At the same time, CFG has expanded its capital markets and advisory capabilities, particularly in the middle market. Transaction activity-driven fee income – from mergers, acquisitions, refinancings, and private-equity deals – is far less balance-sheet intensive than traditional lending. Management expects 2026 and 2027 to be more transaction-oriented years, with activity shifting from refinancing toward new investment and acquisition financing, allowing the bank to capture advisory and underwriting revenues in addition to loan growth without proportionately increasing credit exposure.
Overlaying all three pillars is “Reimagine the Bank,” a multi-year simplification and technology initiative targeting approximately $450 million in pre-tax run-rate benefits by 2028. About two-thirds of that is expected from structural efficiency, with additional upside tied to improved customer acquisition and cross-sell. As non-core loan runoff1 fades and credit normalization2 stabilizes, Citizens enters 2026 positioned to scale both spread and fee income – a regional bank increasingly competing on capability rather than footprint alone, and one with a structurally stronger earnings mix than in prior cycles.
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1 – Non-core loan runoff: The continued paydown and reduction of legacy and non-strategic loan portfolios that had been weighing on reported loan growth.
2 – Credit normalization: The decline in credit losses and provisioning levels after they rose due to commercial real estate pressures and post-pandemic risk adjustments.
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Carried Forward
Citizens finished 2025 with clear operating momentum. For the full year, adjusted EPS reached $3.86, up 19% year-over-year, while fourth-quarter EPS of $1.13 surged 36% from the prior year. Q4 revenue increased 8%, reflecting stronger net interest income (NII) and continued fee expansion. Pre-provision profit climbed 21% in the quarter, highlighting that earnings growth was driven by underlying operating strength rather than accounting adjustments.
NII rose 9% year-over-year in Q4, driving 4% full-year growth. Net interest margin (NIM) expanded to 3.07% in the fourth quarter, up 20 basis points from the previous year, marking the third consecutive quarter of margin improvement. That expansion reflects loan repricing, funding mix improvement, and the diminishing drag from non-core portfolios.
Fee income reinforced the shift toward a more diversified earnings base. The Wealth segment delivered underlying growth above 20% year-over-year, while capital markets revenue rose 16% in Q4, supported by increasing deal activity. The Private Bank contributed $0.28 to full-year EPS – about 7% of total earnings – while generating returns near 25% on allocated capital, underscoring the quality of growth emerging within the franchise.
Efficiency also improved. The efficiency ratio3 moved to roughly 62% in Q4 from the mid-60% range a year earlier, and full-year positive operating leverage4 reached approximately 125 basis points. Net margin expanded from 19.3% to 24% year-over-year, demonstrating that profitability gains were not solely dependent on spread expansion.
Credit performance showed measured progress. Net charge-offs declined to 43 basis points in Q4 from 52 basis points a year earlier, reflecting improving credit trends across the portfolio. Non-performing loans decreased to approximately $1.52 billion from roughly $1.66 billion in 2024, while CRE balances declined about 10% year-over-year as the bank continued to de-risk the portfolio. CET1 capital5 stood at approximately 10.6%, and the February 2026 redemption of subordinated notes6 further simplified the capital structure.
Looking ahead, management projects 2026 net interest income growth of 10-12%, with NIM trending toward roughly 3.25% by late 2026. Loan growth is guided at 3-5%, and noninterest income is expected to rise 6-8%, driven primarily by wealth and capital markets. Expense growth is projected at approximately 4.5%, implying operating leverage in excess of 500 basis points for the year. Management also expects net charge-offs to decline into the mid-to-high 30 basis point range. Taken together, that outlook supports a medium-term ROTCE7 target of 16-18% and suggests that 2025 was not a peak year, but a transition into a structurally higher-return phase.
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3 – Efficiency ratio: Operating expenses divided by total revenue; a lower ratio indicates greater cost discipline relative to income generation.
4 – Positive operating leverage: Revenue growing faster than expenses, resulting in expanding profitability margins.
5 – CET1 capital: Common Equity Tier 1 ratio – the bank’s core regulatory capital as a percentage of risk-weighted assets, a key measure of financial strength.
6 – Redemption of subordinated notes: In February 2026, Citizens redeemed three series of 2031 fixed-rate reset subordinated notes at par, eliminating those instruments ahead of their rate reset period and further simplifying its funding structure.
7 – ROTCE: Return on tangible common equity – net income relative to tangible shareholder equity, commonly used to evaluate bank profitability.
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By The Book
Citizens’ valuation is best framed against a focused group of U.S. super-regionals with similar scale and earnings drivers. Regions Financial provides the clean retail-and-commercial benchmark. Huntington Bancshares offers a comparable consumer and middle-market mix. Fifth Third represents a diversified regional with meaningful fee exposure, while M&T Bank serves as the quality yardstick – historically commanding premium multiples for underwriting discipline and consistent returns. Together, they define the competitive band Citizens now operates within.
Over the past year, CFG rose roughly 40%, far ahead of Regions at about 22% and well above FITB, MTB, and HBAN. The gap reflects Citizens’ delivery on a high-conviction growth agenda in a supportive backdrop, while others produced solid but less differentiated results. Citizens entered the period from a discounted base, weighed down by non-core runoff and commercial real estate concerns. As those drags diminished, NIM expansion became visible, the Private Bank scaled into a meaningful earnings contributor, and the path toward 16-18% ROTCE came into clearer focus. The stock shifted from a recovery narrative to an earnings inflection story, and a re-rating followed. Despite the notable gain in the past year, analysts still see a meaningful upside for the Strong Buy-rated stock.
Even after that rally, valuation is far from stretched. Forward P/E ratios sit broadly in line with peers, suggesting the market acknowledges accelerating earnings but hasn’t yet priced in full normalization. The more notable gap lies in Price-to-Tangible Book. At roughly 1.2x tangible book value, CFG trades at the lowest multiple in the peer set despite comparable tangible book growth in 2025 and a credible plan to lift returns. That discount made sense when returns lagged structurally, but it becomes harder to justify as profitability converges. If execution continues and the ROTCE trajectory materializes, the remaining valuation gap increasingly looks less like a reflection of risk and more like residual skepticism – creating room for further re-rating.
Citizens’ capital return approach is a three-pillar framework: buybacks, dividends, and a deliberate prioritization of organic investment – all anchored to maintaining a CET1 ratio of 10.5-10.6%. As a strong recovery in its earnings power continues, the bank has transitioned from a defensive posture to an aggressive capital return phase.
CFG has signaled a significant increase in its appetite for share repurchases, approving a $1.5 billion buyback authorization in June 2025 in addition to the $300 million remaining capacity. For the full year 2026, management is targeting $700-850 million in buybacks, a notable step up from the $600 million repurchased in 2025, which retired about 3% of shares outstanding. Overall, since the commencement of its share repurchase program in January 2021, Citizens retired about 17.4% of its outstanding common shares through buybacks.
Citizens has paid dividends since its independence in 2014 and has steadily raised them through the years. Today, its dividend yield of 2.9% is more than double the Financial sector’s average, while its moderate payout ratio of about 46% leaves significant room for further dividend growth. While buybacks remain the primary capital return vehicle, steady dividends offer support for consistent shareholder returns.
Citizens Financial now combines visible earnings acceleration, disciplined capital deployment, and a still-discounted tangible-book multiple – setting the stage for continued shareholder return expansion.
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Investing Takeaway
Citizens Financial has moved beyond the phase of balance-sheet repairs and into a visible earnings expansion. Margin momentum is taking hold, fee growth is scaling, and capital return is accelerating from a position of strength. What was once a discounted recovery story is now a structurally improving franchise with a clearer path toward higher returns on tangible equity. The stock has partially re-rated, but the tangible-book discount remains. As profitability converges with peers and execution continues, that gap becomes harder to justify. For investors looking at super-regionals through a forward lens, Citizens stands out not for stabilization – but for acceleration.
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New Sell: Check Point (CHKP)
We are exiting our position in Check Point at this stage. This is not a loss of conviction in the business itself. On the contrary – CHKP remains one of the most trusted enterprise security franchises in the world, with a durable brand, deep customer relationships, and a portfolio that continues to evolve in the right direction. The issue is not quality, but timing.
Check Point delivered solid fourth-quarter and full-year 2025 results. Revenue rose 6% year-over-year to $745 million in Q4 and $2.73 billion for the year. Subscription revenue grew 11% in the quarter, recurring billings expanded, and remaining performance obligations increased 8%. Non-GAAP operating margins remained exceptionally strong at 41%. Cash generation was robust, and the balance sheet now holds more than $4.3 billion in liquidity.
Operationally, the company is doing many things right. Management is pushing aggressively into AI security, exposure management, and SASE. Emerging products are growing at more than 40% annual recurring revenue rates. Strategic acquisitions are reinforcing the long-term platform vision. If execution continues, Check Point could evolve into a broader enterprise security standard bearer – arguably the “Microsoft of enterprise cyber” over time.
But markets are not rewarding long-term potential right now, expecting acceleration across all verticals. The core problem is growth optics. CHKP’s total revenue is expanding at a steady mid-single-digit pace, while its cloud-native peers are posting materially faster numbers. Product revenue remains soft as the mix shifts toward subscriptions. The 2026 revenue guide of 4-8% growth – with Q1 notably below prior run rates – signaled continuity rather than acceleration. In a momentum-driven AI environment, that is not enough.
Compounding this, headline EPS strength was inflated by a one-time tax benefit. Once stripped out, the underlying earnings trajectory looks far more modest. Analysts responded by trimming price targets, reinforcing a sentiment cycle that has become increasingly fragile. In volatile markets, perception can outweigh progress. We do not want to hold through a sentiment reset while capital is tied up waiting for acceleration to materialize.
Importantly, valuation is not the problem. By traditional metrics, CHKP is inexpensive relative to its balance sheet strength, cash flow profile, and profitability. The long-term opportunity remains intact. But near-term patience is thin, and multiple compression can persist even when fundamentals are stable.
This is a disciplined step aside, not a structural exit. We remain open to returning Check Point to the portfolio if and when operational execution translates into clearer top-line acceleration and sentiment turns constructive again. But for now, preserving flexibility and reallocating capital is the prudent move.
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Smart Investor’s Winners Club
The Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Markets were mostly in the red, and although the Portfolio stocks performed better, the Club lost IBM and JPM. We expect them both to rejoin the Winners Circle, but meanwhile the Club is down to 20 stocks: GE, AVGO, TSM, EME, HWM, ANET, APH, PH, IBKR, VRT, ORCL, GOOGL, MTZ, RTX, ASX, ATI, BK, KEYS, MS, and CSCO.
The first contender for the Club’s entry is still STRL, which has gained 29.96% since we bought it on December 10. Will it join the ranks, or will another stock outrun it to the finish line?
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