Bank of America (BAC)

He likes the big banks in the US. This is probably one of the more interest rate sensitive banks in the US, so if interest rates move up, you’ll probably get a pretty good lift on the stock price. Wouldn’t be surprised if this gave back some of its recent gains, but is still a good Hold.

He sees more upside. There are several reasons to like it. The chart is scary. He is recommending it here. It stands to benefit after being handcuffed for nearly 10 years. They have gone the extra mile to streamline their product line up and reduce costs. They are going to benefit from being a more streamlined operator. They will get the tail wind of higher interest rates. (Analysts’ Target: $23.81).

He loves it. It is coming out of the blue. The regional banks trade at higher valuations. He is looking for BAC-N to benefit from less regulation and more dividend increases. He is looking for an increase in the first quarter.

The minutes from the Fed indicated inflationary pressure if the Trump government goes ahead with the fiscal stimulus they have been talking about. Lending spreads go up as interest rates go up, and banks can make more money. It seems to be a positive environment for the banks. The question is, is it already priced in? He is positive on US banks right now.

Bank of America (BAC-N) or Citigroup (C-N)? He prefers this, because they have done a very good job of exiting low margin businesses. Also, they have a very strong retail franchise in the US. They can’t make any more acquisitions, but they can grow organically. The yield curve probably steepens by about 100 basis points. For every hundred basis points steepening in the yield curve, this bank makes $5.3 billion of more revenue. Has a great franchise name in investment banking, a great retail franchise, great commercial and wholesale franchise, and a good wealth management franchise.

US banks stand to benefit from the political reforms. They have a lot to gain because they are the most harshly regulated. Lower corporate tax rates will help them. He would expect faster dividend growth that you have normally seen as well as share buy backs. A lot of good things are already price in, however. Weak economic data is their biggest risk.

A great pick in the money center banks. He got in in October before the election. It is up sharply. It is the most levered to a change in interest rates. Deregulation that we will likely see will add to profitability. It will all lead to a revision to a multiple higher.

All the US financials did well after the election, on the premise of less regulation and potentially higher rates. This bank has recovered from where it came from back in the recession, and is still trading below BV. The ROE is still mid-single digit. Usually there is a very strong relationship between Price to BV and PE multiples based on ROE. The company is improving, and most of their past problems are behind them.

US banks went up about a week ago on the huge optimism for the sector. They are being unshackled after years of humiliation. With rising rates, they should be able to expand their margins.

For people that need income, they need to own things that will give them a rising stream of income, to offset the impact of rising interest rates. This bank has a lot of levers. Higher interest rates certainly help them to get better net interest margins. Deregulation can help them on the costs side. Better economic growth means their domestic business improves. 85% of their revenues come out of the US. They have a wonderful Capital Markets and Wealth Management business in their Merrill Lynch division. It has 20% ROE. Trading at less than 1X BV. He is expecting significant dividend growth going forward, north of 20% a year. Dividend yield of 1.34%. (Analysts’ price target is $21.33.)

This has done extremely well recently. It has broken through its resistance level. Seasonally, financials tend to do well from December 15 until mid-April. You might see the financials breathe a little and pull back a bit, but structurally banks have been held back for so long, and have underperformed the market for quite a while, and are now looking at some deregulation with the economy moving forward. Even though there may be a pullback in the seasonal period, over the next few months will still see this higher.

Synthetic Long Position. He is looking out to January 2018. He buys a $25 Call and sells a $25 Put. That is exactly the same as if he went out and bought the stock. He is going to get exactly the same return, whether the stock goes up or down. The risk is all the way to zero, and the upside is unlimited. The synthetic is a way to participate in this, without getting involved in the currency issue. The $25 Call is going to cost you less then the sale of the $25 Put. You are going to end up with about a $2 US credit, so you have no money outlay.

Banks are a very, very interesting area, whether it is in the US or in Europe. It is an under-owned area, and an area that has underperformed for 8 years. There is a tide including the Italian election, Mr. Trump and BREXIT. There is a new dawn happening, and this is one of the areas where you can make money for an extended period of time. This bank is trading below Book. We are in a very, very early phase of a structural Bull market in financials. It is very under owned by large institutional investors globally. Dividend yield of 1.4%.

(A Top Pick Dec 8/15. Up 20.91%.) He loves this bank. This is trading at its highest valuation going back to 2008. (See Top Picks.)

(Market Call Minute.) He likes the US banks.