Bank of America (BAC)

Financials have run in the US because of expectations under Trump of less regulation that will free up capital. Also, there is hope and expectation that the yield curve will steepen. In the near term it looks like we are getting a correction in interest rates. We are close to the end of the 35 year bull market in bonds.

Bank of America (BAC-N) or Wells Fargo (WFC-N)? Both are large US banks, so are going to have more in common than in disparities. It is hard to see one going dramatically in one direction and one going in the other direction. They are both going to be interest rate and economically sensitive. If interest rates move higher, margins are going to improve and will benefit both companies. However, he has a slight preference for this bank because of valuation. When looking at BV, this one is dramatically cheaper at about 1.2X.

Trading at 1X BV and the multiple of Book is expanding. They have multiple drivers. They’ve been cutting costs which has been going on for quite some time. They are getting higher interest rates, giving $600 million of additional revenue last quarter from their net interest margins. They win if there is less regulation. They win if there is economic growth, which they are getting. They win if they can return more capital by way of dividends, which they are now allowed to do. Dividend yield of 1.2%. (Analysts’ price target is $26.)

Bank of America (BAC-N) or Toronto Dominion (TD-T)? He prefers J.P. Morgan (JPM-N), which is a bit more tilted to the investment banking side, and would see a bit more participation in the deregulation that he feels is coming. There is room for the Cdn$ to come down further.

This is a long-term asset, and you have to think of it in the long terms. It has had quite a rise since the fall, at about $15-$16 to over $25 today. Yesterday US banks traded off and bond market backed up, which caused people some surprise. Believes people bought the rumour and were selling the news, and when the Fed came out and did exactly what they were expecting, the market acted disappointed. That is only one day, which does not make a trend. He expects the bond market will turn around and we will see higher rates and lower bond prices, with higher equity prices for financials. (See Top Picks.)

Rates are going up which is great for financials. The bad news is when you look at this over the last 52 weeks, it is up about 90%, so a lot of that is priced in. The big question is, how much of it is priced in. If you are light in US financials, this is one of the best ways to get exposure to rising rates. The interest margin will continue to skyrocket if interest rates stay where they are or continue to rise. Trading at about 15X, which is not cheap nor expensive. If buying at these levels with a 3-4 year hold, you will be fine. Dividend yield of 1.25%.

Sell and use proceeds to buy Manulife (MFC-T)? He wouldn’t make that trade. You have to own US financials, and this is one of them. Earnings growth is happening well above the S&P number. Earnings revisions are happening in the banking sector. On a valuation basis, they have been re-rated, but there is lots more room to be re-rated as it is trading below BV. It could certainly trade at 1.5X Book, and he could see the dividend going up. They are accumulating capital at an unprecedented rate, which is really important, because they can buy back more of their shares.

He is very bullish on US and Canadian banks. It is his highest sector weighting in financials. A perfect opportunity for them with rising net interest margins, increasing earnings profiles. A great company with definitely more upside.

Bank seasonally tend to do well from about mid-January all the way through to mid-April, so we are right in that sweet spot. Basically it should be a spike in interest rates during this time. Bond prices trade lower; hence bank stocks really benefit. This stock gapped higher yesterday, so there is a level of support directly below at about $25. He likes playing off the gaps, so when you have a gap higher or a gap lower, tend to trade off of them. $25 trades a short-term gap support based on yesterday’s activities, so you expect investors to shoot off that. If it breaks below that, you could see levels firmly below its 50 and 20 day moving averages. He has a 50 day at $23.17, but the moving averages are still curling higher. If you get a pullback in the stock, those would be opportune times.

A little too complicated a stock. It has a lot of moving parts. Also, any company that had to turn to the government for help in 2008, scares him. They let themselves get levered too high, so he doesn’t trust the risk controls. He would prefer something like Manulife (MFC-T) which has a better and steadier free cash flow yield and also pays a nice dividend.

US financials have a way to go, two or three years. It is only going to get better. It pays a dividend. He is confident the housing market will stay robust. (Analysts’ target: $26.00).

Feels a lot of people are hoping this is going to happen and if he is wrong, he will be running for the hills. The US banks have really done nothing for about 11 years and he feels they have a lot of upside from here.

Likes the low cost to Book ratio, which is trading at .8X. Compare that to Canadian banks, which are at 1.6X. Also with some of the deregulations that are coming in the US, this bank will be a beneficiary.

(Market Call Minute) You could buy it for exposure to the US economy.

As US interest rates rise and the net interest margin environment for the banks improve, all banks should do well. This is probably one of the cheaper ones on a valuation basis. They also have a large consumer mortgage business, which they should benefit from going forward.