The global recession of 2009 wreaked havoc with hundreds of companies, forcing many to become leaner in order to survive and emerge from the quagmire. Companies that make it through hard lessons like that often make for great investments. Now I'm going to suggest three such companies that deserve your investing attention: American International Group (AIG), Bank of America (BAC) and Citigroup (C).
Surprised? Shocked? Offended? Let me explain in the paragraphs that follow:
From the Bottom, There's No Place to Go but Up
Yes, it was largely the three companies above, along with ratings agencies Standard and Poor's (MHP) and Moody's (MCO) approval of mortgage-backed time-bombs, which literally ruined the economy, wiping out billions in shareholder wealth that hit average investors' pensions and mutual funds hard. These three banks experienced a combined reduction in market cap in excess of $500+ billion - staggering to say the least.
Then again, having very much bottomed out, you can bet that these companies are well-positioned to bounce back, possibly stronger than ever, which could result in some very substantial returns on investment. At the very least, you're practically guaranteed to do much better than you would in the extremely anemic bond market, where even the slightest bit of inflation ensures losses.
Most investors will probably avoid the stocks of BofA, AIG and Citigroup like the Plague, which is the very reason why they deserve a closer look from you. When everyone else harbors resentment towards these companies and has consigned them to the land of rejected investments, this indicates that there could be a real opportunity. If these companies find themselves in a position to reinstate or increase dividends and make progress on profitability, the mutual funds, pension funds and other investors that fled screaming will flock back in droves. The smart thing to do in this case is to snatch up shares of all three and sit tight to watch prices start rising.
Patience Is a Virtue
Patience will be critically important if you decide to go this route. Yes, both BofA and Citigroup stocks have been paying a mere penny per share in dividends since January, 2009, and AIG hasn't paid any dividends at all since 2008, although CEO Bob Benmosche is hoping to change that in 2013. All three companies are poised to raise dividends, I just can't predict exactly when. My gut feeling, however, is that investors who want to take advantage of the turnaround effect better not wait much longer to get in on the game.
The dividend yields of only 0.3% for BofA and 0.1% at Citigroup pale in comparison to Wells Fargo (WFC) and JP Morgan Chase (JPM), where dividend yields have been hovering at 2.5% for some time, which is still less than the historical average of more than 3%. However, those rates are likely to stay relatively flat while BofA and Citigroup are likely to see an increase, though again it may take a while given that profitability is still not what it used to be. This is where you play the patience card, because in a couple of years you could see a dividend yield of 2% on stocks whose prices have increased two or three times what they are today.
Poised for Growth
It also looks likely that the banks will also be allowed to buy back billions in stock. It's important to note here that when a company announces a major repurchase, it is usually preceded by active downward earnings management (solely my opinion) that drives the stock price down so that the companies don't have to pay as much per share. Such repurchases are often then followed by a "surprising" upturn in performance, which then attracts many new investors and can result in abnormally high returns (one of the few times when the word "abnormal" is welcomed).
I think that of all the banks, BofA has the most promise. It has taken care of all its bad debt problems and returned to profitability in 2011 with $1.2 billion of net income that year and $4.2 billion in 2012. The share price bottomed out at $3.95 in 2009 and now is above $12. And don't forget that Warren Buffett, who doesn't tend to make an investment unless he thinks it is very sound, pumped $5 billion into the bank's stock in 2011. You might do very well to follow suit with the Sage of Omaha.
The Bottom Line
As always, maintaining a diverse portfolio should be standard operating procedure, and banks should be a part of that diversity given the continuing recovery of the housing market.
The approach I recommend is to invest in all four of the biggest banks: BofA, Citigroup, JP Morgan Chase and Wells Fargo, allowing the current strength of the latter two to act as a shield against the more uncertain futures of the former two while you wait to see if those numbers go up as I believe they will.
AIG has completely come out of its tailspin, the federal government has completely liquidated all of its holdings in the company and this is a company and stock that is poised for success. All five companies represent a great strategy for investors with the patience to take a longer-term approach.