Replies to post #124656 on Biotech Values

[bladerunner1717]

ariad,

About exactly two months ago, Hilary Kramer (probably not the most trustworthy name in investment advice circles--LOL) said that the financial sector was "incredibly undervalued." And she listed names. I would guess that the same names are now even more "incredibly undervalued." (She also said the Markets were entering a new bullish phase---hmmmm.) But anyway, here it is:

http://blogs.forbes.com/wallaceforbes/2011/07/18/u-s-financial-sector-is-incredibly-undervalued-debt-debate/?partner=yahootix


Bladerunner

[DewDiligence]

Attention, Shoppers! Blue-Chip Stocks Are On Sale

[Among the names mentioned in this Barron’s piece are PFE, MRK, XOM, CVX, MSFT, INTC, and JPM.]

http://online.barrons.com/article/SB50001424052702304183104576488481370158912.html

›The selloff leaves U.S. stocks at some of the lowest valuations in a generation, and at a time when corporate profits are healthy and balance sheets strong. The best asset class in the world?

AUGUST 6, 2011
By ANDREW BARY

After the recent plunge in major global markets, U.S. stocks look attractive.

The benchmark Standard & Poor's 500 index trades for little more than 12 times projected 2011 profits, one of the lowest price/earnings ratios in a generation. The Dow Jones Industrial Average has a similar P/E—11.6 times this year's estimated earnings. Its dividend yield of 2.62% exceeds the depressed 2.56% yield on the 10-year Treasury note, another rare occurrence.

This isn't the 1970s, when P/E ratios were low but inflation and interest rates were high. Investors are worried about different problems: a weakening domestic economy, Europe's debt mess, political dysfunction in Washington and a massive and seemingly intractable federal budget deficit. Yet American corporations rarely have been in better shape, with generally robust profits and balance sheets flush with more than $1 trillion in cash.

Analysts are loath to predict when the sell-off, which began July 22, might end, but many say they see stocks ending the year higher. If the S&P 500 merely gets back to its 2011 peak, set in April, the index would rise 14%. "The economy is doing well enough to keep earnings rising and bring some bullishness back to the stock market," says Jim Paulsen, investment strategist at Wells Capital. Management.

Investors have been rattled by the swift pace of the sell-off, in which the S&P 500 fell more than 10% in 10 trading sessions. This marks only the fourth such decline in a bull market since the end of World War II. The other three 10% drops occurred in late 1974, October 1997 (during the Asian crisis) and August 1998 (after the collapse of the hedge fund Long-Term Capital Management). The good news is that the market rallied an average of 18% in the ensuing three months after each of those three setbacks, according to J.P. Morgan strategist Thomas Lee.

Stocks might be near a bottom after a week of selling. The Dow finished Friday at 11,444.61, up 60.93 points in a volatile session but down 5.8% for the week. Most of the damage occurred Thursday, when the average fell 512 points, or 4.3%, its biggest point drop since late 2008. The industrials are down 1.2% for the year; they were up 10.7% at their April peak. The S&P 500 ended the week at 1,199.38, off 7.2% for the five days and 4.6% for the year [down 12.5% from the May 2011 high and up 80% from the Mar 2009 low].

The situation is worse overseas. The Euro Stoxx 50 index is down 15% this year, Japan's Nikkei is off 9% and formerly once-hot Brazilian stocks are down 24%. Every major European market except Switzerland has a P/E below 10, and European stocks yield an average of 4%.

Closer to home, the top 50 U.S. banks trade on average at around book value [but the balance sheets of large banks cannot be taken at face value, IMO]. They have been cheaper only twice in the past 25 years—during the deep recession of 1990 and the 2009 financial crisis. Both those times were major buying opportunities, and today, notes RBC Capital Markets analyst Gerard Cassidy, the industry's fundamentals are improving.

At 37.60 a share, J.P. Morgan Chase (ticker: JPM) trades below book value and for under eight times projected 2011 profits. [If I had to buy the shares of a big bank, this would be the one.] The stock yields 2.7%, which is likely is going higher. Citigroup (C), at 33.44, is down 29% this year and trades for less than 75% of book value of $48.75. Tangible book is a conservative measure of shareholder equity that excludes goodwill and other intangible assets stemming from acquisitions. Goldman Sachs (GS), at 125.18, trades just above tangible book, and Morgan Stanley (MS), at 20.02, changes hands below tangible book of $26.97.

A wobbly global economy poses risks for big financials, but the industry's capital levels are appreciably higher than in 2008 and leverage is lower. [But it’s hard to say what the true leverage is if you cannot take the figures on the balance sheet at face value.] It will be tough for most big financial companies to earn 15%-plus returns on equity in the coming years—a performance that was common before 2008—given higher mandated capital levels. But the stocks are priced for single-digit returns or worse.

Drug stocks, normally defensive, haven't done a lot to protect investors lately. Pfizer (PFE), at 17.49, trades for around eight times estimated 2011 profits [#msg-65791666], while Merck (MRK), at 31.71, has a similar P/E ratio. Both yield more than 4.5%. Government pressure on drug-cost reimbursements could escalate around the world, but that concern seems captured in drug stocks' low valuations.

Technology companies have more exposure to Europe than other stock-market sectors, but they also have excellent balance sheets and low price/earnings multiples. Microsoft (MSFT), at 25.68, trades for nine times estimated earnings for the fiscal year ending next June. Its P/E, excluding net cash and investments of $6 a share, is under eight. Intel (INTC), at 20.79, trades for nine times projected 2011 profits and yields 4%, while Hewlett-Packard (HPQ), at 32.63, fetches less than seven times current-year profits. Apple (AAPL) the market's premier mega-cap growth stock, at 373.62, trades for 14 times what it is likely to earn in the fiscal year ending September. Excluding $80 a share in cash and investments, its P/E is closer to 10.

In the energy sector, many investors prefer exploration plays and oil-service stocks, but the best value could lie in industry giants like ExxonMobil (XOM) and Chevron (CVX). [I agree; in the oil patch, I like XOM, CVX, HES, and CLB.] At 74.82, Exxon trades for under nine times projected 2011 profits and yields 2.5%, while Chevron, at 97.61, has a P/E of just seven based on estimated 2011 net. It yields 3.2%. The recent drop in U.S. oil prices to $87 a barrel from $100 could pressure profits, but the stocks look to be discounting far lower oil and gas prices.

The prospect of cuts in the Pentagon budget has crunched defense stocks. Northrop Grumman (NOC), for instance, now trades at 55.49, down from 70 in early July, and sports a P/E of eight. It yields 3.6%. Lockheed Martin (LMT), another major contractor, trades for 72.82, or 9.7 times earnings, and yields 4%.

Gold has been a bright spot, rising $36 an ounce last week to $1,663.80. The metal is up 17% so far this year. Gold is shining because investors fear that the U.S. government will continue to pursue policies—notably zero-percent rates and massive fiscal deficits—that will further debase the dollar and spark inflation. Gold remains an "underowned" asset class with few individuals and institutions with a sizable weighting, which could mean more buying.

While gold has gained, major producers have lagged. The leading miner, Barrick Gold (ABX), is down 14% this year to 45.86, and trades for just 10 times estimated 2011 profits. Gold bugs weren't happy that Barrick paid up to buy a major copper miner earlier this year, diluting its exposure to gold. There is rumored to have been heavy selling of Barrick by some institutional investors in recent months. Even so, Barrick has rarely had such a low P/E and its profits have a lot of leverage to gold prices.

Berkshire Hathaway (BRK-A, BRK-B) is a financial Fort Knox, with one of the strongest balance sheets among huge companies. Its shares have been no safe haven, falling 11% this year to $107,300, or just 1.1 times book value. Berkshire looks inexpensive with a price/book ratio that has rarely been lower in recent decades. Its earnings power has never been better. Berkshire CEO Warren Buffett has been cool to stock buybacks– the company has repurchased virtually no stock since he took over in 1965–but he ought consider a buyback rather than paying cash for another major acquisition, given Berkshire's low valuation.

Stocks had a tough summer in 2010 as the S&P 500 dropped 15% from its spring high to a low of about 1,050 in late August. That proved to be a buying opportunity as Federal Reserve Chairman Ben Bernanke came to the rescue with a new credit-easing program, known as QE2. By the end of 2010, stocks had risen 20% from their August lows.

While the Fed is more reluctant to begin a fresh asset-buying plan this year, stocks look even cheaper than they were last summer. Historically, it has been good to buy the stock market when its trades around 10 times earnings. Barring global financial mayhem, investors with a modicum of patience should do well. Stocks could be the best asset class in the world.‹

[RC2]

OT but anybody got any opinions or good buys in the bank areas looking for 1-2 good ones bac ???

There's a seasoned analyst named Dick Bove who bounces from one securities firm to another but who seems to command a good deal of respect. His comment on Bank of America (BAC), published 7/19/11, stock @ $9.42:


Reason to Buy (This was his conclusion. I bring it to the front to save you having to plow through his reasoning, but you may want to read on…)

I would agree that Bank of America’s earnings are going to be pressured for the next few quarters. I also am unable to gain certainty that the litigation issues facing the company will not become more difficult before they are alleviated. I do not see, however, why the company will need to raise capital when it literally has trillions of dollars in assets it can sell.
However, these are not the reasons that I have a buy on this stock. The core reason is franchise value. The bank has over a trillion dollars in deposits ($1.038 trillion) on its balance sheet. This is a unique source of future earnings. It has $139 billion in cash. This is greater than its tangible equity which is $125 billion. The cash per cash now equals $13.78 per share. This is 46% above the stock price and higher than tangible book value which is $12.42 per share.

At some point, the recognition of value is likely to appeal to investors. Then, over time, the earnings will recover. This is a very undervalued company despite its many problems and issues.



The report begins:

Highlights

Bank of America reported a second quarter loss of $0.90 per share (operating profit of $0.33 per share). This was 1 cent above my estimate and compared to a $0.17 per share profit in the first quarter. The earnings forecasts have been adjusted as follows: a) the 2011 estimate has been reduced to a loss of $0.35 per share from a profit of $0.44 per share (the company is expected to post an operating profit of $0.88 per share); b) the 2012 estimate has been cut to $1.42 per share from $1.66 per share; and c) the 2013 estimate has been reduced to $2.23 per share from $2.51 per share. The normalized earnings estimate has been cut to $2.50 per share from $3.15 per share.

Bank of America’s stock recorded a new 52 week low following the earnings report. Investors are concerned about four core issues: a) revenue generation; b) litigation costs; c) the net interest margin; and d) the capital adequacy of the bank.

Taking these subjects from the last to the first, there are estimates that this bank must raise $50 billion to meet regulatory capital requirements. While most investors appear to understand that this number is quite high, most believe that the bank must be involved in some capital raise near-term. They simply do not believe management’s claims that no capital raise will be required.

My numbers tend to support management’s view. For example, assume that the risk weighted assets derived under Basle III (actual formula not revealed as yet) is calculated by subtracting the cash and 50% of the company’s securities from its current assets. Further assume that management reduces RWA by 0.5% per quarter though the end of 2012.

Next add the estimated earnings available to shareholders to the current common capital (see actual calculations in appended company earnings model). This exercise supports management’s view and indicates that the bank will have a Tier 1 Common Ratio of 7.01% at the end of 2012 under the Basle III rules.

Revenue

Negative view

The first problem one encounters when making the capital assumption is that there will be no growth in the bank’s balance sheet. In fact over the next six quarters, the risk weighted assets are expected to decline by close to $60 billion. If one assumes flat margins then revenues from this source would decline. However, few are willing to make the assumption that margins will remain stable. The bank’s argument that the company’s net interest margin has troughed is being rejected.

The reason to reject the argument is that in the second quarter, the cost of the company’s liabilities rose by 2 basis points while the yield on the assets fell by 17 basis points. This caused the net interest margin to decline by 17 basis points. If one assumes that this downward trend continues then there will be lower margins on lower assets and Bank of America’s net interest income will fall for the foreseeable future.

Painting an even bleaker picture of revenue growth potential is the imposition of the Durbin Amendment in what will be the fourth quarter this year. This may cost up to $475 million in revenues per quarter without reducing costs in any way. Further, despite the expected settlement with some mortgage plaintiffs (see below), there is no sign, as yet, that the housing industry’s woes have stabilized. This suggests further issues with mortgage servicing income.

Push Back

While the quarter end data show that the bank’s lending actually increased on a sequential basis in both commercial and residential real estate lines, it is unlikely that these trends will continue as the bank attempts to shrink its balance sheet. However, it does seem likely that the net interest margin might improve. This is because the bank will be eliminating debt as it shrinks its balance sheet and it can force a positive mix shift in deposits. Beyond this I continue to believe that interest rates will rise throughout 2012 driven by a higher inflation rate.

Thus, while net interest income is likely to decline for the remainder of this year it is expected to recover in 2012. A similar assumption is being made about non-interest income. The negative impact of the Durbin Amendment will have been absorbed. Trading activity could pick up from the current very low level and the mortgage business should turn around even if housing does not.

Thus, revenues could come close to 2010 levels in 2012 and reach 2009 levels in 2013. By 2014, revenues could be at a new record for the company. These are not exciting numbers but they do represent forward momentum.

Litigation

The next big issue is housing/litigation costs. The bank believes that it is slowly getting control of the relevant issues and that it is lowering its exposure and its potential losses in this area. Investors simply do not believe this to be true. The big $8.5 billion proposed settlement with a number of plaintiffs is now in question. The attorney general suit is still alive. Housing prices have not stabilized.

The fear is that a combination of these factors will result in meaningful losses for which the bank has not properly prepared. Moreover, that these expected losses will result in a need for substantially more capital. Management spent some time arguing that this is not the case in its conference call and it provided it metrics to prove that the bank is not vulnerable.
Quite frankly, this one is too difficult to call. It is impossible for an outsider to know what the politicians or the judges may do in these cases. It does appear to me, however, that if there is to be an increase in inflation, the prices of housing will stabilize. Moreover, housing affordability has improved substantially in the past few years and this should also stabilize housing prices, also.

[zipjet]

good buys in the bank areas

Keep in mind that banking is inherently a derivative of the economy. They do well when the economy is healthy.

Take a look at recent bank reports. In general, you will see that bank deposits are rising nicely. Consumer finance lending is in decline. At some banks commercial lending is up. Overall, lending is flat to down.

The banks are benefiting from historically low cost of funds. But the margins (lending rate - cof) are slowly dropping.

IF I felt that I had to buy a bank, I would go with one of the best. JPM, WFC, USB. In a somewhat different "best" is COF (not referring to cof). They do junk credit card but do it exceptionally well. Their cof is very low, their margins (junk) are huge and they are very well run.

I would view BAC as an option (high risk) on recovery in the RE market and a return to trendline growth of the US economy. If those happen, BAC will print money. (BAC was once a very well run bank with a deep bench of bankers that knew what they were doing. That has been trashed to survive.)

All that said, I would stay out of banking for now.

zip