Banks
“When there’s blood on the streets, buy property.” - Baron de Rothschild
Every major bank is being hit with concerns over the debt they hold. Yesterday, Morgan Stanley reported a $3.7 billion hit to their fourth quarter earnings. Previously, Citigroup announced a $8-11 billion hit to their fourth quarter, after taking a hit in the third quarter.
While the fallout has been much higher than I anticipated, the recent sell-off has given everyone a great opportunity to buy.
Let’s look at Citigroup, for example. The big worry here is that Citigrup will need to raise capital or lower its dividend to increase its capital ratios. So what? Citigroup has many assets it can sell at less than firesale prices and who cares if they lower the dividend? It shouldn’t materially affect the long-term value of the company.
Even though the write-downs sound huge, Citigroup usually earns $5-6 billion per quarter after taxes. The two announced write-downs, after taxes, should only be equal to about 3 quarters of earnings for Citigroup.
After Citigroup takes the charges in the fourth quarter, the ship should start to right itself. In fact, analysts expect Citigroup to earn approximately $4.40 a share next year. This means you can buy this company, a company with an average ROE above 15% for a forward P/E of 7.6 (based on the price this morning of $33.41).
Citigroup looks cheap to me.
Disclosure: I own Citigroup. As always, perform your own research before making investment decisions.
