Give the perfect gift from American Express.
One thing I like about the recent turn of events in financials is the bargain you can find right now. There are some you want to stay away from of course but the bigger players are worth taking a look at. Companies like Bank of America(BAC) and Wells Fargo(WFC) are large enough to weather the really bad storms while others just may sink under the weight of their own debts.
Wells Fargo (whom I happen work for) is at a 52 week low at $23.23 in intraday trading. Two years ago, the stock split from the $70’s which dropped the price down to $36 roughly and since most financials trade in tandem, the stock is experiencing the same downgrades and downtrends others are. Does this spell doom for the company? Of course not. What’s happening is an overreaction by the market to the housing and credit crises currently going on and really, it’s overdue.
For a long time after the Silicon Valley bubble burst, everyone was looking for the next boom. In technology, the “web 2.0″ explosion could be seen as a kind of bubble, but VCs aren’t investing in phantom businesses anymore. Housing, it seems became the next bubble. Even as businesses in Silicon Valley began to fold, housing prices continued to rise. In some places (like where I live) prices still seem to have been unaffected. The mean price for a house in my area is $580k for a 2 bedroom 1 bath, 1200 sq ft. single story house. Add on another story and another $100k.
Wells Fargo, in its wisdom had only minor exposure to the sub-prime market that has taken out behemoths like Bear-Stearns. However, since these sector stocks all trade together, earnings can only play into a portion of the outlook. You have to dig deeper than earnings to understand why you might want to invest your money here.
WFC is looking at 13% growth through 2009 and a current PE of only 10. If you base your position on earnings alone, this stock should be at $60. That’s nearly triple the price currently. I try to look at an 18 month timeline because downtrends like this can take time to recover especially in this kind of market. I like the potential here and given enough interest (average volume is near 50k shares over a 10 day period) it could turn into a major momentum play.
Comparing this to Bank of America Corp. which according to earnings estimates over 2009 has 48% growth and also a current PE of 10. and you get some pretty unrealistic numbers for price targets. Based on earnings alone over next year, the mark is $170 a share. This leads me to believe most analysts are overestimating BACs profit potential and this stock hasn’t been over $55 in the last 3 years.
Taking that into consideration, sure, you could bank a double off BAC. They’re both about the same price and they both have as much potential to double or triple in value from here, but pick one or the other. You don’t want your portfolio to be overweight in any one sector.
I put 40% of my 401k each month into WFC and my company matches dollar for dollar so not only do I get the stock cheap, I get half of it for free. You can’t beat that!
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