Sunday, August 12, 2012

Is It Time To Buy The Banks?

A couple of weeks ago, I was watching CNBC early in the morning when news broke of Warren Buffett's investment in Bank of America (BAC). The stock popped instantly, rising to about $8.80 at one point. At this point, anyone who believed that the stock was ready to run seemed justified. But that day did not end well. Bank of America finished up 10%, which was actually quite impressive being that the Dow finished down 170. The question pops up again now as B of A is back to its pre-Buffett investment price. Is now the time to buy the banks? I guess it depends on your investment horizon.

At $7.00, Bank of America could be a steal over a longer time period, if they can solve their problems. Certainly, Buffett's investment has improved confidence. They also cut 30,000 jobs and have shaken up their top management. But they need to get their mortgage mess solved, and sooner rather than later. It's like a hole in a roof that you never get around to fixing. The longer you wait, the larger the hole gets, with the more water coming in that you'll have to deal with. Remember, during and after the 2008 crisis this stock went from $2.50 to $20, so it can rebound nicely when things are good. And right now they aren't. Long term investors may find a good value here, but short term people might be able to get it cheaper. Just think about this. The stock dropped from $11 to $6 in two months. It could lose 10% in a day easily. But on the flip side, just imagine if it recovers to $10 at some point within the next year. That's a 40% gain from current levels, a nice reward to those that would be willing to take the risk.

While Bank of America is most likely considered a growth play in the industry, JPMorgan (JPM) and PNC would be your best value plays. Both pay close to 3% a year in dividends, which right now is approaching 30-Year Treasury yields. PNC has held up a little better recently, and would be in a good position to take market share away from a struggling B of A. You could make the same case for Wells Fargo (WFC). I'm still not into mobile banking yet, but if you are, they just rolled out their Virtual Wallet for Android. The Virtual Wallet program has been a success and has recently seen additions jump to 10,000 a week from 6,000 due to more students joining the program. JPMorgan recently lowered some of its revenue expectations, but I think that most people have been expecting them to do so, and it's probably already priced into the stock. It will be interesting to see if anyone comes out and lowers their price target on these lowered expectations. These two financials are good value plays that offer the potential for some price appreciation, but if you are a trader they probably aren't the best names. I would stick with B of A.

Morgan Stanley (MS) announced Friday that Chairman John Mack will step down at the end of the year, as expected. Some might see this as bad news, but the stock was up over 4.5% Friday. I never hear that much about Morgan Stanley anymore, although I did hear that Citigroup (C) lowered bank estimates last week. Their quarterly estimate on MS is $0.25, about half of the street's current estimate of $0.45. In the same note, Citi said that earnings from trading and investment banking will be a bit lower, so you would expect Goldman Sachs (GS) to be hit the worst. Citi cut their estimate from $2.70 to $0.10. Ouch. I'd stay away from these two names. For now.

AIG and Citigroup have done well since those reverse stock splits, right? Not so much. I've never been a fan of those moves, but they had to be done. And with the government still having AIG shares and I believe Citigroup warrants as well, you might want to stay away from these names.

I wrote this article on Wednesday, so it needs a little updating here for Thursday's action. UBS announced a rogue trader lost more than $2 billion, and now blame is spreading throughout the firm. Shares are down 10%. Financials are up a bit today as major central banks decided on coordinated intervention to prevent a liquidity crisis. A short term positive, but I think it speaks to how bad the situation is.

If you are a long-term investor, I think you could get into the banks at these levels and be happy in a couple of years. But if you are looking to trade them on a short-term basis, I would stay away for now. Let's see what happens in Europe over the next month and see how bad this quarters' earnings turn out. I think we have some more pain ahead in the next few months, and that's why I'm positioned the way I am. Although if Bank of America heads to $6 again or Goldman approaches $90, I may start to take another look.

Disclosure: I am long FAZ.

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