Accumulate These Banking Stocks in 2016
Accumulate These Banking Stocks in 2016
Hi Real Life Traders! It's Adam Faragalli again with another sector that is looking like a contrarian's dream, banking stocks. If you followed any of our trade recommendations on energy back in February of 2016 you should be looking pretty right now. And just so you know, at RLT we don't just write about our ideas like everyone else, we actually execute them and here is a screenshot of those positions. Lets just say while I'm happy now there is much more room for gains and to lock in those long term capital gains before I plan to sell most of these positions.
So moving on, let's talk about the banking stocks that have my attention. Love banks or hate them - they control everything. They own your car, home, hold your retirement savings, your debt and your ability to borrow. They control and do influence the largest of companies and countries. After all, it's all about the haves and the have nots right?
Buying a bank stock for me is kind of like buying Comcast. Both Jerremy and I dis-like Comcast for so many reasons, but I recognized their monopoly in my local area (basically, the south) and looked to act when the stock traded around $20 bouncing off its 200 long term support in 2011. When it went to $64 I didn't feel as bad at being royally screwed over for internet and TV, but I still hate Comcast. So let's apply this 'love to hate them' principle on some bank stocks.
For this article, there are three diverse banking zones that are interesting to me right now. The first is European banks, specifically Deutsche Bank (DB), Credit Suisse (CS) and the Hongkong and Shanghai Banking Corporation (HSBC).
These are the big boys. These banks are the definition of 'Too Big To Fail'. They have also been around a really long time. I bet you didn't know that Credit Suisse was established in 1856, or HSBC in 1865, or Deutsche Bank in 1870. They have not been publicly traded that long, but you get the point.
Guys, these three are undervalued right now. These 3 stocks, Jerremy covered in his Real Life Stock Review on April 11th, 2016. From that video, they are already starting to bounce.
It does not take a rocket scientist to see that they are trading not only below their historical norms, but also way below their historical book values. Consider this, as of writing this Deutsche Bank has a price to book value of $0.32. That is music to my ears. Would you like to buy an asset for less than a third of its total intrinsic value? Well sure, where do I sign?
If you consider that as of writing this JPM, the largest bank in the U.S, has a book value of $0.96 you should start to see a slightly bloody picture here. Now, Credit Suisse trades at $0.60 price to book and HSBC for $0.62, both undervalued right now. Consider that HSBC's average book value over the past 5 years has been $0.99 means it has been fairly valued. Not today!
I could go into the why these banks are so low. We could talk about the large goodwill write down that Credit Suisse was forced to take in the 4th quarter of 2015, or that central bankers are playing with financial fire trying their best to stimulate the European economy. Bottom line, I don't really care why, because if any one of these three banks fail it would mean damn near the equivalent of the Roman Empire collapsing. And while the collapse of the modern world is still possible, I'm willing to bet these three will make it.
Frankly, I'm willing to bet that Europe (you know, that collection of countries that has survived for thousands of years), will be just fine.
Now, lets turn our focus over to Japan. I don't quite know why, but I love Japanese products. I love their car companies like Honda and Toyota and all those wonderful technology companies like Sony, (but not Samsung, that's Korean!) So let's see if we can learn to love their banks. There are three that I have my eye on right now. They're Mitsubishi Financial Group Inc. (MTU), Mizuho Financial Group (MFG) and Sumitomo Mitsui Financial Group (SMFG).
MTU trades at a very attractive $0.53 book value. It is also the largest bank in Japan with a market cap of $67.7 billion as of writing this. Beyond that, the bank is making money and trades at a forward P/E of only $7.13. This stock is a fundamentalist's wet dream, but what is also cool is that MTU is diversifying their company to focus on investments outside the sluggish Japanese economy. For example, I bet you did not know that MTU owns 21% of Morgan Stanley (MS). Yes, that is the Morgan Stanley here in the U.S. They bought them for $9 billion back at the height of the 2008 financial crisis. For me, that's just another reason to buy this stock.
SMFG trades at another attractive book value of $0.56. And the P/E ratio is even lower at $6.12. It is also a massive 43 billion dollar company with international reach. To round out the numbers MFG is also $0.56 and has a market cap of $38 billion.
Now SMFG, MTU and MFG are being forced, because of negative interest rates, to pursue positive returns outside of Japan. And do you know what the Japanese banks have been doing with their capital? Investing in struggling oil companies and countries! That's right, Bloomberg recently reported that SMFG was the TOP loan arranger for the second straight quarter in the six-nation Gulf Cooperation Council. This was a first for an Asian bank in the region. Interestingly MTU was third! So bottom line, if you are long term bullish on energy (as I am), then these three banks will be especially benefiting.
The last area of banking stocks that I am going to cover are the U.S. banks. Like the majority of the domestic blue-chip stocks are either fairly valued or overvalued. There are only two stocks that I see as a buy right now for U.S. banks. These are Bank of America (BAC) and Citi Group (C). I am not saying that JPM, STI, WFC, COF or FITB are bad buys either. In fact, the banking sector is a buy right now - period, but looking at the technicals and fundamentals, BAC and C do stand out to me.
BAC's long term chart is brutal. I mean the stock is acting like it was fired back in 2008, but never got the memo that you can return to work. From $54 to only a HIGH of $18 in the past 8 years? Today BAC is trading at a book value of only $0.62. That is a very fair price for a very large bank. In fact, they're the second largest bank in the U.S and one of the top 10 largest banks in the entire known universe. The P/E ratio is also below average at $10.74, and it pays a small but decent dividend. So yeah, go buy some BAC and watch this stock return to its historical averages within the next few years.
Now interestingly enough, City Group is very similar to BAC, except this stock was not fired it was taken out back and shot. I mean, lord, from a high over $550 to today's humble price of $44 bucks? What is crazy is even at that price the market cap is $132 billion. The fundamentals are sexy too. The P/E ratio is only $8.27, and the book value is only $0.58! So yeah, go buy some Citi Group and hold that sucker for a few years. I don't think you will be disappointed as the dividend will also be a nice plus along the way.
So there you have it. You now know my thoughts on the banking stocks that I am most interested in. Now I recommend everyone start buying, but not before I have built up a sizable position in them all first.
I am sure you might be aware, but our boy Newsome puts on a sensational episode every week called Finance Friday. It's from 5-6 eastern and he does record each session in case you can't make it live. He covers everything from short term trades, long term analysis, stock trades and in-depth long term option trades. He's really a magician when it comes to analysis.
I begged him to give out a link so you guys can see what energy him and his team of traders, students and friends bring to the table each week. Click here to check it out.
- Thanks for reading. Adam Faragalli
Adam has been called an old soul. He understands money is not the key to happiness, it's just there to help keep score. Adam is also a leader in digital marketing helping Titan Web Marketing Solutions Inc. grow as co-owner.