Bank of America (BAC)

This one just came out of the blue (his strategy) last week. His model price is $19.17, a 15% upside. The market is saying that they finally believe in its balance sheet. They have $2 trillion in assets, so it is very important that the market gives it’s A-OK.

The jury is still out. Ultimately the too-big-fail-banks will have challenges. There will be big run ups and then pullbacks. You want to buy them on pullbacks. It will be with more volatility than in the past couple of years.

Generally speaking he likes the US financials. Prefers Citigroup (C-N) and J P Morgan (JPM-N) as well as Wells Fargo (WFC-N). They are all trading at discounts to where they should be. This one is trading below Book Value, which is pretty cheap, compared to where it should be. There is a lot of regulatory noise around larger banks. Once we get past those stages, the banks should continue to do well.

The banking sector in general historically has always been a pretty good place to make some money, but after the 08-09 downturn the one big thing that has changed is the amount of underlying equity capital required to support these businesses. Because of that, the return on equity is going to be much lower than it has been historically. Feels the recovery out of some of these banks is not going to be as good as some people expect. The government is going to let this bank start increasing dividends, but he prefers something like an Element Financial (EFN-T) that has a much more established and aggressive growth path in front of them. It is also cheaper and better valued.

Very cheap, but the key is paying all their debt from the financial crisis. We don’t know if they have done this as a fact. However, most of the financial burden is behind them and they can move on now. Feels there is reasonable upside to this company. However, they are not the best operator. He looks at this as a middle-of-the-road company but one that you can play.

Trading at 85% of tangible BV. Seem to be doing a better job and things are improving. The big litigation seems to be out of the way. A good sector to be in and this one should do well over the next few years.

As they make more profit, the government will continue to take a little bit of money off them. A change in government might change that. These big money center banks will continue to grow. Get the US banks on the downside and ride them up. This one is a bit risky for him, however.

The outlook for this is fairly positive. They have had everything but the kitchen sink thrown at them, in terms of fines and penalties and recovery of the financial crisis several years ago. Trading at 10-11 times earnings and paying a fairly decent yield. He prefers the Canadian banks.

Feels they are out of the penalty box. This could be a pretty good stock from here.

There is really no catalyst. Loan growth is picking up a little bit, but margins and the net interest margin, because of the flat yield curve, just isn’t there. They keep getting fined and you wonder when it is going to end. He has been looking at this, but just hasn’t pulled the trigger. There will be a time in the cycle when banks will start to do well and there will be some good upside. His choice in banks, after doing his research, is more in Citigroup (C-N) because they are more behind the curve which gives him more opportunity.

Wells Fargo is the only US banks she holds. BAC had credit quality issues, miscalculated capital ratios and Fed had to tell them they could not buy back stock. She prefers Wells, not BAC, where the dividend is minimal.

The Up trendline, which has been in place since 2012, seems to be breaking down and seems to be consolidating. Technically it is reasonably safe. There are other stocks that he would rather be in, but this is not a disaster story.

(Market Call Minute) Money center banks are the way to go.

Does not make the cut for him. The earnings profile is too volatile for him. But it is a very inexpensive stock. The sensitivity is the yield curve. They don’t make as much margin as they should. He also sees a heck of an M&A cycle. He would continue to hold this. 3-5 years it should be a pretty nice performer.

Paying a $17 billion fine which actually pushes the stock higher. Only $9 billion is in cash. This is not the big issue. The issue is that they are finishing off with all these huge regulatory issues. The fact that they are able to increase their dividend is a sign that the Fed is much more comfortable with their balance sheet. Likes this company because the regional and global economies are recovering. Banks do well in a global recovery. This bank is very leveraged to the retail business in the US. Trading at 0.7X Book. Reasonable dividend yield. Expects their capital ratios are going to explode over the next little while, and they will have to buy back more shares or increase their payout ratio.