Point of No Return or Perfect Buying Opportunity?

The recent declines in many Financial stocks have put them in unprecedented negative territory.  Below we highlight historical charts of the percentage from 52-week highs for Lehman (LEH), Wachovia (WB), Citigroup (C), Merrill Lynch (MER) and Bank of America (BAC).  At its low point earlier this month, Lehman was 72% below its 52-week high, making it the furthest below it has ever been.  Wachovia is 68% below its highs over the last year, and Citi got down to 66% below back in March.  Merrill Lynch and Bank of America aren't quite at record territory yet, but they're getting close.  Back in 1998, Merrill got down to 65% below its 52-week high, and it is at -60% now.  In 1990, BAC was 66% below its 52-week high, and it's at -50% now. 

The consensus view is that the struggling Financials still have much further to go on the downside before the pain is over.  But if they fall much further, they might have dug a hole they can't get out of.  Taking a longer-term view of one, two, or even five years from now, will these charts have marked a screaming buy, or a clear sign that the companies were "toast?"

Comments

[Vobogeck]

Seeking Alpha produces too many of these bearish scary pieces in which the author does not give an opinion. I don't know who runs this site, but they should consider changing the name to Seeking Answers. You don't find "alpha" by following the herd.

[doug estadt]

I actually value this article quite a bit, I do business with some of the banks and have owned a few of their shares and am right now pondering the time to get back into them and this info is just what I'm seeking.

[ChannonH]

I take a hybrid position on the value of this article. Yes, it doesn't go far enough, but these are interesting charts. My question is, in each of the minimums (before this most recent one), how long has it taken for the stock to get back to the high it reached before taking the dive? To get back to 75%, 80%? Buying BAC at -51% and riding it to -20% could be a nice return.

[mallarde]

Who cares about hitting the top again? If it recovers half the loss you double your investment in, perhaps, 2 years or so.

I have ridden WB down from an average investment of $27 or so. I hold on because I see the stock recovering to the low-$30s, in a good scenario. This would be a great outcome for me after taking a large hit.

The question in my mind for WB is -- after you write-off the bad loans (taking a worst case scenario view), is that company a good value based on its core business? What are the cash flows of its core business? They seem to be growing at a healthy pace. The brand is strong and they have retail outlets all over the country.

[Vobogeck]

I agree that the charts are useful. I just wish the author had shared his/her interpretation. My interpretatio of the data is that we can expect these banks to bounce back to within 10% of the previous 52 week high within two years. A nice return unless all of them go bankrupt (an unlikely scenario). The pain that investors feel in buying these stocks only to see them drop another 10-20% is nauseating, but that is why "buying low" is so much harder than it seems.

[danf]

Regarding BAC, the market seems to be pricing in a significant cut in the dividend. Yield at these prices is 9.4%. I would certainly buy that if I didn't think a 50% dividend cut is coming in the next quarter or 2.

Any thoughts out there on BAC dividend ? Maybe this is one of those difficult places where announcement of a dividend cut would actually be a catalyst for the stock to turn around

[Just The Facts]

In my limited experience of 8 or so years, public companies will never pay a dividend over what can be gotten on Treasuries for more than a quarter or two. Regardless of their cash flow or profits, if Mr. Market drops their price so low that they start cutting into the money going to buy our national debt because they are pating way more, then they will slash their dividend.


Not sure why, but that seems to be the case. Pressure from "above", perhaps?

[lavalyn]

I like these "non-answer" type articles. If anything, it's these sorts of articles that help astute investors find alpha. Specifically, I don't like being spoon-fed the analysis and conclusion.

Bespoke points out some anomaly in the market, to illuminate where to do some further due diligence. Sure beats the pumping of the usual suspects (ETFC, FSLR, etc.) by the usual fanboy/girl crowd.

[Georealist]

Bespoke always presents data..it reminds me one's tax accountant.."You can certainly take these deductions...there is, however, a chance that..blah..blah..blah...
The real problem with this kind of presentation is that it doesn't take a position..it is...NOWHERE!! Of course, we need to make our own decisions and do due diligence...but what's the point of putting one's name out there if you stand for NOTHING???

[elsancudo]

Government is going to stop the excessive speculation in oil futures and only allow those who have a legitimate need to hedge positions participate in those markets. When that happens, the price of oil will collapse to the $60-65 a barrel range and retail gas prices will also fall precipitously. Then, the U.S. economy and world economies will bounce from the effect and within a year we'll see a horrific "Great Depression Two" when all of the intertwined financial derivatives, etc. these idiots have created implode. Mene Mene Tekel Upharsin to all.

[lavalyn]

There's no such thing as excessive speculation. Or rather, where there's excessive speculation, there's a profit opportunity.

And no, oil going up like this did not cause the financials to implode. Overzealous and irresponsible lending by the banks did.

[Tantrist]

A baited banker thus desponds,
From his own hand foresees his fall,
They have his soul, who have his bonds;
'Tis like the writing on the wall.

[.*.]

Tantrist.....I like it.....give us some more.
Thanks
We need more WH von Dreel in our posts.

[skrummydummy]

I DUNNO, ALL DEM STOCKS U SHOWED US WHENT BACK UP AGIN--PRETTY GOOD TOO. FOR D FURST TIME EVUR IM SORELY TEMPTED TO BUY BAC, IF'N I COULD AFFORD IT.

SKRUMMY

[bnj646]

As Congress looks to bailout the bad loans made by companies like CFC, the banking sector will rebound because the risk of write-offs will alleviate in the short term. However, next year we will see the beginning of another spike in adjustable rate mortgage resets which will be followed by increased defaults followed by increased writedowns etc peaking into 2011. With the some tech favorites hurting from pressure on the consumer, we may begin to see funds rolling money back into some of the financials trying to catch the bottom. So a short term trade in the financials may be a good idea (maybe up to election???) but long term I wouldn't touch them with your ten foot pole.

Quick side note: Home equity loans (which make up billions of dollars on the balance sheet of many lending institutions) become virtually worthless when a borrower defaults.