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
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
Bank of America (BAC) announced a profit of 4.2 billion dollars for the 1st quarter which surpassed analysts expectations. Analysts expectations were for a profit in the millions but not the billions. This is the latest bank to report earnings that exceeded Wall Street’s low expectations. Wells Fargo, Citigroup, JPMorgan Chase and Goldman Sachs all had earnings that surprised Wall Street. These inflated earnings have not been based on increased revenue but on acquisitions, change in mark to market accounting rules and lower interest rates. The problem for banks is that loan losses continue to rise and credit markets continue to weaken. I still don’t believe that the bottom is in for all financial firms as charge offs and credit losses will continue to rise. Banks also will not have government aid in future quarters to help prop up earnings. It appears that banks will need to raise more capital to deal with loan losses in coming quarters. The easiest way for banks to raise capital is by selling additional shares. The negative to this is that this will dilute existing shareholders’ equity.
Finance
BAC, JPMorgan Chase, Wells Fargo
