Bruce Berkowitz is ready for a long Labor Day respite.
The founder of Fairholme Capital, who was named as Morningstar's
"Fund Manager of the Decade" for his audacious and well-timed
investments, made a major gaffe this summer. He loaded up on
financial stocks in the first and second quarters, only to see the
whole group take a beating in the recent market plunge. The KBW
BankIndex , which is comprised of major bank stocks, has plunged
from 48 to 37 in just one month. If he had a "do-over," he'd likely
find the group to be even more compelling than before, though he'd
certainly be more selective. This may be bad news for Berkowitz,
but it's good news for investors like you.
Berkowitz's only real error seems to have been a fixation on
Bank of America (NYSE:
, which has so many problems it's hard to find anything nice to
are cheap, but BofA's legal problems remain quite serious and
management has lost all respect with investors. Berkowitz even held
a staged a Q&A with management on August 11 to ostensibly
provide clear answers to tough questions. Big mistake. "Management
did little to improve investor confidence... and the answers
perhaps left far more questions than answers," writes Sterne Agee's
Todd Hagerman. (Warren Buffett's just-announced capital infusion
does nothing to change the bank's dim outlook. Its problems are not
about liquidity but instead about operational decision-making).
Yet the whole rout in banking stocks obscures a far more appealing
story that has emerged in recent quarters. Most other major banks
besides BofA are steadily getting much healthier and are poised to
be very strong by 2012. And this is happening while theeconomy
remains very weak. Berkowitz's bet, albeit premature, is that
investors will eventually note the big disconnect between lagging
share prices and brightening outlooks. Let's look at two banks that
exemplify why this is a great time to boost exposure to this
On several previous occasions, I've noted that Citigroup has done a
very impressive job of boosting its exposure to Latin America and
Asia while reducing its reliance on North America and Europe. I
should have also been focusing on the remarkable turnarounds in
In each of the last two quarters, Citigroup has earned at least $1
a share, thanks in large part to sharply reduced losses in its loan
portfolio. In fact, profits would have been even more robust if the
bank hadn't decided to spend heavily in Latin America and Asia to
rapidly build out its presence. Those regions, which are showing
double-digit sales gains for Citigroup in recent quarters, have
actually been a
drag while offices are being opened and talent is being hired.
"Expectations for positive
in LatAm and Asia in 2012 remain encouraging," notes Sterne Agee's
Hagerman. Turning those regional drags into profit centers is why
analysts expect per share profits to rise from around $4 a share
this year to around $5 a share in 2012.
And as Citigroup keeps adding profitable quarters, it is boosting
of its balance sheet, which recently stood at $48 a share and is
headed to $55 a share by the end of next year, according to
analysts. Shares trade for just half of that targeted book value.
UBS notes shares historically traded at an average of 2.8 times
tangible book during the past 10 years, highlighting just how
washed-out this stock has become. Simply trading back up to book
value represents a double for this stock.
It's also worth noting the stock also trades for just five to six
times projected 2012 profits. This may not last too long. "In our
view, the market will eventually recognize that Citi is better
positioned and faces far less uncertainty... than BofA," write
analysts at UBS after recently noting both banks' stocks have
fallen by a commensurate amount this year.
Wells Fargo (NYSE:
For some investors, it's hard to embrace Citigroup after the bank
famously imploded in 2008 and had to be re-capitalized. For them,
Wells Fargo represents a seemingly safer route, albeit with less
potential upside. When I last looked at the stock
back in June
, I noted mega-investor Warren Buffet was "underwater" with this
investment. Shares were at $27 back then and are now below $25 and
haven't been this cheap for quite some time. As my colleague Ryan
Buffett's investment firm,
Berkshire Hathaway (NYSE:
, actually increased its position, and it now accounts for a hefty
19% of the total portfolio.
Buffett is not alone in his ardor for this stock. Goldman Sachs
figures shares are worth $37 -- roughly 50% higher than the current
share price. When Q2 results were released in mid-July, the numbers
underscored Goldman's view that "
power is approximately $4 (a share) and once the market gets
comfortable around this, it should lead to outperformance." Goldman
thinks the bank's
earnings per share (
will rise smartly in 2012 toward that figure, in part due to a
hefty stock buyback that is underway.
Risk to consider:
These stocks may stay range-bound if the
weakens further, although it's hard to see how they can fall much
more after approaching such low price/book and price/earnings
Action to Take -->
The most remarkable aspect to these bank stocks is they look very
inexpensive at a time when operating conditions are lousy. When the
economy finally improves in general, with spikes in employment
, then these banks will really be poised for strong organic growth.
Current share prices are extremely low in the context of that
eventual upturn, and you would do well to consider either of these
stocks if you don't already own them.
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stock has plowed through 8 bear markets and has
returned over 170,000% since 1972. Every $700 you invested back
then would be worth more than $1 million right now. Today, the
company is raising its dividends, spending billions to buy back its
own shares, making smart acquisitions, and is the dominant leader
in a $30 billion market. This stock is just one of the 10 best
"Forever" stocks to own today.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.