Bank of America (BAC)

Until we start to see rates rise and the market take control of the yield curve again, the banks really aren’t going to get any traction. It is very, very difficult to get the timing exactly as to when to buy the stock. Good quality company.

Why is Bank of America (BAC-N) telling us to Short Canadian banks? She does not agree with that. We should all be buying them now because they have pulled back 8%-10% in the last 46 weeks. They are very attractively valued now and she is expecting earnings growth in the 6%-8% range. They all have target payout ratios of 40%-50%, and if you apply that to the earnings to what their current dividends are, it would be in the low end of that range, so she would expect that they would increase their dividends. When the banks reported in early December, their exposure to energy was very manageable. On their total loan book exposure, it is anywhere from below 1% to maybe 2%-3%, depending on the individual bank. (See Top Picks.)

He is not a fan of the big money center banks in the US. Prefers regional. The problem with big money center banks is that they have big capital markets divisions and that is not an area where he wants to focus.

A very good company. Regulatory pressures have held on all of the stocks. The US is not approving any more bank licenses, so competition is decreasing for the US banks. The ones that have the better balance sheets are the ones that will survive and thrive. He prefers others, but if you want a better leverage play, with potentially more upside, this would be yet.

If he had to pick one large cap US bank, it would be this one. The upside for the stock price is quite easily in the low 20%’s. There is a very clear path to significant ROE expansion. If rates go up, net interest margins expand for all the banks. Ignoring that, he thinks there is a significant amount of operating expense reduction that will get realized in 2015, and if you layer on top of that, normalized fixed income, currencies and commodities, you could very easily make the argument that M&A activity will be higher than it was in 2014.

(A Top Pick Jan 23/14. Up 1.44%.) Thinks he was early on this. They are going through their model and are fixing the things that need to be fixed. The market is not prepared to reward them yet. On every quarterly conference call he thinks it will be the last time they have to pay a fine or litigation of some kind, but then there is another one. He thinks they are now at the end of that process and they were just allowed their 1^st dividend increase in the last quarter.

99% of revenue is from the US. The big headwind on legal should be starting to subside. A very, very strong consumer-based business. He likes it very much and thinks it will continue to move higher.

0.8 times book, not at a high PE. 10 times earnings. Legal issues have gone away. 10% of all deposits within the US. Thinks there will be a lot more M&A and so they will do well. Great card business. Sold off non-core assets. Management has done a great job.

J.P. Morgan (JPM-N) or Bank of America (BAC-N)? He is more familiar with J.P. Morgan, so that would be the one he would pick.

This bank would love to be able to have a dividend right now, but are still paying the debts back from the financial crisis and paying what they have to pay to the regulators. Thinks they will eventually be allowed to. There is some good earnings leverage here. This has had a pretty decent run. He has taken a little bit of money off the table.

One of the banks that came out with that very large deal with the US government, paying off a bunch of the charges against it. Sees any of the banks that cleaned out their lawsuits with the US government as generating capital, getting back to more normalized dividend levels with an opportunity to buy back their shares. If housing really starts to recover in the US and the mortgage market starts to recover, they might actually start to do some lending. Dividend yield of 1.16%.

Doesn’t own any banks and is not a huge fan, but would probably prefer US banks to Canadian ones. This is an alright Hold. Had a decent recovery here. Relatively low dividends, but are being allowed now to pay out more, as the balance sheets have recovered. He is still a bit cautious, and would probably Buy on weakness.

Bank of America (BAC-N) or AT&T (T-N)? When you are valuing stocks, you have to look at the long-term free cash flow that a company can generate. In the short term, you are probably better with AT&T. It depends on what you want in the stock. AT&T will be much more stable, and he would prefer it because he is much more cautious on banks in the short term. However, on a 10 year term, you would probably make more money on this one.

She can see this higher in 12 months. A lot of similar types of stocks trade together, so you wouldn’t see much of a difference between this and Citigroup (C-N). The stock is trading at a considerable discount to BV. Things are improving. They are rationalizing their asset base, and are really working towards those ROE’s that everybody would like to see. When they are able to return their capital to shareholders, as she expects they will, ROE’s will automatically get better. She expects it to go much higher from here.

Trading below 1X BV at .82. Good value here.