A question I am trying to answer for myself currently is whether to continue to add to existing holdings or to initiate new ones.
For me the problem is that Bank of America and AIG are more expensively priced now than when I initially invested.
This leads to the superficial thought that the gain has been gained, but then there is an obvious next question to this; if so why don’t I sell them then?
I have found a useful model to use is to ask myself, if a shareholding was accidentally sold would I immediately buy it back or not?
This way of thinking clears out the mistaken thought process of holding on to stuff that should be sold (i.e. I wouldn’t actually re buy it) or conversely not adding to positions because they have increased (the ‘yes I would buy it back because there is still considerable upside’ answer).
In the case of both of the above shares I would still most emphatically re buy them because:
In the case of BAC it is trading at 1 times tangible book value (the measure of real assets) and at about 65-70% of intangible book value (the value including good will). This second value is not as silly as it sounds if one considers the cost and time it would take to create BAC from scratch, effectively its nigh on impossible so there is an intangible value to the company as long as it’s solvent and making profits (which it now very much is).
Banks historically have sold for around half tangible book value at the worst of times, and 2.5 to 3 times at the peaks.
As a comparison Wells Fargo and US Bankcorp are currently valued at 1.9 and 2.5 times book so BAC has a lot of upside.
Litigation is still on-going which is depressing sentiment, but the costs of working through the problems are dropping rapidly and within the next 18 months the annualised savings on expenses are estimated to be around $6 to 8 billion; this flows straight to the bottom line as profit and is perpetual.
In addition BAC will in all likelihood initiate a dividend which will be much welcomed by investors in the next year (ish).
Looking at AIG, it currently sells for about 70% of book value, has great management, has growing profitability and is a world class business, enough said really!
It still trades at a depressed level because it nearly died in 2008/9 which people still remember and are thus afraid of it.
The reality is that it’s financially very secure, the issues that caused the problems are no longer there and it’s sentiment not reality that’s depressing the share value, making it an ideal value investment (beliefs will change, value is the truth).
If you are considering a new portfolio today both of the above stocks are worthy candidates.
If one wanted to buy the equivalent UK financials the best options would include Barclays, Lloyds and possibly Bank of Ireland (although this is € denominated so there is a secondary currency consideration as with the two US stocks).
The TATA motors analysis is coming by the end of the week and the share price keeps getting cheaper due to the Indian economic and currency issues, an opportunity?
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.