Bank of America (BAC)

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.

He likes the US banks across the board. This is trading at about its nominal Book Value, a discount to what he would call his Fair Market Book Value. It has huge upside potential, and he thinks that potential is going to grow under the Trump administration. Dividend yield of 1.37%. (Analysts’ price target is $20.07.)

Bank of America (BAC-N) or Wells Fargo (WFC-N)? US banks have gone on a tear because there is a belief that net interest margins are going to go up. Bank of America is a little steadier while Wells Fargo is more of a higher risk/high reward. (See Top Picks.)

Probably the most levered money centred bank to the change in interest rates. The CEO was quoted that a 1% move in interest rates would lead to about a $5 billion net income for the company. That represents about $.50 a share. If you put a 10, 11 or 12 multiple on that, you have some serious movements of the stock. Dividend yield of 1.42%. (Analysts’ price target is $19.90.)

(A Top Pick Nov 9/15. Up 16.44%.) If rates just stay where they are, this bank makes $1.3 billion in revenue. Not an expensive stock, trading at less than BV. Also, it is not trading on a huge PE basis. They have a great retail franchise, a great investment banking business and a great asset management business. They’ve really spent time to get their cost structure down.

This has been looking underpriced for a while because of the low return on equity. It was trading below its tangible BV, but has now had a big jump. If you are a short-term trader, you have made most of your money on this and he would be out. As a long-term investment, there are better places to be outside of the financial services space.

US financials have had a really good run of late, and he likes them. This is looking a little toppy right now, but is still trading slightly below BV. Feels that it has a couple of dollars more to run. You have a good 10% upside as a minimum in this name. Money is going to come out of some of the defensive sectors and go into these cyclicals, and the financials screen really, really well.