Bank of America (BAC)

Owns a couple of other comparable banks. American banks went down today even as the Dow rose to a record high. Global financial stocks are suffering as the yield curve gets flatter. The Fed indicated that a number of rate increases are coming in the next 12 to 18 months, but if those increases have their main effect on the short end of the yield curve, the result will be the dreaded inverted yield curve, which is almost always a precursor to a slowdown in economic activity. The current spread between the 2-year bond yield and the 10-year yield is only 25 basis points. Banks do best when the yield curve is rising, because banks borrow short and lend long. He would not sell a large bank at this point, but he wouldn’t be surprised to see their prices drop further because of the Fed rate cycle.

BAC-N vs. C-N. Why is C-N momentum faster than BAC-N? It is not just about the quality of that business but also what you are paying to acquire it. Both of these names longer term will be okay. He likes BAC-N. It is diversified and heavily into the US economy.

Trading at 1x book value, and in past bull markets has traded at 3-4x that. Not expensive and he sees a lot of upside in the US market. The US economy is growing and there's a little inflation in the system--tthese are great conditions for BAC. (The US banks underperformed, because they had a great run from Sept. 2017 to Feb. 2018.)

Well-run. All banks are sensitive to interest rates. BAC has a big investment banking operation. Its CEO has done well to maintain cost discipline. Boasts decent international exposure. All US banks have been stuck for the past year. As long as the US market holds, BAC will do well. He expects more investment to flow into the US banks.

Generally, he likes the US large cap banks. Trading above the 200-day moving average. At some point, interest rates will start picking up and net interest margins will move higher. Fairly cheap. As long as the global and US economies continue to do well, the stock will do fine. Lower tax rate and less regulation are positives. Yield is just under 2%. (Analysts’ price target is just above $34.)

(Past Top Pick, Sept. 11, 2017, Up 34%) Many expected rising interest rates would push up US bank earnings, but people are holding record debt. Investors got ahead of the trade, but this is a good long-term story. Regulation rollbacks in banks will be a major tailwind. This is one of his major holdings.

US Banks are very successful and are trading at reasonable valuations, but he prefers Morgan Stanley to BAC.

Management is really up there in terms of reputation. Model price is $32.70 or a 5% upside. They increased their dividend a month and a half ago. There is still more dividend growth coming. The financials need to lead the bull market higher. (Analysts’ target: $34.39).

Own it for a long time. Very cheap. Have great growth prospects. Well capitalized. Trades at 1.1 times book and 10 times next year earnings. Regulation is coming down. Yield of 1.9%. They have a great global franchise. He likes that they are returning a lot of capital to shareholders via buybacks and they are increasing their dividends. (Analysts’ price target is $34.39)

Comparing this to Citigroup: he owns both stocks. Both came out of the 2008 crisis in worse shape than the other large money center banks; both have recovered substantially and are trading at a narrower discount to them now. He expects the gap to close further. Citi trades at a greater discount and has more upside potential.

Historically, the banks have been an underperforming industry. He owns zero banks. BAC is one of the better large cap banks, but they are very sensitive to interest rates. An investor is really guessing what the front-end of the interest rate curve will be.

His target is $38 and change. He paid $6. He thinks there is at least 20% upside. He is happy to sit and collect dividends on this one. This has been a great play for him since 2008/9.

He likes the stock and banks in the US. Ten years yield is at 3% and that is where you want it to be. If we get another bump up in the interest rates it would be great for the banks as they tend to borrow short and lend long. It sold off also.

Over the long term it is a great company. The entire group of larger cap banks in the US are very well positioned. They are as well capitalized as they have ever been. They are benefiting from a strong US economy and housing market. Loan losses have been very modest as housing prices continue to rise. They trade at a pretty low PE multiple. He thinks they will continue to do well.

(A Top Pick May 1/17 - Up 26%.) He thinks it is a great story. Continue to bring down costs. Continue to see growth. Trading around book value. Still a lot of upside.