Bank of America (BAC)

You could see a bit of a pullback in the share price, just because the 2^nd quarter earnings might not be all that great. This should be a $21-$22 stock price 18-24 months out. You are going to continue to see management focus on cutting costs. When you combine that with mid-single digit growth and corporate and consumer loans, you should see them really benefit from higher ROE’s.

(A Top Pick May 13/15. Up 10.71%.) January (2017) 17 Call. A rising interest rate environment is good for banks. This one is fairly leveraged to residential mortgages. Thinks they have tremendous earning power, and once that starts to turn, it is going to be a pretty dramatic move. He can see $20 on the stock. Would probably sell half his position if it doubled.

He likes the US financials, especially when compared to the Canadian ones. This is trading at a 0.8 price to BV and 13X forward earnings. Has a 9% growth rate.

Thinks you will do well with this bank. The whole banking sector is going to be the beneficiary of the steepening yield curve. That allows banks to do the old-fashioned thing of borrowing short and lending long, at a spread. (See Top Picks.)

He prefers J.P. Morgan (JPM-N) or Wells Fargo (WFC-N). This bank has been a real stinker in terms of the amount of legal costs it has had to pay comparatively, the amount of trouble it got into and the fact that it is still not paying a reasonable dividend.

All US banks are starting to come out of the phase where we saw them receive a fine every 2^nd day. From that perspective, it is positive. This one has brand appeal as it is a name that everyone recognizes. If you are looking at this as a growth play, you have to ask yourself why you are there. If you are there for the retail banking, he prefers the regional banks. If you are there for the investment banking side, he would prefer Goldman Sachs (GS-N) more. However, as an overall package, it gives you a little bit of everything.

After a nice move up between 2012 and 2014, it is now kind of moving sideways, as most US financials are doing. You really only have to buy this when it breaks out, and it is not showing any signs of wanting to break out at this level. There are probably better stories.

US banks have been in the penalty box for quite some time, both from a regulatory perspective as well as an investor perception perspective. He thinks they are in better shape and have more upside here than the Canadian banks at this point. If interest rates go up, this is good for the banks, and they will do very well.

Post the financial crisis, all the big US banks have recovered for the most part, and this one is no exception. The biggest issue that the banks are going to face in the next 2-3 years is dealing with the slow growth economy. Rising interest rates will help their net interest margins. He sees the housing market probably slowing down because of rising rates. It’s tough for a bank like this to grow in their regulatory environment.

(Top Pick May 29/14, Up 11.12%) It is not expensive. Trading below book at about 10 times earnings. Their M&A side is doing well. The brokerage business and asset management business is doing well. We just need interest margins to do well. He thinks they will move the dividend up when they can.

(A Top Pick June 2/14. Up 10.84%.) Big American banks look like a good place to hide or to look for value. They are going to start paying dividends again at some point. Earnings are starting to turn. At some time interest rates are going to start to rise, which will benefit the banks. Trading at a pretty good discount compared to our banks.

He prefers Citigroup (C-N) and J.P. Morgan (JPM-N). This bank, more recently, has moved a bit more sideways. He can’t say that this is one of the cheaper banks from a Price to Book valuation ratio. He doesn’t mind the stock and thinks it will do okay.

(A Top Pick May 5/14. Up 12.1%.) Trading at .7X BV and 10X earnings. Litigation has now settled down. It is cheap and the recovery in the US is helping them make profits. They are probably going to increase their dividends in the next couple of quarters. Also, interest rate lifts do help financials. He likes it and thinks there is more upside.

This is in an industry where the government seems pretty happy with consistently suing them again and again and again. With their acquisition of Countrywide, they really got ahead of themselves. We have seen the government regulate that company, more so than others, which has had the effect of forcing them to operate within pretty tight guidelines. Has a good retail banking platform. Unfortunately there is a lot of work to be done to get it up to a good level as well as to win government trust. This would be a wait and see, but is certainly one that you could nibble away at. Good value.

To get a lot of growth out of the banks, we need interest rates to go up. Unfortunately, even if the Fed starts raising rates, he believes it will be gradual, so the margins won’t be improving all that much. Meanwhile the domestic recovery in the US has been slower than everybody had expected. Hopefully we are reaching the end of the penalties and fines. This is one of the cheaper names, and when the economy does get rolling it will have a lot of torque. Still somewhat premature.