The past month has not been kind to Bank of America (BAC). Shares of BofA have dropped 16.8% over the last month. The stock was priced at $13.65 just a month ago. The banking giant saw its shares drop another 3.3% to $11.36. Bank of America’s shares have been very weak over the past few weeks and the stock has been in a freefall.
Bank Stocks Continue Their Downward Spiral
October 14, 2010 By 2 Comments
Today, has been a rough day for economic news. Things are looking bad on the mortgage front as foreclosures increased during the 3rd quarter. This is despite interest rates dropping to 4.19%. Applications for jobless benefits surged to 462,000. Credit default swaps are widening again as fears abound that banks may be on the hook as more residential mortgages go into default. Despite all of the negative data, I am going to use the current weakness to add to my positions in the following stocks.
Recent Buys
April 23, 2010 By Leave a Comment
I picked up additional shares of Bank of America (BAC). I still like the banking giant despite potential financial regulations. Earnings may not be as robust as they were previously but banks will be more financially sound. As stated in previous posts, I believe that the Merrill Lynch and Countrywide acquisitions will increase top line earnings over the long run.
Bank of America Sells Stock
May 19, 2009 By Leave a Comment
Bank of America (BAC) was able to raise capital to help strengthen its liquidity. The bank giant was able to raise 13.47 billion in a relatively easy fashion. There was great demand for BOA shares as the company sold 1.25 billion shares without a hitch. I have to admit that this stock market rally has lasted a whole lot longer then I originally expected. I don’t know how much more steam this rally but it appears that momentum has been driving the market higher day after day. At some point I still expect a significant pullback. Investors will realize that all of these equity offerings will be dilutive to existing shareholders and toxic debt will impair company earnings for the near future.
Are Bank Earnings Really Better Than Expected?
April 20, 2009 By Leave a Comment
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.
Financial Stocks
January 28, 2009 By 1 Comment
Sold 750 shares of XLF at $10.10 for a 15% gain. There was a tremendous run up in XLF today and I wanted to take some profits. Only made $1500 but in this market I will take it. I still hold almost 400 shares but I didn’t want to be greedy.
Sold 350 shares of Bank of America today. The stock has been on a run from the $5.70 level that I bought it at. I still have shares in my long term portfolio.
Financials Move Higher
January 21, 2009 By 1 Comment
Financial stocks rebounded today. Ken Lewis, Bank of America CEO, bought 1.2 million in BOA stock. I had a feeling that the stock was oversold. The stock has popped up to $6.70 a share today. There could still be more pain ahead but I am comfortable with my current cost basis. JPMorgan CEO Jamie Dimon bought 11 million of JP Morgan stock today. I think that this illustrates that he thinks his company’s shares are undervalued. JPMorgan is one of my long term holds. I know that financials look terrible but long term there may be an opportunity. You just have to be selective and pick wisely.
Bank of America Analyst Downgrade
December 16, 2008 By Leave a Comment
Trimmed my position in Bank of America at 15. I still hold a small amount of shares in BAC but I think that a better entry point may arise over the next few weeks. An analyst at Friedman, Billings and Ramsey placed a $9 price target on BAC and thinks that they may need to raise even more capital. BAC has already received $25 billion from the Treasury and raised $10 billion in a stock offering. Recently, BAC issued an additional 8.1 billion in debt. I normally don’t pay too much attention to analysts opinion but for financial stocks I do. Financial stocks have such difficult balance sheets to understand that I do rely on analysts opinion. It appears that BAC is diluting the stock by borrowing so heavily. I figure that I can get in cheaper after the next capital raise.
Financial Stocks: Danger or Opportunity?
November 26, 2008 By 4 Comments
I am trying out a rather risky investment thesis by investing in financial stocks. I have begun to start building a position in the major financial stocks. I believe that the last few weeks have presented some good buying opportunities for financials. The three financial stocks that I have invested in are Wells Fargo, JP Morgan and Bank of America.
Wells Fargo is probably the best capitalized of the major banks. The recent addition of Wachovia has given Wells Fargo about 800 billion in deposits. Wells Fargo size is a major competitive advantage. They have a Tier 1 capital ratio and a solid balance sheet. Wells is currently the 2nd largest bank in the US in terms of market cap. Wells also has excellent management. Wells Fargo management have already accounted for a 74 billion dollar writedown of Wachovia’s total loan portfolio. This should reduce Wells exposure going forward. Wells stock has held up pretty well over the last few months compared to its peers. Wells has historically had a 22% profit margin and solid ROE of 18% over the last five years. It doesn’t hurt that Warren Buffett loves Wells Fargo and has owned it for years.
JP Morgan Chase should emerge from the financial crisis as the dominant player in the banking industry. JP Morgan got a steal with the acquisitions of Washington Mutual and Bear Stearns for well below their true value. JP Morgan has the largest deposit base of any bank in the country which gives it a strong capital base. JPM has solid management that has delivered an 18% profit margin over the past 5 years. The return on equity averaged 10.5%. I think this will increase in the future as Jamie Dimon and company realize the synergies of the Washington Mutual acquisition. JP Morgan currently sells well below its book value and pays a healthy dividend.
Bank of America is definitely the riskiest of the 3 banks. From its purchase of Countrywide just before the subprime crisis to its pending merger with Merrill Lynch, Bank of America has made some questionable moves. The Countrywide and Merrill Lynch deals that appeared cheap before now look severely overvalued. Bank of America’s shares have plummeted and this may provide an opportunity. The stock was selling for $10 recently which is well below its book value. Bank of America has historically averaged a 16% ROE and a 27% profit margin. I think that the Bank of America name is a major competitive advantage. Bank of America has a huge deposit base and the BOA name has significant goodwill. I think the Merrill Lynch acquisition will be a valuable brand for Bank of America long term. But I am not so sure about the Countrywide acquisition. Countrywide has a damaged brand name due to its heavy association with the subprime crisis. However, I do think with their ability to access capital and their strong brand name Bank of America will remain a viable entity.
These 3 stocks will probably continue to face difficult circumstances in 2009. I do think that over the long term these banks will benefit from the financial crisis and emerge with even greater market share and a stronger financial structure.
Can Citigroup regain its lost luster?
November 18, 2008 By 3 Comments
Citigroup announced that they would be laying off 53,000 workers yesterday. Citigroup has already laid off 23,000 employees earlier this year. Citi has lost 20 billion dollars over the past year and has had four straight quarterly earning losses. Citigroup is on its third CEO in the last year. Citigroup has watched its stock price decline to $8.00 per share and its market cap has shrank to 43 billion. Citigroup is also facing mounting losses from its mortgage, credit card portfolio and will likely need to raise additional capital. Citigroup is trying to return to profitability by selling off assets and implementing a number of cost cutting initiatives. This strategy will help Citigroup in the near term. But it does not solve the long term issues that plague Citigroup.
Beginning with the ill fated acquisition of the Travelers Group, Citigroup has struggled since the late 90′s to find its niche in the banking industry. Citigroup grew to prominence by making large acquisitions and through aggressive cost cutting. These tactics allowed Citigroup to flourish in the 90′s. The problem with relying on these methods to fuel growth is that eventually you run out of major acquisitions to make and costs can only be reduced for so long. This is the problem for Citigroup. They don’t seem to be exactly sure what kind of business they are. They have been trying to redefine their business model for the past 10 years. Is Citigroup’s main business consumer banking, investment banking, insurance or as a credit card issuer? Is Citi more focused on international growth or increasing their domestic presence in US banking? Can Citigroup be a smaller player and still survive among the banking giants?
Citigroup is now trying to find its place in the new financial landscape. Citigroup faces a much more challenging environment with Bank of America, JP Morgan, Wells Fargo and US Bancorp all aiming to become larger players in the diversified financial services industry. The failed merger with Wachovia would have helped Citigroup by significantly increasing their number of branches in the US. It would have also given them a foothold in the southeast region of the US. However, it would not have addressed the larger problem at Citigroup of no organic growth. Citigroup’s main focus should be on increasing profitability through organic growth and not acquisitions. Citigroup needs to maximize the earnings in the businesses that they already own.
Citigroup currently pays a dividend of 64 cents per share which amounts to a 6.7% yield. The dividend does not appear sustainable based upon the company’s weak balance sheet and deteriorating loan portfolio. Will Citigroup survive? Definitely. Citigroup is a company that has been deemed too big to fail. The Federal Government’s 25 billion dollar cash injection makes that a certainty. Citigroup will survive but the days of Citigroup as a thriving company in the financial services industry may be a distant memory.
