Bank of America (BAC)

A great story. Has a great franchise in the US on the retail side. Has a great investment banking franchise through Merrill Lynch. Has a great asset management business from the broker business. He can see them executing incredibly well through 2014, especially if the stock market continues to do well. Earning power potential is very strong.

Analysts like the recovery. Stock is probably going to be in the outperform category. If we get a 10-20% correction, it will probably be closer to 20. Wait for the correction before you step in.

Will find out next week if they will be able to boost their dividends. If they don’t get to do it this time, it is coming eventually. In the meantime, you can Buy this at just over 1.25% tangible Book Value. This is a play on the US housing market which, if it is not recovery now, it is going to recover soon. US economy is normalizing. Strong investment banking, very good expense control, good loan growth last quarter, great deposit growth and good execution of their Merrill Lynch asset.

Coming off the stress test, the banks very likely will get the go-ahead to allocate capital with more autonomy. You’ll see both buybacks and increased dividends. Will probably increase dividends first. This bank has done quite well coming off the 2011 low. Trading at about 80% of BV so it still represents pretty good value. His favourite at this point is probably Citigroup (C-N) but that is more on a valuation basis. This bank represents good value.

Financials on both sides of the border have had quite a run and is probably getting exhausted, particularly when he looks at the peaks showing in 2009-2010. Chart is showing a little double top and he assumes the trend line will be violated.

One of the overhangs is the litigation risk, but they are getting it behind them. Should raise dividend in the next 4 months or so.

0.8 times book value. Thinks dividend will go up over the next couple of years and they could buy back stock. They have potential upside from the Merrill Lynch side. This is a great story that is not expensive and thinks you will see a double. Potential earning power is much higher than a Canadian bank.

With the US housing recovery taking place, this is one of the biggest providers of mortgages. Definitely room for growth here. There would probably be a share buyback before there was a reinstatement of the dividend.

Trading at 12X. Housing is improving, credit conditions are improving and there is all this untapped synergy out there yet to go. There are cross/sell opportunities. Some litigation risks, but as soon as that passes, you are going to start seeing share repurchases, dividend increases.

Period of seasonality for US banks is from around the 3^rd week in January right through until around the end of April of each year. You could also do this through the SPDR Financial ETF (XLF-N). Technically and seasonally, this is a good investment at current prices.

Likes the financial trade in the US. This one needs no introduction. Money centered bank with global operations that is fixing its operations and is cheap on a book value. It is nowhere near earning its potential on an asset basis. Return on assets was half a percent last year, where it could be 1.5%. It will take some time, but this one has the most upside going forward.

People say you should invest in US banks. They are quite large and are coming off their bottom. This is not the one he would own long term. You should look at how US banks used to operate. BAC and JPM were not ones with a high valuation multiple. Welles Fargo (which he holds) had a high multiple.

Financials are still deep in the red compared to where they used to be, but their balance sheets are 3 times better than they used to be. This bank still hasn’t gotten the go-ahead to increase dividends. BV is north of $20 a share, which is like buying $1 for $0.75.

Thinks banks in general will go ahead and there will be opportunity for them to perform fundamentally. Stocks have done well, but if you look at the banks themselves, they’ve really done well on cost-cutting, recapture of reserves, etc. Loan growth has been anaemic. Until we start to see a steepening of the yield curve and the interest margins increasing, it’s tougher for the bigger banks. He would wait a little until they get a lot of their other issues out-of-the-way. (See Top Picks.)

The case for some of the US banks is that statistically they are much cheaper than Canadian banks. His preferred play among the US banks is Wells Fargo (WFC-N).