An interview with the Chief Investment Officer of Loews (L), Joe Rosenberg, was published in Barron’s last week. Rosenberg has 50 years of investing experience and worked with billionaire Larry Tisch from 1973 until he passed away in 2003. So when Rosenberg speaks investors should take advantage of the opportunity.
To sum up, he said in his 50 years of experience he has rarely seen such big named and great businesses selling at these prices. I agree with him. Warren Buffett must as well, since in the past year he has invested nearly $10 billion into Lubrizol (LZ), $11 billion into IBM, and $5 billion into Bank of America (BAC).
Here are a few opportunities I recommend that could make investors a lot of money in 2012.
BAC: Bank of America is down 55% since the beginning of the year and is trading at nearly 1/3 its tangible book value. With all of the negative press, lawsuits, and BAC’s struggles to stay in the black, it is not surprising the stock has been one of the worst large-cap performers in 2011.
Warren Buffett recently gave BAC his endorsement by investing $5 billion into the company. The stock received a quick bump, but within a few weeks was declining again. Buffett looks for stocks with a large “margin of safety”. At this valuation, it appears the only thing that will keep BAC permanently this low is consistent and large losses—an unlikely scenario.
Merrill Lynch is doing very well and Bank of America itself is in a tough operating environment, but still making money. Countrywide is responsible for many of the huge write-offs and lawsuits. Once a few lawsuits are settled and some good news is reported, sentiment will likely change. Bank of America could double in 2012 and still sell below tangible book value.
In the long-term, BAC also appears to be a good buy. Bank of America has very strong and profitable businesses. In a normal environment—a few years from now—Bank of America could earn $15 billion a year. With Merrill Lynch and Countrywide it could earn $20 billion a year (it earned $21 billion in 2006 and $15 billion in 2007, before the Merrill and Countrywide acquisitions). Bank of America currently sells at $60 billion.
HPQ: Hewlett Packard is another company that gets a lot of bad press. You probably can’t name two people on HP’s board, but you have probably heard that their board is inconsistent and controversial. That seems to have changed.
Meg Whitman is the new CEO and is very well liked by the board. She has proven she can lead a large company and is not CEO for the money (she is a billionaire). The addition of activist investor Ralph Whitworth to the board is also a clear sign HP’s board is looking to gain a shareholder’s perspective and create value for shareholders.
HP is struggling in its PC business and faces challenges gaining market share in tablets (if it decides to try again at tablets, which is very likely given tablets will compete with PCs). However, the PC division only accounts for 13% of HPs earnings. The Imaging and Printing division and Services division account for 65% of earnings.
With $4 in EPS expected in 2011 and $4.5 expected in 2012, HP appears undervalued at $28. As a sum-of-the-parts valuation HP should sell at a p/e of at least 10, giving it a valuation of $45 in 2012. That, of course, is if EPS meet expectations. If they do meet expectations, the stock could be up 60% and still trade at a p/e of only 10.
MSFT: Microsoft is getting a lot of press lately too, but it is mostly about how investors think it is undervalued. Search for articles on Barron’s, Seeking Alpha, or other investing sites and you will find a large number people saying it is cheap. Often I go against the crowd, but this time I agree with it.
Microsoft is slowly growing sales and earnings. I don’t expect predict organic growth rates to be higher than mid-single digits in the coming years, but with about $30 billion in excess cash, Microsoft has the ability to make strategic acquisitions. If you deduct excess cash from the current market cap, it sells at a p/e of 8. Even without deducting excess cash Microsoft only sells at a p/e of 9.25.
I am not sure what the intrinsic value of Microsoft is precisely ($36-$48 is my range), but it is definitely above 8 times earnings after excess cash.
TCHC: 21st Century Holding Company is a small homeowner’s insurance company in southeast Florida. It has struggled the last few years and is turning around. With a market cap of $20 million, it is only for the small investor (I bought shares recently and paid about a 10% premium).
In 2008 and 2009 the company struggled with losses on its investments in bonds and stocks. The investment portfolio has since turned around, but TCHC faced a very tough operating environment the past few years. A combination of high reinsurance costs and low premium rates created losses.
In the past year TCHC was approved to increase premiums in the double digits and reinsurance costs have declined significantly. TCHC swung to a profit in the last quarter and 2012 will likely be a profitable year as well.
TCHC currently trades at $21 million and has a tangible book value of $55 million. In 2007 TCHC earned $21 million in profits (today you can buy the whole company for $21 million). While I don’t believe TCHC will earn $21 million anytime soon, the potential is there a few years down the road. If the next few quarters are profitable, which I believe they will be, the stock could soar.
ALLY-PB: Ally Financial was formerly known as GMAC. It has 15 million customers and provides financing to GM (GM) and Chrysler dealers. It also is growing its online banking business, Ally Bank.
In 2008 the U.S. Treasury bailed out GMAC and controls nearly 70% of the company. It changed its name to Ally Financial last year.
Ally planned to have an IPO in 2011, but that was delayed due to the volatile stock market and the losses from its mortgage lending unit. Ally reportedly made a $1 billion profit in 2010 and was profitable for six straight quarters before the mortgage lending unit had losses. The IPO will now likely be in early 2012.
They are exploring the option of bankruptcy protection for their mortgage-lending unit, which lost $555 million in the past two quarters. This is a strategic step to make the IPO more attractive to investors.
Given that there is an upcoming IPO, the Treasury owns 70% of Ally, and that Ally is profitable, it seems unlikely they would default on their preferred stock. The U.S. Treasury has $16.3 billion invested in Ally and to get its money back Ally has to have an IPO and be able to raise capital through preferred stock and bonds. A default on preferred stock right before an IPO seems highly unlikely.
ALLY preferred B shares are trading at $17.50 with a par value of $25. They pay out $2.125 in dividends a year, giving it a current yield of 12%. With a 12% yield and the potential for it to rise 40% in price, this could be a great addition to your portfolio.
BAC-PJ: Bank of America preferred J shares are trading at $21 with a par value of $25. Some weeks you can find it trading below $20.
The shares currently yield 8.5%. Warren Buffett’s recent purchase of $5 billion of Bank of America preferred shares yield 6% for Berkshire Hathaway (BRKA) and have warrants attached. In the open market, you can get an 8.5% yield and some upside potential as well with BAC-PJ.
MET: MetLife is largest life insurance company in the U.S. and you will probably recognize their snoopy logo. The company trades for $34 billion and has a tangible book value of $48 billion. MetLife is expected to earn $5 per share in 2011 and 2012. The acquisition of Alico from AIG should add significantly to earnings going forward.
Shares have fallen from $46 to $32 since the beginning of the year. If the stock goes back up to $46 it will sell at a p/e of 9 and at tangible book value, which is a justifiable valuation. With the stock currently at $32, if the company goes back up to $46 investors will gain a 40% return.
Additional disclosure: Some of my clients own stocks mentioned above.