Even the best stock market analysts miss home plate more often than they’d like, but recent takes on the banking sector have been especially off-base.
JPMorgan (JPM) is a good example.
"I am not going to repeat my negative viewpoint on banks - I have done a lot of this already in my Diary all week,” TheStreet’s Doug Kass said recently. “But I’m astonished that JPMorgan owners have routinely defended their holding in the largest money center bank by repeating worn sound-bites without discussing the decline in Tier 1 Capital from 13.1% to 11.9% - which reflected the write-down of securities held for sale (mostly fixed income) and counterparty credit risks.”
Kass says that only on Wall Street can holders, who have watched JPM shares decline in price from $171 to $127, omit such important facts and seem blasé about the aforementioned erosion in shareholder value.
“The same applies to Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC.PRN) - that have all fallen from grace and are approaching 52 week lows,” he said. Those numbers underscore the fact that bank stocks have been among the worst-performing sectors in the last six months.”
“Yet, the vast consensus view was that, in a rising interest rate environment (seen in the last three months), bank stocks would be among the leading market performers,” Kass noted – and he brings receipts.
* The share price of the largest and most popular money center bank extant, JPMorgan , has fallen from $170 to $127.
* Citigroup shares, a favored "value play" among the banks, has dropped from $79 to $50.
* Among the better-performing large money banks, even Bank of America ($50 to $39) and Wells Fargo ($60 to $48) have performed poorly.
Why did bank investors get it so wrong? Kass a few ideas that investors should know about.
1. What has been lost on bank-stock investors is that over history, while bank earnings do well with rising interest rates (as net interest income climbs), it is normally bad for bank stocks and the U.S. economy. “That’s especially the case when that rise is as extreme as since February, presaging economic weakness and a reversal of the favorable banking trends (read: reduced credit demand, slowing economic growth),” he said.
2. Bank investors failed to recognize that banking is increasingly a competitive business that is being commoditized.
“The threat of non-bank financials and inflation is keen -- both of which have served to raise technology costs and general expenses at a time when many of the business lines' profitability is contracting under the constant pressure of competition,” Kass noted.
3. Bank investors failed to understand how a rise in interest rates would adversely impact the marks to market on "securities held for sale" and, in turn, capital ratios -- which will likely limit company buybacks
4. Bank investors failed to remember that the world has grown flatter economically and that, like in a game of dominos, lending around the world can be treacherous and victims of outlier events. “Russia is a good example of that,” he added.
5. Bank investors failed to understand how quickly investment banking revenues/profits can evaporate.
6. Bank investors failed to calculate the impact of a quick cyclical turn in investment management fees (lower bond and stock prices) and in reduced capital market activity.
7. Bank investors failed to recognize that the credit cycle can turn quickly.
“Above all, bank investors failed to identify that some bank managements (like Citigroup) can become victims of empire building and expanding geographical presence, at the expense of profitability and capital positions,” Kass said.
Banking isn’t the only sector under the microscope this week. TheStreet’s trading gurus are focusing on these stocks, as well.
Nabors Industries NBR $219.87. 5-day performance 24.67%.
Nabors Industries (NBR) is an “overlooked” energy play that should surprise on the upside, said TheStreet’ Bruce Kamich said on April 14.
Kamich sees NBR as an overlooked company that deserves more attention.
Investors may not know it, but Nabors owns and operates the world's largest land-based drilling rig fleet and they are a leading provider of offshore platform workover and drilling rigs? The stock has been rallying the past two years but the long-term picture is "interesting," in Kamich’s opinion.
“The daily bar charts of NBR show that prices have broken out on the upside after a sideways consolidation from April to February,” Kamich said. “Prices are now trading firmly above the rising 50-day simple moving average line and above the 200-day simple moving average line.”
“Additionally, the trading volume has become stronger this calendar year and confirms the price gains we have seen,” he added.
There’s more. The On-Balance-Volume (OBV) line has been rising since August as buyers turned more aggressive back in the summer. “The Moving Average Convergence Divergence (MACD) oscillator is in a bullish alignment above the zero line,” Kamich noted. “Also, our Point and Figure charts show an upside price target of $233.”
Kamich believes traders could go long NBV on a dip towards $170 risking to $145.
“Our price targets are $233 and $268 for starters,” he said.
Interface TILE $12.73%. 5-day performance (-) 0.47%.
Interface (TILE) stands as a solid “risk/reward” play right now, said TheStreet’s Paul Price.
“Seeing stocks you own and like go down significantly is disheartening,” Price said. “It can make you wonder if your investment thesis was faulty.”
When you can go over all available data and find nothing but good news, however, options are limited. Smart traders average down or re-initiate positions at the now heavily discounted quote, Price noted.
That’s where TILE comes into play.
“As of Monday, April 11, flooring manufacturer Interface TILE was off by greater than 30% from its November 2021 peak even though Q4 and full year 2021 results came in ahead of estimates,” Price said. “That nasty price action appears to reflect general market weakness rather than any company specific factors.”
Despite absorbing temporary setbacks due to the Covid crisis, TILE's recent decade showed positive growth across most major metrics. Cash flow and earnings per share both more than doubled. Total shares outstanding shrunk by 10.7% over those 10-years.
“Shockingly, Interface is now available marginally lower than it was exactly a decade ago and its total return was up less than 1% annually due to its severely depressed current price,” Price added. “That’s depressing news for those who bought and held but a fabulous opportunity for traders establishing positions right now.”
In similar scenarios, where huge value has already been created but is not currently reflected, the situation almost always gets rectified via "catch-up" moves higher which arbitrage away the disparity.
“TILE has a long history of sharp drops followed by even larger percentage rebounds,” Price said. “Since 2012, the stock's average price-to-earnings has been 17.6-times. As of Monday, TILE was asking just 9.7-times Value Line's 2022 projected EPS of $1.30. That is among the lowest valuations so far for these shares.”
Thus, a simple regression-to-the-mean P/E on this year's profits could easily send TILE back up to north of $22 by this time next spring.
Value Line assumes a sustainable 18 P/E in figuring its 2025 - 2027 target price range for TILE. In addition they expect EPS to rise to $1.80 by then. “If they’re even in the ballpark on those numbers Interface could double or triple from today's quote,” Price added.
Warner Bros. Discovery WBD $25.05. 5-day Performance 7.85%.
Is Warner Bros. Discovery (WBD) a “two thumbs up” stock?
Yes, indeed, says TheStreet’s Brad Ginesin, who’s bullish on this entertainment giant..
“We now have a clearer picture of investment opportunities with Warner Bros. Discovery WBD, after AT&T's (T) completed merger deal with Discovery removed any lingering static,” Ginesin said.
When the two companies traded as separate stocks on Monday, shares of T were under accumulation, rallying over 7% to $19.60 after an upgrade to overweight by JP Morgan with a $22 target. The WBD stock was generally flat, trading around $24.50, even though Deutsche Bank named it their top media pick with a $48 target and Evercore ISI upgraded the stock to outperform with a $40 target.
“The strength in T was a quick repricing of shares from a deep value situation,” Ginesin noted. “Overall, Wall Street likes the lack of business complexity and renewed focus on wireless. The valuation is palpable and the consistent, predictable cash flow is under-appreciated, a case I outlined for buying T on March 22.”
“At the time, T was trading at the implied price of $17 ($23.20 pre-deal close),” he added. “After the equivalent of a 15% rally in T, the stock can consolidate and is a buy on weakness.”
An opportunity for significant appreciation in WBD is possible, but the risks are also much higher to realize that return.
“Over the coming weeks, the stock may be especially volatile due to the flow back of shares from index funds that don't have a mandate to own WBD or from other AT&T investors who have no intention to hold the spun-off shares,” Ginesin said.
Evercore ISI sees the stock overhang as the buying opportunity for their upgrade on Monday.
The merger of Discovery with Warner Media, says Evercore, creates the second-largest media company after Disney (DIS) with 2021 revenues of $46 billion, a content budget of over $20 billion annually that supports a library with over 200,000 hours of programming, and the assets needed to successfully compete in the global direct-to-consumer video streaming opportunity.
That last part is what Evercore says is most important, Ginesin noted.
"We think the shares are undervalued," Evercore said. “That’s the case with WBD having a 14% 2023 levered free cash flow yield and a path to grow free cash flow/share at a double-digit rate per year thereafter.”
"As the spin-merge transaction structure is likely to create a massive supply of stock, we recommend (long term) fundamental investors to take advantage of this technical aberration as our (year-end) 2023 price target of $40/share provides over 60% upside from current levels,” the company added. “As such, we upgrade WBD shares to Outperform."
Evercore also finds the valuation compelling, noting that "WBD is the cheapest media company on levered free cash flow yield (14%) and the second cheapest on EV/EBITDA (7.9-times)."
MoffettNathanson takes a more conservative outlook with a $27 target on WBD, but it also seeks an opportune entry to buy from the short-term technical selling.
“The firm believes the combined Warner Bros. Discovery has an improved gateway to expand internationally, since Warner Bros. has been more focused domestically, in contrast to Discovery, which has assets abroad that can be leveraged,” Ginesin said. “The $3 billion in synergies will offer a pathway to huge cost savings leading to the No. 1 goal -- de-lever the balance sheet.”
Right now, Warner Bros. Discovery represents a true media and entertainment company hit, Ginesin said.
“The shares offer a compelling value, but will take time to form a new shareholder base and realize potential synergies,” he noted. “Buying WBD on merger-related weakness, likely to play out over the next few weeks, will provide a solid entry for long-term holders.”
