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TMFAleph1 (94.91)

Time to Buy the Banks, but Which Banks to Buy?

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September 08, 2008 – Comments (12) | RELATED TICKERS: WFC , BBT , C

The much anticipated (scoff!) follow-up article to Is It Time to Buy the Banks? is now available on The Motley Fool: Time to Buy the Banks, But which Banks to Buy?

Comments are welcome! Please leave them below. (I try to respond to all those that are constructive.)

 Alex Dumortier (XMFMarathonMan)

12 Comments – Post Your Own

#1) On September 08, 2008 at 11:51 AM, DemonDoug (81.27) wrote:

buy PM.  yielding 4%, much more stable and better than any bank better, and heck cigarettes are used as currency around the world.  if you mean money exchanging institutions, you'd be better of going to vegas and betting on your favorite color, red or black.

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#2) On September 08, 2008 at 12:28 PM, dexion10 (27.48) wrote:

dude you've got it backwards... you don't buy the banks on the rips when the market takes them 10% higher.

You are a day late man.

There will be time to buy the banks but the good banks are not terribly cheap and the maginal ones that are "cheap" have un-resolved issues that weren't fixed today by the fannie mae "plan"

 

for example banks that issued construction loans will soon become land owners and that land is worth 20% to 80% less than what they loaned against it...  on average it's probably worth close to 60% nationally.

Next credit card issuers like BAC JPM are due to get hit hard by rising defaults too!

would you really buy banks with book values that are still inflated and pay 2x book multiples.

 

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#3) On September 08, 2008 at 12:38 PM, awallejr (85.54) wrote:

I've been debating whether to sell my BAC shares into this rally since I am up a pretty penny, having bought a bunch when they were pummeled down to 18. Will sell some I suppose, but I really want to just hold onto the company long term, and long term I see this eventually in the 50s several years from now with it still paying a growing dividend. Same thing with ACAS, which I really do like alot (I think of it as the FRO of financials, every year they have been returning nice dividends to its shareholders, even in the supposedly "bad" years like now).

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#4) On September 08, 2008 at 1:10 PM, leohaas (31.85) wrote:

My 2 cents:

The whole analysis is based on P/B. Until the credit crisis started, that was the accepted measure when valuing banks. The crisis has changed that dramatically: banks have been writing assets off and at this point we do not know when they are done doing that. As a result, the B in the analysis is unknown.

Buying banks should be postponed until we see 2 quarters without significant write-offs. Anyone buying before that is speculating.

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#5) On September 08, 2008 at 2:12 PM, kirkydu (93.74) wrote:

Folks, it's not time to buy the banks.  When they drop to multi-cycle lows that's when it will be time.  JPM could easily touch 20, and maybe could to single digits if the toxic waste they inherited is a bigger problem than anticipated.  BAC could easily touch 20 as well, and possibly teens.  The list goes on and on.  The banks just aren't going to make enough money for years, at least three and probably 4 or 5, to support growing pps.  If they were smarter, they'd ditch their dividends for a year or two and get back in shape. 

The simple facts are that credit expansion won't occur again until consumers have the income/debt ratios that are appropriate historically to borrow again.  That will take several years if we do things right.

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#6) On September 08, 2008 at 2:13 PM, kirkydu (93.74) wrote:

Folks, it's not time to buy the banks.  When they drop to multi-cycle lows that's when it will be time.  JPM could easily touch 20, and maybe could to single digits if the toxic waste they inherited is a bigger problem than anticipated.  BAC could easily touch 20 as well, and possibly teens.  The list goes on and on.  The banks just aren't going to make enough money for years, at least three and probably 4 or 5, to support growing pps.  If they were smarter, they'd ditch their dividends for a year or two and get back in shape. 

The simple facts are that credit expansion won't occur again until consumers have the income/debt ratios that are appropriate historically to borrow again.  That will take several years if we do things right.

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#7) On September 08, 2008 at 5:37 PM, Tastylunch (29.20) wrote:

As usual Leohaas has it right.

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#8) On September 08, 2008 at 6:15 PM, awallejr (85.54) wrote:

Thing is BAC did hit 18 in July, all the financials got pummeled hard then. For the financials to go back down to those lows you would need a serious drop in the market from here.  If the Fed didn't step in on Fnm and Fre, that could have happened.  But the Fed's action really is a MAJOR event which hopefully creates the bottom.

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#9) On September 08, 2008 at 9:09 PM, TMFAleph1 (94.91) wrote:

leohaas,

Thanks for your comment which I'd like to address. As you can see from Buffett's quote at the end of my article (which I reproduce below), this crisis is not exceptional in highlighting the limits of the information content of a bank's book value. However, your point is well taken in that the circumstances that contributed to depressed bank valuations in the fourth quarter of 1994 were different from the ones that are currently prevailing. I sure wish the data in Capital IQ went back to 1990/ 1991 -- it would have been very interesting to see how low bank valuations dipped during what was a bona fide credit crisis.

 "Our purchases of Wells Fargo ... were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted."

(Warren Buffett, 1990 Letter to Berkshire Hathaway Shareholders)

 Alex Dumortier (XMFMarathonMan)

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#10) On September 08, 2008 at 9:23 PM, rd80 (98.26) wrote:

leohaas is exactly right - you cannot come up with a believable P/B value for any of these things right now because no one has a clue what their balance sheets are really worth.  But, if you wait until you can value them, the train will probably have left the station.  I do think most of the financials bottomed in mid-July, but that leaves a lot of room to back and fill without breaking those lows.  And I could be wrong about the lows being behind us.

If you want exposure to financials, do some research and pick companies that have some kind of competitive advantage and/or are in a position to take advantage of the fire sales that are inevitably coming. 

I'd be very cautious chasing any bank stock in this market.  However, this is a good time to investigate some of these stocks and prepare a shopping list.  The biggest red flag is any company that's needed to raise capital.  As far as I know, Merrill is the ONLY financial that hasn't gone on to trade below the secondary issue price soon after a capital raise was announced.  And that one is still early.

There is a lot of upside to the 'bad' stocks in Alex' list, but if and only if they survive without needing to dilute shareholders further. Those are long odds.

I own WFC from Alex' 'good bank' list.  I base the holding on a good dividend that looks safe, an ability to pick up assets and acquisitions without many competing buyers, and I think they'll own the mortgage market when it turns around - some day.   I haven't done any research on BB&T or M&T from Alex' good bank list so can't comment on them.

IMHO, anything other than a good bank is gambling and maybe any bank is gambling.  I define 'good bank' as hasn't needed to raise capital and has enough earnings to cover the dividend with some cushion.  USB, JPM and maybe BAC probably fit the 'good bank' profile, but JPM and BAC have their hands full digesting Bear Stearns and Countrywide.

This rally in financials may play out for a while, but it's a very safe bet that there will be some news that hammers financials before too much longer.  If you want to buy, that's the signal to start or add to a position.  There is no need to rush or to buy all at once.  If you're comfortable with a little more risk, the market has been pretty good for trading around a position.

I'll get off my soapbox now.

Fool on! 

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#11) On September 10, 2008 at 8:06 PM, TMFAleph1 (94.91) wrote:

dexion10,

Thanks for your comment. Even though my blog post dates from Monday, when bank stocks rallied heavily on the news of the GSE bailout, the article actually went up the previous Friday.

I'm not trying to time the market with my article; the point was to produce some evidence that although banks have rallied strongly since mid-July, the disciplined lenders among them may still represent compelling values at their current levels.

Finally, the fact that book values may be inflated doesn't necessarily invalidate this conclusion -- Buffett's quote at the end of the article demonstrates that this phenomenon isn't unique to the current crisis.

Alex Dumortier (XMFMarathonMan) 

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#12) On September 11, 2008 at 12:35 AM, TMFAleph1 (94.91) wrote:

dexion10,

Thanks for your comment. Even though my blog post dates from Monday, when bank stocks rallied heavily on the news of the GSE bailout, the article actually went up the previous Friday.

I'm not trying to time the market with my article; the point was to produce some evidence that although banks have rallied strongly since mid-July, the disciplined lenders among them may still represent compelling values at their current levels.

Finally, the fact that book values may be inflated doesn't necessarily invalidate this conclusion -- Buffett's quote at the end of the article demonstrates that this phenomenon isn't unique to the current crisis.

Alex Dumortier (XMFMarathonMan) 

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