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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 561  
Subject: Banks Date: 5/22/2013 6:30 PM
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I was wondering why there are no banks in the portfolio?

Many banks offer better (and growing) dividend yields than many of the stocks in the portfolio. There's a number of regional banks that didn't take an earnings hit during the housing bubble and continued to increase their dividends. Also, Canadian banks might be worth a look.

Then of course there's Buffett's favorite, Wells Fargo. Berkshire can't seem to get enough of their shares. The dividend is above 3%, and, on a total return basis, and a rising dividend basis, it's expected to handily outpace most of the stocks in the portfolio.

kelbon
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Author: TMFBigFrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 133 of 561
Subject: Re: Banks Date: 5/22/2013 9:46 PM
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Hi kelbon,

I was wondering why there are no banks in the portfolio?

Excellent question my friend. Before I answer, let me offer you an opportunity. Pitch a bank for the portfolio that passes on the criteria spelled out below. If you convince me, I'll write a "Why XXX Stock is Worth Owning" article announcing an intent to buy, then, if the valuation holds after the Fool's disclosure policy allows, I'll buy it for the iPIG portfolio. If you'd like, I'd be happy to credit you with the pitch in that article.

Criteria:
Dividend: Reasonable history, solid dividend coverage, recent dividend growth, and reason to believe the dividend growth can continue.
Valuation: At or below fair value using a fundamentals-oriented valuation methodology. If it's a methodology that requires a discount rate, please use 12% or higher as the discount rate.
Balance Sheet: Convince me it's healthy enough to survive another financial meltdown like the one we lived through in this past decade & help me understand why I should believe its dividend would remain covered & stable or growing in such a meltdown.
Diversification: This one should be easy, as there are no other banks in the portfolio. :-)
Exchange: I need to be able to buy the bank's stock on a major US exchange. Foreign banks are ok, but only if they're buyable on a major US Exchange.
Market Cap: It's very difficult to write these types of articles & publicly manage a portfolio on the Fool site if the companies involved have market caps below $300 million. Smaller cap companies can be volatile, the Fool's articles can be influential, and anything even coming close to the potential appearance of a "pump and dump" scam needs to be avoided. Please pick a company with a market cap above $300 million to make that not an issue.

Be forewarned, I may come back with clarifying questions...

Now, on to the original question...
There are two reasons why there are currently no banks in the portfolio:
1) Screening
2) A portfolio manager with a lousy history of real-money investments in bank stocks.

Screening: Most of the portfolio picks started with screens that included balance sheet measures & dividend measures. A lot of banks slashed their dividends and/or wrote down assets because of the financial meltdown & thus didn't pass the screen. Many of the banks that did pass were, as you mentioned, smaller community banks. Many of those wind up below that $300 million threshold. That makes them tough for "intend to buy" or "intend to sell" articles for the Fool.

History: Darn near every bank stock I've ever owned imploded. Some completely died in the financial meltdown. Some slashed their dividends & haven't really started recovering. One even looked incredibly healthy during the meltdown, then tried to commit suicide by making some incredibly ill-timed and poorly thought-out acquisitions. When it comes to investing, I have a fairly decent track record, with bank stocks as the biggest and (I think) most costly exception.

Clearly, I haven't figured out how to correctly analyze bank stocks, so any help you can share with me in order to improve would be most appreciated.

Best regards,
-Chuck
Inside Value Home Fool

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Author: 2ndHalf One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 134 of 561
Subject: Re: Banks Date: 5/22/2013 10:30 PM
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Clearly, I haven't figured out how to correctly analyze bank stocks, so any help you can share with me in order to improve would be most appreciated.

________________________________

This is one of the reasons why I won't buy any bank stock. Plus I am never quite sure what is on their books, or if what is on their books can be taken at face value.

There are probably a lot of smaller banks that are great investments. But I tend to stay clear of things I don't understand.

CN

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Author: SBNash55 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 135 of 561
Subject: Re: Banks Date: 5/23/2013 9:24 AM
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Just for the record, I love this kind of transparency from a Fool!

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Author: rainphakir Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 136 of 561
Subject: Re: Banks Date: 5/23/2013 9:50 AM
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>>> Just for the record, I love this kind of transparency from a Fool!
>>>
And the courtesy, and professionalism!

Thanks Chuck
Ralph

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Author: TMFRichDad Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 139 of 561
Subject: Re: Banks Date: 5/24/2013 5:40 AM
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In an inflationary environment, Banks do offer a unique advantage over other business types that need to hold a prayer meeting before they raise prices (else customers leave). More dollars chasing goods and services means banks will keep pace with inflation without doing anything. They'll still earn their net interest margin on the growing (due to inflation) loan book. As the purchase price of autos, boats, houses and the other things people borrow money to buy increase, so too will the amounts borrowed and a banks profits.

Rich

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