Viking
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Posts posted by Viking
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Right now most people are looking at the big bank and all they see are the challenges: large legal payouts, worsening regulation, shrinking NIM, all pointing to lower rates of return than those earned pre-2008.
People are not looking at the other side of the equation: the big banks have been given time to earn their way out of the mess they created. Looking at the past 10 years, yes, there are many bad things that happened and shareholders have not been rewarded (long term shareholders). The big US banks are like coiled springs right now. As people come to appreciate how they will each adjust their business models and grow earnings in the future we will get a nice jump in the share price. It reminds me of Apple 18 months ago. Everyone was overemphasizing the negatives and underemphasizing the positives. Over the next 18 months I expect the big banks to earn some crazy amounts of money; this will be spent increasingly on dividends and share repurchases. A virtuous circle. At some point the the big banks will be where the hot money will go and everyone will love them again. Crazy how the pendulum swings back and forth over time.
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JPM held their investor day two days ago and exceeded expectations. They basically said they can continue to grow earnings despite the regulatory overhang. They communicated $30 billion in 'normalized' earnings by 2017 which = about $8.00 per share. Add a 12 PE and you get a share price of $96; with the stock trading just over $61 this would result in more than 50% gain in under 3 years... Not too shabby for what is now essentially a regulated/utility type business. Dimon also stated we could see a dividend payout ratio = 50% of earnings; this would provide a yields greater than 4% ($8 in earnings and the stock trading at $96).
The regulations are resulting in the big banks significantly de risking their balance sheet. And every year that passes allows the banks to clean up their legacy real estate issues. With house prices in the US rising nicely the past few years this also must be helping to clean up legacy issues.
I am hopeful that BAC is able to articulate their 'plan' as well as JPM has just done. BAC trades today at $16.00. TBV (Dec 31) = $14.40. Let's assume BAC pays $0.30/share in dividends and earns $1.30/share in 2015. In early 2016 a buyer today would see their cost base fall to $15.70. At the end of 2015 TBV will likely be about $15.70. If you buy the stock today there is a good chance your cost base will be = TBV in 10 months time.
The key for BAC moving forward will be if they can have a (relatively) clean year of earnings so investors can get comfortable with what it can actually earn moving forward. Time should reward the patient investor quite well when it comes to BAC.
JPM earnings are more predictable right now and they have articulated their near term plan very well. The shares are increasing nicely as a result. bottom line is the large US banks are crazy cheap; perhaps the JPM presentation will be viewed as an inflection point (in hindsight) in investor sentiment.
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Scott, I have been purchasing both, but much more BAC than JPM. My concern with BAC is if we get a few more skeletons coming out of the closet this year slowing earnings and BV growth. BAC is selling at more of a discount to TBV than JPM so if we get somewhat clean earnings this year then the stock should have more upside looking out 12 to 18 months. One of the concerns with JPM currently is meeting the new capital rules will use up a chunk of earnings the next few years and limit how much the company can return to shareholders (via div and share repurchases).
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Which is the better stock to purchase today: BAC or JPM? (assuming 24 to 36 month holding period)
Both stocks are 'cheap'. JPM looks cheaper and to be the 'safer' purchase. JPM has already turned the corner. Earnings are growing. Cash return is happening (dividend and stock buybacks). TBV has been growing nicely for a couple of years. Management is strong. Their business the next few years (revenue, earnings and growth in TBV) looks fairly predictable.
BAC looks like it may just now be turning the corner with earnings mostly flowing to the bottom line (and not getting eaten up by settlements or write downs). Dividend should increase and perhaps we will see stock buybacks. TBV should start to grow nicely. Management is OK. However, it is not as easy to predict revenue, earnings and growth in TBV over the next few years (are more large one time charges coming?).
JPM 2014 2013. BAC. 2014. 2013
ROE. 10% 9%. 1.7%. 4.62%
ROA .89 .75 .23. .53
TBV. $44.69 $40.81 $14.43 $13.79
Div. $1.60. $1.52 $0.20 $0.05
NI. $21.7 $17.9 $4.8. $11.4
E/sh. $5.29 $4.35 $0.36. $0.90
Expected earnings in 2015: JPM $5.75. BAC $1.40
Share price $55.50 $15.50
PE. 9.65 11.1
Price to TBV. 1.25. 1.08
Expected earnings in 2016: JPM $6.44 (13% growth) BAC $1.66 (18% growth)
Which one do you like more and why?
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From Calculated Risk: Dallas Fed: Texas Manufacturing Activity Stalls and Outlook Worsens
http://www.calculatedriskblog.com/2015/01/dallas-fed-texas-manufacturing-activity.html
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How are people on the board thinking about recent currency movements? Before last year I had never really thought about currency when making an investment decision. The last year the U.S.$ has been on a tear and it looks set to continue. Over the past 24 months there have been massive moves in the currency markets as countries attempt to generate growth:
1.) Japan massively weakens the Yen; exports increase significantly
2.) ECB, partly in response to Japan, needs growth and is weakening the Euro; we may see parity this year to the US$
3.) Russian ruble has depreciated massively
4.) commodity currencies (Can$, Aus $, Kiwi) have depreciated 25% in last 24 months vs US$
5.) Swiss franc is the outlier; by removing the peg to the Euro the currency is appreciating
6.) the big 'winner' is the US$, which is appreciating massively. How long can this continue before the U.S. says enough is enough?
7.) China's currency is pegged to the US$; as the US$ shoots to the moon China exports become less competitive.
Many developing countries hold their national debt in US$. Their 'earnings' are falling as economic growth slows and the home currency falls; debt payments in US$ become harder to make. This is what caused all currency crises in developing nations in the '90's. Looks like the same movie is playing again!
Global growth is slowing. China is slowing. Euro region is slowing. Commodity exporting countries are slowing. The U.S. is the one area where the domestic economy looks to finally be growing (at a slow pace). However, if the U.S.$ continue to appreciate against world currencies at what point does the US$ economy get hit and US politicians react? And if the U.S. economy starts to slow then we likely enter a new phase in the current game.
If the global economy enters a recession later this year what will the central bankers do to stimulate growth? Drop interest rates the usual 2 or 3 % to get the economy moving? Nope; bank rates are already under 1% so they is not much room to go lower. How about talking the currency down to drive exports? Nope; already tried that too. Bottom line is if we enter a global recession in the next 12 months we are in uncharted territory.
The appreciation of the US$ is already hitting large US multinationals; during current earnings season as many are missing earnings and providing weak guidance due to crazy strong US$.
I have done my best the past 2 years to not think about macro when investing. However, I am getting increasingly nervous about how all of this is going to play out. Looks to me like there is more uncertainty right now than usual. This tells me that volatility will likely rule. Expect the unexpected.
From an investing standpoint, I am going to be more conservative than usual. Hold more cash (US$). Be patient. If volatility returns, we should get some great opportunities once again to buy great businesses at cheap prices. I think I might do a little reading and dust off some of the books I bought back in 2008 and 2009 on what has happened in past debt/deflationary periods (focussing on round 2 shocks that hit 4-5 years after the initial crisis).
http://www.bloombergview.com/articles/2015-01-23/europe-just-started-waging-currency-war-on-the-u-s-
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Eli, I agree $0.80 looks to be a more sustainable level. Unfortunately, the dollar was at or above parity for long enough for many manufacturing companies to decide to leave Canada. With the currency dropping back down those jobs will not be coming back any time soon. And 24 months from now things will likely look totally different again. The question now is how low will the CAN$ go? I will not be in a hurry to sell my US$. I do love the volatility as it creates many great buying opportunities as markets often overreact in the short term.
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Canada's economy rode the commodity wave the past 10 years. Manufacturing sector shrank and resource sector grew. Western Provinces lead the country in growth. These industry changes happened slowly and over many years.
The key for the Canadian economy moving forward will be what happens to commodities. If prices bounce back up then all is OK. If commodity prices stay low or go lower then the Canadian economy is only going to get worse. The bank of Canada is telegraphing what they think is likely going to happen.
Crazy to see the CAN$ go from parity to the US$ to below $0.82 in less than 2 years; and should the U.S. economy strengthen and Can economy weaken further in the near term (likely) the CAN$ will likely drift lower still. Being Canadian, glad I decided to visit Hawaii with my family when we were at parity! I also am not a currency trader; however, leaving 80% of my assets in US$ the past 2 years has resulted in currency driving some pretty significant portfolio gains. Strange times.
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Net/net, you have hit on exactly what I have started to think about; how what is happening in the oil market could morph into the larger economy. Lots of things swirling around at the same time; harder than normal to make sense of it all. Perhaps time to focus on 'return of capital' and not just 'return on capital'.
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Wellmont, I enjoyed reading your thoughts on what is (or is not) 'priced in'. I still have a bad habit of assuming that just because something is pretty obvious to me that it is also obvious to everyone else (and therefore must be already reflected in the stock price). as a result, things tend to play out much more slowly than what I expect. As a result I am often early to the party and early to leave. Not a bad thing. I am trying to be a little more patient when I buy and sell an investment.
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My guess is interest rates are the key. As long as rates stay low the machine will continue to roll. Once mortgage rates move up a couple of percent things will get interesting.
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We certainly are in interesting times. From the little bit I have read today it looks like OPEC is not going to cut production any time soon (they meet again in 6 months). It looks like we could see cheap oil for an extended period of time (sub $70). What are some of the likely economic outcomes if we see cheap oil for an extended period? More interesting to me is where are the great investment opportunities? Given the news today from OPEC, I was just wondering how people are looking at the current environment and the opportunities it presents.
The obvious place to look is oil and gas companies. However, to invest in this sector you need to have an opinion on what is going to happen to oil prices (how low do they go and for how long). Do you buy the majors or go for the home run and buy one of the smaller players.
Petro currencies: living in Canada, low oil prices will hurt our economy and this should lead to a weaker currency. Low oil prices can't be good for Russia and the Ruble.
One the other side of the ledger gas prices are coming down significantly. This is an immediate and very large tax cut to consumers and businesses. In the near term do we see consumer spending in the US increase? My guess is lower oil prices are a net benefit to the U.S. economy? Does this also lead to marginally higher interest rates in the US? Looks like US bank stocks could be in a good position to benefit.
Much lower oil prices are having a ripple effect on many industries and companies. The question is where are the no brainer investment opportunities.
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I like companies/sectors that are out of favour. Most oil stocks are in a bear market. When I look at supply/demand dynamics it looks like supply definitely has the upper hand (market is oversupplied), world demand is weak and the oil price is falling. What I am trying to understand is if we are in a multi year bear market for oil with the shale/oversupply driving prices low for a multi year period. Or is this current sell off short term in nature and giving people a wonderful buying opportunity?
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Five Sigma, by 'stabilized', I mean the crisis no longer looks to be escalating further out of control. I am not suggesting anyone is happy with where everything is at or that it is not a brutal situation for those involved. When I read that the EU is meeting to review whether they will begin removing some sanctions placed on Russia this suggests to me that things are at least not 'escalating'.
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Russia RSX ETF is once again trading near 52 week lows. It looks like things have 'stabilized' in the Ukraine (ie not getting worse). Interesting.
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As the article states at the end, the key is what happens to interest rates. The five year rate currently sits at a generational low of 3%; if it normalizes to 5% (as the author expects) then, yes, we likely will see a decline in prices. The higher interest rates go the bigger the price decline.
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Three books really got me started and pointed in the right direction:
1.) The intelligent Investor - Graham
2.) one Up On Wall Street - Lynch
3.) The Warren Buffett Way - Hagstrom
In terms of an enjoyable read (I love history) I have read Reminiscences of a Stock Operator by Lefevre multiple times.
In terms of building wealth I have read Rich Dad Poor Dad by Kiyosaki multiple times and it will be on my kids must read list as they get older.
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Yes, over the years many people have got lots of great help. What I find interesting is the value I get from the board has changed over the years. It is very multifaceted and evolving. Great job everyone.
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Tricky question. A couple of very good rules of thumb are
1. Incentive pay should only be tied to what they have control over. This is critical as it can be very demoralizing to have incentive pay tied to factors outside of ones control (like total company results).
2. Percent of total compensation should be tied to type of business; a company like Kraft foods may have 15% of total compensation as incentive pay as sales function is more maintenance driven.
One of the challenges is a salesperson can do a lot of unethical things and look like a star for a year or even two. However, the truth inevitably comes out. The key is to have an incentive system (perhaps staggered, multiyear awards) that addresses these issues if they are widespread.
Perhaps the salesperson gets a certain amount at sign up, another amount after 12 months and a final payout after 24 months. Could be a bitch to track. Good luck.
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Lance, I do not agree with the comparison between Putin and Hitler. To me Russia of 2014 does not look like Germany of 1936. Russia is weak and must be very careful. Having said that, it would not surprise me to see Putin carve off parts of Eastern Ukraine should he be given the opportunity. Should Ukraine enter a bloody civil war then perhaps the Russians will be given their opportunity. My read is Putin has acted very rationally (from the Russian perspective). However, if they want more of the Ukraine the 'costs' will increase dramatically and I think he is too pragmatic to take that risk on; the Russian economy is too linked to the rest of the work for Putin to get too greedy.
Yes, there are significant risks that the situation could devolve. However, I now think the better odds are that the situation muddles along with Russian stocks moving up 15 or 20% over the next few months. Reading the tea leaves today, I like the risk / reward.
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Looks like we may have seen the lows for Russian stocks for this crisis. Looks like Putin is happy to take Crimea and call it a day; big strategic win for Russia. As others have mentioned previously, RSX is a pretty easy way to get exposure (thanks for doing most of the leg work) and it is still very cheap.
Future looks pretty bleak for Ukraine. Perhaps things go sideways until presidential elections are held and we see who gets in and what their plan is. Russia likely is happy with an economically messed up Ukraine as it makes them very dependent on Russia.
Putin must really like capitalism; very easy to game the system and make some serious money. (Sell high and then buy low.)
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This is the thread each year where I give thanks to Sanjeev and the many great posters from years past. I moved to Toronto for business reasons about 12 years ago and discovered this board and Fairfax as an investment. Good advice from many others on this board, good decisions, dumb luck and time all combined over many years to put me in a good enough position financially that I was able to quit my day job and spend quality time with my young family (7 years now and counting). I have since moved back to Vancouver and in hindsight one of the greatest gifts of taking the job in Toronto was that I discovered this board and Fairfax; an example of unintended positive consequences. Thank you to Sanjeev, bsilly, cardboard and ericopoly to name just a very few; many more have helped me. I will always be very thankful.
Thank you and have a great holiday and a prosperous new year!
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I am amazed at how fast smartphone companies have blown up: Palm, Mororola, Nokia, RIMM... soon HTC? They have not been able to stay popular with consumers. RIM was not able to make the transition from enterprise to consumer. I am sure the decisions made in the boardroom were backed up with great analysis and made perfect sense at the time. Who in their right mind would have been able to predict how fast the company has lost sales.
Apple has been able to stay very popular with consumers. Samsung has as well; what's interesting is Samsung made their business by basically copying Apple's phone (very smart). Perhaps RIM's fatal decision, made years ago, was to dismiss Apple's iphone as a strong competitor and not offer a similar product.
Samsung's 'dog with fleas' launch of Galaxy Gear shows how few companies are able to launch great consumer products in new categories. Microsoft's Surface is another good example of how challenging it is.
Perhaps Apple is grossly underappreciated for how well it develops and manufactures products for the consumer market. Perhaps Apple has the culture and talent to keep innovating; and perhaps their competitors simply do not. Time will tell.
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Imagine if you purchased a Kindle and got as part of the purchase from Amazon a free on-line subscription to the Washington Post. I realize that this was not an Amazon purchase. I wonder if we will reach a point where the major tablet/smartphone ecosystems (Amazon, Apple and Google/Android) decide to get into the content business in a major way. However today it currently looks to be a catch 22 (for the hardware manufacturers) as they may get the benefit of the content they purchase but run the risk of having other content providers (competitors) cutting them off.
Which is the better stock to purchase today: JPM or BAC?
in General Discussion
Posted
Over the past 8 weeks in have listened to JP Morgan's investor day, and (for both JPM and BAC) read the CEO letters in 2014 Annual Reports, read Q1 earnings report and and listened to Q1 earnings conference calls. I have also been following the companies pretty closely for about the past 6 months. I have decided that today JPM is the better investment (for me).
I continue to like BAC and feel it should do well for those with a 24-36 month time horizon. It looks to me that the big litigation bills are behind BAC which is great. Future earnings will finally drop to the bottom line. However, given all the earnings that have been drained from the company over the past 5 years due to litigation it appears BAC will need a couple of years of earnings to get its capital levels up to those of Citi or JPM. I just get the sense that BAC is at least one year behind Citi and perhaps two years behind JPM in terms of cleaning up legacy issues and being able to move forward in a quality way. BAC also looks to be slow to adjust their business model given the new regulatory framework. As a result, moving forward, BAC will show nice earnings growth and the business will improve from here. However, there is a great deal of execution risk. Add in the fact that Moynihan is a poor communicator (just compare his comments in the BAC 2014 Annual Report to Jamie Dimon's comments in the JPM AR) and the execution risk gets even bigger. The wild card for BAC is interest rates. If interest rates increase the stock will pop as it is highly leveraged to movements in interest rates. Should interest rates stay low then earnings for BAC will be hurt as NIM continues to be compressed.
JPM really looks to be firing on all cylinders right now. All of its business units are doing good to great. Legacy issues, which are already quite small, should be behind the bank in about another 12 months (for the most part). Most importantly the company is totally dialled into the current regulatory reality and are managing each of the businesses to optimize on this. The dividend yield is about 2.7% ($0.44/share/quarter). The share buyback is good, although stock issuance each year offsets about half of this benefit. The stock is cheap, trading at less than 11 times 2015 estimated earnings. Earnings are expected to grow better than 10% per year over the next couple of years. Should interest rates normalize JPM will also benefit (just not as much as BAC).
My key takeaway is JPM looks to be a best in class company (large U.S. bank). I am not sure how good the new BAC will be; might be great or might be terrible (likely will be somewhere in between). We likely won't know the answer for BAC for another couple of years. BAC is much cheaper. For me, today, JPM is the better investment. Better quality. Better management. Better plan. Better results.