Bank of America (BAC)

Has been lightening a little on the US banks recently, but is not worried that much. We are not going to see another collapse of the banking system. This is at a turning point where some of the acquisitions they made at the bottom of the cycle are starting to benefit a little bit more and you will start to get a dividend paid a little bit more. Valuations are fairly low historically. Feels this has the most upside leverage between it, Citigroup (C-N) and J.P. Morgan (JPM-N).

You have to have this or C-N or both in your portfolio. The market either loves them or hates them. They are both ‘coming out of the blue’. They have regulatory problems. There is a huge speculation on C-N. for BAC-N, the model price is $18.95, 20% upside so the market is believing the balance sheet. It is cheaper than the Canadian banks.

If you have a spot for a financial to complement the rest of your portfolio, you should fill it. This one is an opportunity. Generally speaking, the whole group is going to move together. It is going to take a catalyst and that catalyst is likely going to be higher interest rates that will allow net margin spread to increase because of a steepening yield curve. This is a decent choice in US banks. (See Top Picks.)

Pretty attractively priced here. Trading at about 10 or 11 times this year’s earnings. If you believe that we are still in the 1^st half of a bull market, as he does, this is going to continue to participate in that recovery.

Late last year paid a very big settlement to the US Justice Department to settle the majority of its outstanding litigation. Trading below Book and right near tangible Book. Trading at around 10-11 times earnings. Thinks the growth outlook for the US is better than in Canada. Dividend yield of 1.22%.

(A Top Pick Feb 13/14. Down 2.13%.) This has not being great, but decent. In general, the large money centred banks have underperformed the market. Money is coming back to shareholders in the form of dividend increases and share buybacks. All the litigation that has been in the overhang is for the most part behind them. Still a good holding.

He owns 2 American banks, J.P. Morgan (JPM-N) and Goldman Sachs (GS-N). Goldman Sachs for its investment banking activity and J.P. Morgan just for its size and scale. Bank of America has pulled back a lot, but he thinks probably the best straight commercial bank in the US right now is Wells Fargo (WFC-N), and this would be his pick. Most investors should really own Canadian banks because the dividend tax credit gives you a tremendous advantage. He also thinks the earnings momentum in the US is probably reducing.

The US is better than Japan, Russia, despite their huge debt and all the money they are printing. The financials are turning the corner. The acquisitions at the bottom of the market will eventually be accretive. They will start to generate earnings growth. Prefers this over C-N and JPM-N.

(A Top Pick Jan 16/14. Down 10.33%.) Q4 was a bit of a disappointment. Thinks the market is really overlooking its good points. Good credit quality, lower energy exposure than other banks and are levered to a housing recovery and improving US consumer. Cheap at 1X 2015 estimated tangible book value. This is not a question of “If”, but “When”.

It has come off a fair bit as have a lot of the US banks. You have a really good chance to get a great company really cheap.

US banks in general have been struggling under a lot of different things, such as regulatory penalties and increased costs. They just don’t seem to be able to get past getting sued by the government for one thing or another. Thinks the problem is going to become more and more acute.

There were a lot of people that had a view that interest rates would start to work their way higher. With what is going on in Europe and Japan, there are $7 trillion of fixed income assets globally yielding a negative return. There is tremendous pressure on long-term interest rates, which in general is not good for big money centred banks. Because of this, this one and other similar ones have been under pressure. If you believe that rates may stay lower longer, you would be better off focusing on a regional bank that is less dependent on long-term interest rates. He sold his holdings in this bank. In the financials, he prefers REITs and asset managers that will probably benefit from asset growth in a stronger equity market. Wells Fargo (WFC-N) is attractive and is a direct play on US housing.

Earnings were a bit shy today. This is why ETFs are so important. The market is having a hard time digesting different news announcements we are hearing all the time. He really likes US banks. They should do really well. The housing market will do well so mortgages will do well. But he prefers to buy the ETF ZBK-N. Spread your risk out. Later he might move out of the ETF and buy individual stocks.

Until we start to see rates rise and the market take control of the yield curve again, the banks really aren’t going to get any traction. It is very, very difficult to get the timing exactly as to when to buy the stock. Good quality company.

Why is Bank of America (BAC-N) telling us to Short Canadian banks? She does not agree with that. We should all be buying them now because they have pulled back 8%-10% in the last 46 weeks. They are very attractively valued now and she is expecting earnings growth in the 6%-8% range. They all have target payout ratios of 40%-50%, and if you apply that to the earnings to what their current dividends are, it would be in the low end of that range, so she would expect that they would increase their dividends. When the banks reported in early December, their exposure to energy was very manageable. On their total loan book exposure, it is anywhere from below 1% to maybe 2%-3%, depending on the individual bank. (See Top Picks.)