Buy Like Buffett

I started a position in AK Steel(AKS) at $23.60 for a short term trade.

I picked up additional shares of Bank of America(BAC) at $16.30 for my long term portfolio.

Investing AK Steel, Bank of America

I read an article today about how Bank of America has seen a rise in short interest. Traders are betting against the nation’s largest bank and expecting a decline in price over the short term. While this may be true I think that any weakness in the stock should be looked at as a buying opportunity. I have been buying more Bank of America(BAC) whenever the stock drops to the $15 range. Shorts may temporarily drive the stock lower but I would just look at this as an opportunity to purchase more shares at a cheaper price.

Over the next few quarters Bank of America will be taking billions in write-offs from its home loan portfolio, small business loans and its credit card division. The country’s largest mortgage lender has seen its earnings hurt by foreclosures and loan modifications. Bank of America’ has seen loans in its small business division rise to the high teens. BofA is the nation’s 2nd largest credit issuer and has seen defaults rise to the low teens. 2010 may be a rough year for the banking giant but 2011 and 2012 should be better. The stock trades at 20 times 2010 earnings but just nine times 2011’s estimated earnings. BofA is selling at just 1.3 times tangible book value and should earn close to $3 a share by 2012. While BofA is the riskiest of the three major banks(Bank of America, Wells Fargo, JPMorgan); I believe that the banking giant has the most upside potential as well.

Finance Bank of America, financials, JPMorgan Chase, short interest, stock, Wells Fargo

For the 1st time in a long time I am feeling better about my investment in Bank of America. Is the nation’s largest bank still troubled by delinquent mortgages payments? Definitely. Has the economy improved enough that the B of A can be sure that credit card charge offs are over? Definitely not. But it is a positive development that the banking giant is going to repay over 45 billion in government assistance from the TARP.

Bank of America will use 26 billion in cash and raised almost 20 billion dollars through the sale of stock and other securities in order to repay its loan from the government. The fact that the government is allowing Bank of America to repay the loan shows the Fed must believe that B of A has enough Tier 1 capital to survive the current economic downturn. Less then 10 months ago there were major concerns over if the 45 billion in government assistance was even enough. Today Bank of America is repaying the loan in full.

It is a smart move by Bank of America to access the improved capital markets for needed funds when the Dow is at its 52 week high. The repayment shows that B of A has been able to offset many of its losses with its strong earnings power. Repaying the TARP should allow B of A to generate more revenue in the coming years by not having to pay TARP dividends. The sooner that Bank of America can repay the TARP and remove all regulatory constraints; the quicker the return to normalized earnings.

Investing Bank of America

Here’s my take on each of the financial companies earnings:

Goldman Sachs

It was a great quarter for Goldman Sachs. The investment bank had huge gains from its trading operations and bond offering business. I know that everyone is saying buy Goldman right here and now but I wouldn’t buy the stock at its current levels. The stock is trading at $150 and I would like to know more about the investment bank’s business model will be going forward. Goldman appears to be taking great risks again. Will Goldman’s trading operations be as profitable quarter after quarter? 

JPMorgan Chase

JPMorgan Chase had a mixed earnings season. The banking giant saw its margins, trading and deposits go down. JPMorgan increased its loan loss reserves for the quarter as its loan portfolio saw increasing delinquencies. JP Morgan did have strong results from its commercial banking and asset management businesses. Analyst Dick Bove says “The reality is that this was a very bad quarter for JPMorgan Chase.” “Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable.”

Bank of America

B of A is my favorite bank because of the upside potential but it is also the bank with the greatest downside risk. Bank of America’s earnings were boosted by its sale of China Construction Bank Corp and its strong deposit base. But the nation’s largest bank is still facing rising charge offs from its commercial, residential and credit card loans. CEO Ken Lewis stated that “Profitability in the second half of the year will be much tougher than the first half.” He attributed much of the bank’s success to capital gains.

Citigroup

I think that Citigroup still faces the same problems that have plagued the company for years. Citi does not have core businesses that make money. If you factor out the sale of Smith Barney to Morgan Stanley, Citi would have lost 2.4 billion in the second quarter. While JPMorgan Chase, Goldman Sachs and Bank of America were all able to generate substantial gains from trading operations, Citi was unable to do the same. The promising news for Citi is that CEO Vikram Pandit stated that troubled asset write downs “may be largely behind us.”  This may be true but I still wouldn’t buy Citi even at $2 per share.

Short Term Outlook for 2009

The banking giants were able to post decent results for the second quarter but many of these gains were attributable to capital gains. It is unlikely that these one time gains will be duplicated in coming quarters. Loan losses will continue to grow as unemployment and income levels continue to drop.

Long Term Outlook

When unemployment moderates and the economy rebounds, the earnings power of these mega banks will be realized.

Finance Bank of America, Citigroup, financials, Goldman Sachs, JPMorgan Chase

Today was a weird day in the market. The Dow opened positive, turned negative and then soared almost 200 points to end the day. The market was fueled by upgrades by analysts to financial stocks Goldman Sachs, Bank of America and JP Morgan. The interesting part is that these stocks have seen extreme run ups from their March lows. Wasn’t the time to upgrade Goldman Sachs to a buy when it was trading below $100? Or Bank of America when it was trading in the single digits? Analysts are often late to the party and miss big moves in individual stocks. They will rate a stock a “buy” after it has had a huge move to the upside. Or rate a stock a “sell” after the stock has dropped precipitously. It appears that investors are once again chasing stocks based on momentum plays. I find it interesting that as retail investors are buying, insiders are selling shares. I believe that these companies are good long term buys but i would load up on shares at cheaper levels.

Investing Bank of America, Goldman Sachs, JPMorgan Chase

I was reading 2 different analyst opinions of Bank of America on CNBC.com. One analyst stated that Bank of America had seen a tremendous run up and would languish between $5 and $10 for the next few years. Another analyst stated that he thinks that BOA’s stock will double over the next year and triple over the next 2 years. Both of these analysts cannot be correct So who is right?

Noted analyst Dick Bove stated that Bank of America’s can earn $3 per share in a normalized earnings environment. I believe that Bove is correct with his assessment of the earnings power of Bank of America. Bank of America now owns the largest mortgage provider in Countrywide and one of the premier brokerage firms in Merrill Lynch. These brands should generate significant revenue when the economy rebounds. But I do think that Bove’s timing may be off. The key question is when will Bank of America operate in a normalized earnings environment?

I think it will take much longer then a year or two for Bank of America to see normalized earnings. The economy has not yet bottomed and Bank of America is still facing issues with rising credit card loan delinquencies and mortgage foreclosures. The banking giant may face an additional $50 billion in losses over the next few years. B of A also still has to repay $45 billion in TARP commitments. As much of B of A says that it wants to pay back the TARP money as soon as possible; I think it says a lot that the bank did not repay the money when other financial institutions did. Bank of America’s 33 billion dollar equity offering will dilute earnings for the foreseeable future.

While I don’t believe that Bank of America will languish in the single digits for years; I do think that the stock will take longer then 2 years to realize the price appreciation that some analysts are expecting. It appears that while analysts were way too pessimistic when it appeared that the great depression 2 was occurring; analysts are way too optimistic now that the economy has not fallen off a cliff.

Finance Bank of America

I have read a few articles late tonight that state that government stress tests show that Bank of America and Citigroup will need to raise billions more in capital. These 2 banks have already received almost 100 billion in funds through the government’s TARP program. These findings illustrate a larger problem facing US banks. IF B of A and Citi need more funds then why doesn’t PNC, Wells Fargo, US Bancorp or Suntrust need more capital? The problem in the banking system is that there is a perpetual cycle. Increases in unemployment lead to greater mortgage delinquencies which result in a decrease in housing prices. This leads to larger asset write downs which require banks to raise more capital. Until unemployment stops rising it will be impossible to predict how much capital banks need to survive this economic downturn. It is clear now that in September of 2008 that the US banking system was insolvent and without the major capital injections from the Treasury; the system would have collapsed.

Finance Bank of America, Citigroup, PNC, US Bancorp

As expected financial stocks soared today based upon a government plan to buy toxic assets from financial companies. Bank of America (BAC) is up to $7.80 a share. Just two weeks ago the stock was at $2.53 amid fears of nationalization.  I still believe that Ken Lewis is in trouble but Bank of America will be okay as long as the stock can stay above $5. B of A  has some very profitable businesses and should post solid numbers in an economic recovery. JPMorgan Chase rose $5 today to $28.86 per share. Wells Fargo (WFC) jumped 24% to rise above $17 for the first time in awhile. Even though these stocks have rallied over the past two weeks, many of them are still down over 80% over the past year. While I wouldn’t jump in and buy a ton of shares at their current prices; I would be a buyer on any pullback of 10% or more. I have been buying shares of Wells Fargo monthly.

Investing Bank of America, JPMorgan, Wells Fargo

The US Treasury is finally set to unveil its plan to buy toxic assets from banks. The public private partnership is expected to buy up to 1 trillion dollars in bank assets. The government hopes to entice private investors with guarantees and offering low interest loans to remove toxic assets from bank balance sheets. The government will share the risk if the toxic assets continue to decline in value. If these assets are removed from bank balance sheets without additional government ownership then the major banks should see their share prices increase substantially.

The Public-Private Investment Program should benefit Bank of America, Citigroup, JPMorgan Chase and Wells Fargo the most. These are 4 of the largest banks in the country and have balance sheets riddled with toxic assets. The 1 trillion dollar plan should help alleviate some of the problems facing these banking giants. All of the assets that are currently deemed as bad assets are not such and will have some value in the future. If the government holds these assets until the economy improves then the stock prices of the major banks should rise over a time. It may take a few years to see a significant rebound in price but with a plan finally in place the financial sector should improve. I have been a buyer of Wells Fargo, Bank of America and JPMorgan Chase at these distressed prices.

I don’t know if 1 trillion is enough to remove all of the bad assets from the balance sheets of banks but it is a good start.

Investing Bank of America, Citigroup, JPMorgan, Wells Fargo

Bank of America (BAC) dropped to the $2.50 level today and has a market cap below 15 billion. There is much speculation that the bank will be taken over by the government and nationalized. If Bank of America is nationalized stockholders and debt holders would essentially be wiped out. This weekend will be very telling for Bank of America. I would expect that that government would be in talks with Bank of America about a possible nationalization plan. Even if Bank of America is able to remain private Ken Lewis is a goner. He won’t be able to survive this. There will be various lawsuits from shareholders and debt holders and it’s unlikely that investors have any confidence in his leadership after the Merrill Lynch acquisition. He could have survived the Countrywide purchase but the Merrill Lynch acquisition has likely done him in. He knew about the toxic assets at Merrill and still went ahead with the deal. He may be held liable for not disclosing this information to shareholders. There are also reports that Lewis is losing the confidence of senior management.

Citigroup (C) is in an even worse situation. Citigroup has declined to $1.61 and its market cap is now below 10 billion. This is unbelievable. Citi does not have the deposit base of Bank of America and is trying to sell of assets in a depressed economy. I don’t see anyway that Citigroup can stay a private firm. If Citi breaks the $1 level the former banking giant will have to be nationalized. Pandit may need to go as well. Although he didn’t create all of the Citi’s problems, Pandit may have to go to boost investor confidence in the stock.

Finance Bank of America, Citigroup, Ken Lewis