Best Time to Buy Is When Blood Is In The Street
The best time to buy stocks is when their is blood in the street. The global market is falling big time which is creating opportunities for investors to take advantage of. August has been one of the most volatile time in recent market history. This volatile has created opportunites for investors to purchase shares in companies that they have wanted to, however they have sold for large premium above fair value. Financial stocks are being hit hard with shares in numerous companies selling near their 52-week lows. The financial sector has been one of the hardest hit by the sell other then the shipping and commodities sectors.
Wells Fargo (WFC):
The bank is seeing again just like last its week its shares falling. Wells Fargo shares have fallen to $51/share that $6 from its 52-week low. Wells Fargo is also one of Berkshire Hathaway's largest holdings with the company owning over 9% of Wells Fargo. Wells Fargo produces operating earnings of $33.91 billion or $6.36 per share. The company has 10-year average operating earnings of $33.62 or $6.31 per share. Right now you can purchase share in Wells Fargo for 8.1x its operating earnings and 8x its 10-year average operating earnings. Wells Fargo is offering investors a operating earnings yield of 12 to 13% at its current price. The company should sell for at least 10x its operating earnings, which means shares would sell for $63.10/share. At it current price Wells Fargo is undervalued selling for at least a 15% discount to estimated business value.
JP Morgan (JPM):
Last week shares in JP Morgan fell below $60/share and currently selling for $61/share. Shares in JP Morgan rallied at the end of last week closing at $66/share. The bank produced $29.79 billion in operating earnings or $7.86 per share, and $30.55 billion in 10-year average operating earnings or $8.04 per share. Right now investors can purchase shares in JP Morgan for 7.8x operating earnings at $61 per shares and 7.5x its 10-year average operating earnings. At its current price is selling at least a 15% discount to estimated business value and offering investors a operating earnings yield of 12% to 13%. With U.S. 10 year Treasuries offering less than 3%, JP Morgan is a no brainer with a operating earnings yield twice that of risk free investment is offering.
Just like Wells Fargo, and JP Morgan, AIG saw its shares fall as well. Even after falling, AIG still sells far above its 52- week low of $48/share. However, AIG is selling for 0.75x its book book value Unlike Wells Fargo or JP Morgan. This is do probably from AIG receiving $150 billion bail-out from the U.S. Government. Before the financial crisis AIG sold at a premium to book value. Currently AIG is selling for a 25% discount to it book value. At 1.2x its book value AIG would sell for $92.4/share. The company produced $10.50 billion in operating earnings or $7.25/share and produce 10-year average operating earnings of $10.07 billion or $6.98/share. At its current price AIG is selling for 8x its operating earnings and 8.2x its 10-year operating earnings. AIG like both Wells Fargo and JP Morgan is offering investors a 12% operating earnings yield.
The company just like AIG is selling below its book value, however the company is selling for more than 10x its operating earnings. Citigroup has underperformed its piers as a whole since 2009. The company is profitable however its has broad emerging market exposure. Citigroup receive far more revenues and earnings from abroad than its leading competitors. With what is happening in China and other emerging markets will directly hurt Citigroup. The company produced $14.36 billion in operating earnings and $20 billion in 10-year average operating earnings. Citigroup is selling 10.5x its operating earnings and 7.8x its 10-year average operating earnings. The company has a operating earnings yield of 9%.
Goldman Sachs (GS):
Goldman Sachs is one of the most profitable investment banks in the world. It has survived numerous financial crisis over it 180 years. The company produced operating earnings of $12.35 billion in 2014 or $26.11 per share. Goldman has produced a 10-year average earnings of $12.17 billion or $25.72 per share. Shares in Goldman fell to $182 yesterday, investors could have picked up shares for 6.9x operating earnings and 7.2x its 10-year average operating earnings. Goldman was offering a operating earning yield of 14% at $176. Shares rose back to $186 by the end of last week. Goldman is selling for 10.5x its earnings and offering an earning yield of 10% at $186.
All of these companies are offering investors potential returns of 9% to 13% which far exceeding that of the yield of a 10-year treasury. The global equity market is falling and numerous emerging market are entering bear market territory thanks to a number of factor. Canada is the first major Western nation to confirm that its economy has fallen into a recession. I believe a few more countries will fall into recession as the global economy is clearly slowing down. This will lead to more sell-offs in the market, which will create more opportunities. Remember shares going down are good. A falling market is enlarging your margin of safety by increasing the discount between market price and business value.
Posted in ...Market Commentary