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January 20, 2013 – Comments (19) | RELATED TICKERS: BAC , C , WFC

As you may recall - I can't find the blog post myself - two years ago, maybe a little more, I acquired a small position, what I think of as a 'half-stake', in both BAC and C, two bank stocks that had taken a colossal whooping during the subprime crisis.  At the time WFC and JPM were trading at small premiums and I decided that, BAC and C being too big to fail, and being valued lower than other issues that were also too big to fail, I'd take a flyer and wait for banks to reach parity again when the economy took off.

I stated publically that I would not sell these positions until Jan 2013, no matter what happened.   At the time I was expecting (guessing) Bernanke to begin raising rates in November 2011 following a housing-driven recovery of the broad economy; and I was expecting GDP growth and monetary inflation to pick up in 2012.

Well, none of those theses came true.  What did happen: both stocks began issuing a tiny dividend.  BAC got hit with a $6b or so fine for originating mortgages improperly, which was a kick in the teeth but better than most analysts were expecting, as their ongoing liability for this appears to have been erased.  Shareholder equity is still nil and the companies are still having trouble executing in this low rate environment.  JPM and WFC have both significantly outperformed and I certainly regret not including them in my basket of distressed bank stocks, as nearly every commentor told me I ought to.

However, stock prices of B and C, which at their nadir were 52% below my entry point, have rebounded, coming to around 11-14% off my entry point in the past couple of weeks.  And there has been a significant housing recovery, such that my stake in ITB (a housing-oriented sector ETF), held over the same time period, has pulled a one bagger.

Chase's reputation for abysmal customer service is legendary - I am one of its victims, will never bank with them again - but I don't hear much better about BAC or C.  I bank with Wells, myself, and they take decent care of me.(although I thought it was odd they wouldn't originate my home loan, but bought it about a month after someone else originated it.)  I hear bad-to-OK things about C's customer service and the last time I walked into a BAC to try to open an account I walked out without being helped after speaking to two tellers and a new accounts officer, none of whom appeared to understand English.

I think the outlook for retail banking remains bleak, but I am not inclined to sell my shares here because I think things are getting marginally less bleak and I still believe an unexpected rate hike - it will have to be unexpected - looms on the horizon.  The one step I am considering is adding some WFC to this basket.

Your thoughts, my Foolish™ gentle readers? 

 

19 Comments – Post Your Own

#1) On January 20, 2013 at 1:17 PM, ikkyu2 (99.38) wrote:

Disclosure:  As I think is clear, long BAC and C, no position in WFC but thinking about initiating one (as if my tiny movements, or this blog, could move WFC's stock price!  Ridiculous.)

Another disclosure:  A prior draft of this post was lost when a fat-fingered trackpad click caused me to accidentally navigate away from the page.  CAPS needs to take a pointer from some other blogging platforms: and retain half-finished blog entries when this occurs.

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#2) On January 20, 2013 at 1:50 PM, HarryCarysGhost (99.76) wrote:

Was this the blog you were looking for?

http://caps.fool.com/Blogs/all-in/516669

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#3) On January 20, 2013 at 2:33 PM, rd80 (98.66) wrote:

I haven't looked at BAC in quite a while, but even tho' it's still trading below book value, last year's share price run has removed a lot of the cheapness.  If I owned it, I think I'd hang on to see if there's another leg up - but would also be worried that it may have topped.  To hold it, I'd want some confidence that the losses from Countrywide - quite possibly the stupidest acquistion in all of history - were finally in the rear view.  They might be, but I haven't had time to follow it lately.

I used to own some Citi, but ditched it when Pandit resigned without notice.  Quite possibly nothing there, but don't like surprises like that.  I felt there were better places to put my money and rolled that stake in to Wells.

WFC is one of my core holdings.  IMHO, it's the best managed big bank in the US.  I added a little to my Roth position last week and I'd rate the current price as fairly valued, maybe the high end of fairly valued. A bit ashamed to say I haven't been through the latest earnings report yet.  The last article I wrote on WFC was July of last year and I think most of the points are still valid.

Bottom line, I think Wells is worth its higher multiples compared to C and BAC.

Disclosure:  Long WFC and am a Wells Fargo customer - love the 100 free trades a year with the brokerage.  The comments above are my opinion and should not be considered investment advice.

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#4) On January 20, 2013 at 3:11 PM, awallejr (82.72) wrote:

I have no confidence in either at this point.  If you undo C's reverse split it is still trading under $5.  C doesn't seem to want to get too involved with mortgage underwriting.  If you are going to hold a $41 dollar bank stock you might as well switch it out to JPM or WFC.

As for BAC I was tempted to spec in it when Buffett did in the $7ish range but I chose other things.  A nice run up since then but I suspect that bank has more pain to go through.

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#5) On January 20, 2013 at 3:15 PM, Mega (99.95) wrote:

I bought C at 0.5x tangible book and just sold at 0.8x tangible book. There's probably more upside, but as Bernard Baruch said, "I made my money by selling too soon."

I don't particularly like banks - in my opinion insurers are a better deal right now.

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#6) On January 20, 2013 at 4:58 PM, Mega (99.95) wrote:

In addition to WFC and JPM, it may be a good idea to check out PNC and DFS.

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#7) On January 20, 2013 at 7:24 PM, Valyooo (99.63) wrote:

Using book value for banks is garbage.  Nobody knows the value of the subprime crap still on those books.

 

Banks should be valued based on potential dividend potential and nothing else IMO.  As it stand, JPM is the of the bunch.  Cheapest P/E, best yield, best retail banking.

 

I used to work at Chase, and I have friends at other banks, and this is what I know:

 

Chase has by far the biggest pipeline of technological improvements coming soon to retail.  And they realize people think their customer service is awful, so they are very customer oriented now.  And they are expanding, while others are downsizing


Citi encourages employees not to answer the phones so they dont have to deal with customers

BAC is just the worst.  They always say their computers are down, the website sucks, etc

 

JPM has the best CEO, the best traders, the best retail segment, the highest interest margins, the best yield. and cheapest P/E.  It is the only bank I would buy, besides maybe WFC, simply because they have the highest leverage toward a continued housing recovery which IMO, will not happen.

 I bought JPM at $36 last year, and sold at $43 5 months later or so.  If I still invested, I would be long JPM.  Now I only trade derivatives, but I would still consider a strong stock like JPM 

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#8) On January 20, 2013 at 8:00 PM, Mega (99.95) wrote:

http://en.wikipedia.org/wiki/Overconfidence_effect

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#9) On January 20, 2013 at 9:49 PM, ikkyu2 (99.38) wrote:

HarryCarysGhost, you found the blog post I was thinking of.  I laughed when I read Valyoo's first comment on it.  You've come a long way, baby.  Maybe not far enough!

MegaShort, I always learn something from you.  Thanks. 

 

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#10) On January 20, 2013 at 9:51 PM, ikkyu2 (99.38) wrote:

Russ, I always appreciate your opinions and I think your article about WFC convinced me even more.  I believe that WFC is also a core Buffett holding, among all the other things it has going for it.

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#11) On January 21, 2013 at 11:59 AM, betnman (27.98) wrote:

WFC is for me, bar-none, the best big bank out there. They are a conservatively run institution (didn't get caught up in the whole sub-prime crisis) that is opportunistic (growing through the acquisition of regional banks) putting them in the best position for future growth. I am an ex-employee of the bank, having spent 6+ years as a commercial real estate lender in the Northeast -- and I can say that their integration of all-things Wachovia into their systems went about as flawlessly as can be expected.

I do feel like their stock price is somewhat played out in the $35 range, so I'm focusing more on the regional banks (PNC, BB&T) as near-term investments, but I still think that in the long-run, WFC's best days are ahead of it. 

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#12) On January 22, 2013 at 9:43 AM, Valyooo (99.63) wrote:

Megashort, what does overconfidence have to do with anything?  There is a reason I no longer work at Chase

 

Yeah, BAC used to be my biggest holding, they were so damn cheap.  When they hit $5 i loaded up and sold around 7 or 8.  I learned never to touch a piece of crap like that again.

You can't stay married to a stock

 

PNC is a very good bank as well

 

I wonder if that C earnings play still works....doubt it 

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#13) On January 22, 2013 at 12:44 PM, Mega (99.95) wrote:

Valyooo, the 4 largest banks employ nearly 1 billion people. Given that scale, I think you are overly confident about the value of your anecdotal evidence concerning technology and customer service.

Also, Wells has a lower cost deposit base and higher ROA than JPMorgan. John Stumpf has been more successful than Jamie Dimon. Book value is important for banks, and subprime debt is clearly identified in their financial statements and declining.

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#14) On January 22, 2013 at 12:59 PM, Mega (99.95) wrote:

"John Stumpf has been more successful than Jamie Dimon."

That's debatable obviously. I'll call it a tie.

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#15) On January 22, 2013 at 5:10 PM, Valyooo (99.63) wrote:

Subprime is not clearly identified on the books.  I know plenty of people in the banking industry high up the ladder on the corporate side, and they tell me that the banks do not reflect the true value of those loans still.

 

I am not overly confident in just my anecdotal evidence.  everybody in my family and many of my friends are in banking.  I speak with all of them and what I have said is a culmination of thatt

 

Ask anybody on wall street who is the most respected banker.

 

Jpm has a better dividend, better chart, and a higger market cap than wfc 

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#16) On January 23, 2013 at 11:13 AM, ikkyu2 (99.38) wrote:

Megashort: ".. the 4 largest banks employ nearly 1 billion people."

I am finding this statistic a little difficult to swallow, unless you are using some widely expanded definition of 'employment' (such as counting all folks who wouldn't have a job without the money multiplier/fractional reserve lending).  Could you say more about this, or maybe point me at some statistics or figures?  In my travels throughout the world I have not found that 1 in 6 humans were bank employees; if the elderly and children are excluded, your figure would suggest that almost 1 in 4 working adults now alive work for one of the 4 largest banks, and I don't think that's right.  

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#17) On January 24, 2013 at 10:56 PM, Valyooo (99.63) wrote:

That is not even close to accurate...he probably meant 1 million

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#18) On January 24, 2013 at 10:56 PM, Valyooo (99.63) wrote:

That is not even close to accurate...he probably meant 1 million

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#19) On January 25, 2013 at 11:32 AM, ikkyu2 (99.38) wrote:

A typo makes the most sense, Valyooo, but I was hoping for a more interesting explanation.  I have found that MegaShort always makes a comment that is educational or at least thought-provoking in some way.

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