The global financial markets have been experiencing a rough ride over the past few month, with debt issues and other related uncertainties making investors nervous, leading them to sell stocks. Since uncertainty is always reason enough for the contrarian for bargain hunting, I have used the time to buy more of the stocks that I already own in my portfolio and that I intend to hold for the long term.
Falling stock prices are a good thing, as they allows me to buy more of the stocks of companies that I already liked at a higher price. So, if stock prices fall, why wouldn't I buy into more of them? I have posted in the past that I am heavily concentrated in financials. In fact, I am holding common stocks and TARP warrants of almost all of the big and hated names in U.S. elite finance: Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and American International Group Inc (AIG).
With the exception of AIG, I am not betting on any stock in particular, as I am a firm believer in the recovery of the United States in general. Financial companies will be at the heart of this recovery, which will as surely come as the sun rises every day. Over the last two to three years, I picked up big household names on the cheap and continue to do so as long as financials are hated. Even though I am overweight AIG, my preference has shifted a bit to BAC as the most beaten financial underdog, and the fundamentally strong, but recently attacked JPM.
Bank of America
Bank of America continues to be the most hated and undervalued stock of the big name financial stocks. With a P/B ratio of only 0.35, Bank of America remains deeply undervalued even though mortgage related issues are continuously worked off. In my opinion, the darkest place to hunt is always the best. Investors continue to price in material writedowns and balance sheet holes that lead to significant discounts from book value, or, margin of safety.
I really do not believe that investors can do much wrong with Bank of America in the long term, as the company has great leadership, a strong commercial footprint and franchise and a huge deposit base to draw from. The pessimism regarding Bank of America is so high and the earnings prospects are expected to be so dim, that BAC literally will have no problem in beating those liquidation-like scenario numbers. In my opinion, Bank of America is a strong buy and can hit pre-recession highs of $30 a share in a couple years time.
Jamie Dimon did a great job maneuvering the company through the financial crisis and making JPMorgan one of the big benefactors of it by buying up Bear Stearns and Washington Mutual on the cheap. JPMorgan's stock price tanked after the announcement of trading losses, which caused a temporary change in sentiment, as JPMorgan seems to be one of the more trusted financial franchises on Wall Street.
JPMorgan currently trades at only $34 a share with a forward P/E multiple of 6.45x, which is way too low a multiple for a leading, well capitalized bank that came out the financial crisis stronger than before. To me JPMorgan is a clear buy with significant upside, especially now that the stock price seems to be impaired because of the derivative bets. Investors can pick up this brand name for 70 cents on the dollar (based on book valuation). A value of $70 a share and a multiple of $70 is more appropriate in my opinion.