Seeking Alpha
Value, registered investment advisor, growth at reasonable price, long only
Profile| Send Message| ()  

The troubles at the banks like Citigroup (C) and Bank of America (BAC) are no secret. Their performance over the last 1, 3, 5, and 10 years has been miserable. You will not find very many happy investors with stock performance like that at B of A:


(Click to enlarge)

Data from Best Stocks Now iPhone app

As you can see, Bank of America has underperformed the S&P 500 by wide margins over the last 1, 3, 5, and 10 years! I think that it could also be safely argued that Bank of America would not be around today had it not been for TARP.

Even with this miserable performance, I still say many claiming this to be great value stock. Even the king of value, Warren Buffett himself, has taken a $5 billion dollar stake in the stock.

I know that Buffett disciples are not going to want to hear this, but Buffett's performance over the last 1, 3, 5, and 10 years has not been all that great either:


(Click to enlarge)

Data from Best Stocks Now iPhone app

As you can see, Berkshire Hathaway (BRK.A)(BRK.B) has underperformed the market over the last 1 and 3 year periods of time. Buffett has beaten the S&P 500 by a few percentage points over the last 5 year and 10 year periods of time, however.

We are all seeking alpha in the market. There has not been a lot of alpha delivered by Berkshire Hathaway as of late.

I have a hard time imagining either Bank of America or Berkshire Hathaway delivering that alpha that we all so desperately seek.

How about if we begin with a stock in the financial sector that has been delivering alpha for years?


(Click to enlarge)

Data from Best Stocks Now iPhone app

As you can see, First Cash Financial (FCFS) has been delivering an abundance of alpha to its investors over the last 1 month, 3 months, 12 months, 3 years, 5 years, and 10 years! How much alpha do you want?

First Cash was even up 29.8% during the 2008 bear market which saw the S&P 500 lose 38.5%!

What is First Cash doing that Bank of America is not?

This has been and continues to be a very lousy economy. Bank of America continues to be plagued by foreclosures and short sales at their old Countrywide unit. 31% of all home sales are currently foreclosures.

The Merril Lynch unit at Bank of America did not exactly escape the sub-prime debt debacle either. Merril Lynch would not be around today, had the feds not have arranged a shotgun wedding between the two beleaguered partners.

The stock of Bank of America has been hitting new lows, while the stock of First Cash has been hitting new highs. First Cash has been growing its earnings by an average of 19% per year over the last five years, while Bank of America has seen declining earnings at the rate of 46% per year over the last five years!

First Cash is benefiting from a lousy economy, while Bank of America is just barely hanging on. In fact, a lousy economy is a major theme to be invested in right now. It can greatly enhance the returns in your portfolio, once you adapt to it. You have to be invested in stocks like Dollar Tree (DLTR), Monroe Muffle (MNRO), Autozone (AZO), pawn-shops etc., that are above the fray and not mired in the muck.

Pawnshop business is very good right now. Unemployment is over 9% and equity in most homes is gone. Traditional lending has almost completely dried up. Folks are turning to pawnshops for much needed cash.

I recently interviewed the CEO of First Cash Financial, Rick Wessel, on my daily radio show. I had chosen his company as one of the top 53 stocks for my latest book and wanted to find out more about the story behind the numbers.

Rick Wessel stated that about 60% of First Cash Financial's business is Gold related. No wonder business is booming at the pawnshops. With Gold over $1800 per ounce, I would imagine that fillings, old coins, heirlooms, jewelry, etc., are also being turned in by folks needing cash.

What about value? Many value investors argue that Bank of America is dripping with value at the current time.

Key Statistics Get Key Statistics for:

Data provided by Capital IQ, except where noted.

Valuation Measures
Market Cap (intraday)5: 82.80B
Enterprise Value (Aug 31, 2011)3: 220.13B
Trailing P/E (ttm, intraday): N/A
Forward P/E (fye Dec 31, 2012)1: 5.63
PEG Ratio (5 yr expected)1: -2.54
Price/Sales (ttm): 1.15
Price/Book (mrq): 0.40
Enterprise Value/Revenue (ttm)3: 3.07
Enterprise Value/EBITDA (ttm)3: N/A

While I see some dirt cheap valuations currently on the company, the stock frankly downright scares me. What is wrong with finding value in a stock that has been delivering alpha?

First Cash has a consensus analyst's estimate of $2.68 for next year. It is currently trading at a forward PE ratio of 17.43. First Cash has a consensus analyst's 5 year growth rate of 19.5% over the next five years.

If First Cash comes close to making these estimates (it has had a history of clobbering earning estimates for several years), then the company would be making $5.47 per share, five years from now.

If the company can maintain its current multiple of 17X, then the stock would be trading at $92.91, five years from now. That gives the stock 98.9% upside potential over the next five years. I would be very happy with that kind of return.

Here is what that valuation looks like:


(Click to enlarge)

I like to only buy stocks that 100% or more upside potential over the next five years, First Cash is close enough. I also like stocks that have been delivering the goods and are still at a price that I can justify going much higher. I believe that First Cash has both. A good stock chart does not hurt either:


(Click to enlarge)

Throw in the fact the company is flourishing in today's lousy economy and you can see why I currently have First Cash ranked number 3 out of 2,730 stocks!


(Click to enlarge)

Bank of American or pawnshops? The choice is yours ...

Source: Pawnshops Over Bank Of America