The Most Shocking Buy Opportunity in the Market

If you can keep an open mind while other investors are keeping theirs firmly closed, I have an opportunity for you.

I can count three strikes against this shocking opportunity, but I think it's a great opportunity nonetheless.

The shocking opportunity
At the risk of losing you a few lines into my column, here it is:

Buy shares of Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , General Motors (NYSE: GM  ) , and AIG (NYSE: AIG  ) .

Before I tell you why I view a basket of these four stocks as an opportunity, let me briefly explain the three strikes against these companies.

Strike 1: These companies were bailed out
Each of these companies needed massive government assistance to weather the recent financial crisis.

In fact, they are the poster children of Wall Street and big business gone bad. Citi and Bank of America are the most toxic Wall Street banks that survived. General Motors went bankrupt even after great government efforts to keep it afloat. And, as detailed by uber-writer Michael Lewis, AIG may be the company most responsible for the financial crisis.

Strike 2: Shares have already shot up
If you're just looking at the stock price charts, it feels too late to get into these stocks. Check out the recent run-ups:

Company

Gain from March 2009 lows

Citigroup ~ 400%
Bank of America ~ 300%
General Motors N/A (back from bankruptcy)
AIG ~600%

Source: Yahoo! Finance. N/A = not applicable.

Strike 3: It could happen again
The scariest strike of all is that each of these companies could fall again. Despite financial reform, Citi, Bank of America, and AIG can still hide shenanigans on their balance sheets (or off their balance sheets!). As for GM, it's just emerging from its post-bankruptcy IPO. Unlike Ford (NYSE: F  ) , which didn't require a bailout and has been making noteworthy operational strides under CEO Alan Mulally, there are still big questions lingering about GM's viability in the global marketplace.

3 strikes ... and they're a buy!
After all that, why am I excited about these four stocks? Basically, despite the run-ups in share prices, the upside of each of these stocks is still being underestimated by the market.

Citigroup and Bank of America are trading at price-to-tangible-book values of 1.07 and 1.02, respectively. Compare those figures with the European banks, which are neck-deep in their own crisis. National Bank of Greece (NYSE: NBG  ) and Banco Santander (NYSE: STD  ) of Spain have been popular contrarian plays recently. But at price-to-tangible-book values of 0.89 and 1.53, respectively, I just don't think we're quite at prices that sufficiently factor in the added country-specific risk (NBG is getting close, though). On the other hand, I think we're at the point with Citi and Bank of America where the reward is worth the risk. With the government in the process of selling its remaining shares in Citigroup, Citi and Bank of America have already gotten through their bailouts and avoided destruction. The same is not true of their European brethren, but you wouldn't know it from the price multiples. 

Emerging from bankruptcy, General Motors is now streamlined and sports a pretty darn clean balance sheet. Its cash position roughly cancels out its debt and pension obligations. In addition, per The Wall Street Journal, GM was allowed to keep up to $45.4 billion in pre-bankruptcy losses for tax purposes. In other words, it doesn't have to pay taxes on its first $45.4 billion of profit. If you believe GM management's projections (roughly $10 billion in annual pre-tax, pre-pension-gains profit within the next few years) and factor in this tax break, GM is trading at around 5 times future earnings.

AIG is probably the biggest black box of these four -- and the biggest risk. Shares recently shot up as the government is finalizing its plans to get out of AIG over the next couple years. Keep in mind that the massive selling of government shares (it owns between 79.8% and 92.1% of AIG depending on how you do the math) has the potential to depress share prices for the duration of its selling activity.

Trying to figure out an exact intrinsic value on AIG is a fool's errand. I won't attempt it here. But what we know is that it's still selling for well below its former highs and that if it returns to being a world-class insurance company rather than a business school case study, it's a big winner from here. We also know that master investor Bruce Berkowitz of Fairholme Fund is continuing to load up on the stock. Per Dow Jones, he now owns 30% of the non-government shares of AIG. That's a strong vote of confidence.

Buy, buy, buy, buy
Each of these four companies -- Citigroup, Bank of America, GM, and AIG -- is easy to discount. And many investors do. That's why this buy opportunity is so shocking.

This investment is certainly risky, but I believe the gains from the winners will outstrip the losses from the losers, and I believe this basket of four will beat the market handily from here.

If you want a few more ideas, we've put together a free report with five ideas from five of our Motley Fool analysts -- including me. Click here to download a free copy.

Anand Chokkavelu owns shares of Citigroup and Bank of America. General Motors is a Motley Fool Inside Value pick. Ford Motor is a Motley Fool Stock Advisor choice. The Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (24) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2010, at 12:01 PM, Guuma wrote:

    Your nuts...

  • Report this Comment On December 13, 2010, at 12:44 PM, thefoolkiller wrote:

    I commend your courage. Most people in the media don't have the ability to do a rational analysis--and even when they do, they wouldn't present the conclusions you reached because it's unpopular to write anything that's positive about the banks. And heaven forbid we write anything the mindless masses don't want to hear. A year from now, they'll all be sorry they missed the boat..

  • Report this Comment On December 13, 2010, at 1:06 PM, stockmajor wrote:

    Citi and BAC aren't half of what their stock values will be within the next year or two. They are on sale and I am long. Patience will pay here.

  • Report this Comment On December 13, 2010, at 1:39 PM, TEBuddy wrote:

    I already came to the same conclusion when they were lower I have shares of Citi below $4 and AIG around $34. Both are long, even though I could take my money and run, there is a lot more to come.

  • Report this Comment On December 13, 2010, at 4:05 PM, TMFBomb wrote:

    I just received an e-mail question.

    "What are your thoughts on the possible Wikileaks BofA info coming at the beginning of the year? Minor speed bump?"

    Scary as possible revelations are in PR terms, my best guess is that the effect on BAC will be more speed bump than catastrophe. Think about the effect all the bad publicity had on Goldman Sachs...not much in hindsight.

    For more, check out the thoughts of two of my colleagues.

    Morgan Housel

    http://www.fool.com/investing/general/2010/12/01/banks-worst...

    Jim Royal

    http://www.fool.com/investing/general/2010/12/01/is-wikileak...

    Fool on,

    Anand

  • Report this Comment On December 13, 2010, at 4:33 PM, ofstej wrote:

    @ guuma

    Your nuts???? I'm not sure what kind of site you think this is, but I don't think we should be commenting on the writer's nuts.

  • Report this Comment On December 13, 2010, at 6:20 PM, XMFRael wrote:

    good one.

  • Report this Comment On December 13, 2010, at 6:37 PM, djm20 wrote:

    With regard to the 'nuts' debate, one must acknowledge the season and that it is natural for these to be roasted on an open fire. Happy holidays.

    On a serious note, I bought Citi a few months ago figuring I would go again the common wisdom (if there is such a thing in investing). It won't break me if it takes a nosedive, but I will be enjoying a more prosperous New Year if it climbs.

  • Report this Comment On December 13, 2010, at 6:41 PM, stan8331 wrote:

    What scare me about the big investment banks is nothing has really changed. They're operating pretty much exactly the same as before the crisis, blithely unconcerned by reform legislation. Even their compensation policies haven't substantially changed. As time moves on and our memory of the crisis becomes less and less fresh, the temptation to juice profits with increased leverage and risk will again become too powerful to resist.

    I agree that the stocks of the big banks could soar as the recovery continues to unfold, but I can't help seeing them as a ticking time bomb.

  • Report this Comment On December 13, 2010, at 6:49 PM, CashorStock wrote:

    I picked up BAC at 4.8833 and after it little more than doubled sold 1/2 so I could play this on the house money. Staying long on the rest.

    I was planning a light try out of GM, had not considered C or AIG, will have to ponder those, not sure I want 4 stocks at that risk level in my modest portfolio.

    Will be very interesting to see how these buyer beware picks work out.

  • Report this Comment On December 13, 2010, at 7:28 PM, mtracy9 wrote:

    Ford is a better buy than GM. It trades at a low forward P/E ratio of 7.8. It's cash position also roughly cancels out its debt, as long as Ford finance (which has nothing to do with Ford manufacturing) is not added into the equation. Ford is already hitting on all cylinders in its recovery (as evidenced by its earnings in the last 4 quarters) whereas GM has a ways to go.

  • Report this Comment On December 13, 2010, at 7:58 PM, TMFBreakerRob wrote:

    Good goin'! I'm glad to see an open minded evaluation of unpopular companies. It's when we look at possibilities and refuse to be bound by rigid thinking or emotions that we can see opportunities that would otherwise be missed. :)

  • Report this Comment On December 13, 2010, at 8:31 PM, easynow7 wrote:

    I agree with the position on these 4 banks. I am currently short on BOA though. I think that the Wikileaks thing will be very bad for the stock. Once it hits though I will reverse my position pick the stock up cheap and def go long for 2011

  • Report this Comment On December 13, 2010, at 8:35 PM, eldetorre wrote:

    Are you kidding me? Those price-to-tangible-book values are cooked! You do recall that mark to market has been effectively suspended don't you?

  • Report this Comment On December 13, 2010, at 11:10 PM, kydderr wrote:

    i agree; you are nuts! as the man says...fool on!

  • Report this Comment On December 14, 2010, at 12:44 AM, raskew wrote:

    I purchased 200 shares of Ford (F) at $11.25 in September, 2010.

    I have almost gotten a 50% increase in three months!!!

  • Report this Comment On December 14, 2010, at 1:37 AM, dividendgrowth wrote:

    The old Mark-to-Market rules are non-sense to begin with.

    They don't market your house to market every day either. So why should MBS be any different. The underlying piece of real estate has value regardless what happens, even if another Sherman marches by and burns them down.

  • Report this Comment On December 14, 2010, at 10:32 AM, TMFDiogenes wrote:

    True, but my lobbyists haven't convinced regulators to let me mark my house to the spreadsheet models on my laptop either.

  • Report this Comment On December 14, 2010, at 11:17 AM, TMFBomb wrote:

    @stan8331, eldetorre, dividendgrowth, and TMFDiogenes,

    The balance sheets of these banks (including the mark-to-market accounting) are just this side of a black box. It's a fair point that the books are so inscrutable as to render price multiples meaningless.

    All that factors into the risk of these investments. Let's be clear here...there is real risk in these companies and I'm happy parting with these types of companies if the investment thesis (that the market is temporarily undervaluing these companies) hits...as opposed to the buy-at-good-prices-and-hold Coca-Colas of the world.

    -Anand

  • Report this Comment On December 14, 2010, at 10:45 PM, mikecart1 wrote:

    I own C under $3

    BAC under $4

    Never bought GM (thank God)

    Never bought AIG (we shall see)

    I believe AIG is toast like butter and jelly.

  • Report this Comment On December 15, 2010, at 7:43 AM, riffdex wrote:

    I agree with your picks except GM.

    I've been considering C and BAC, but I'm afraid AIG is simply too risky for me. While I think it's possible it could return to its former glory (can I even call it that?), I'm not willing to bet much on it.

  • Report this Comment On December 17, 2010, at 11:31 PM, whyaduck1128 wrote:

    I own some C and will consider BAC and GM, but AIG? Vaporware.

  • Report this Comment On December 22, 2010, at 5:34 AM, LACEYLEE wrote:

    I bought Ford @ 12.00 because they didn't need a bailout and probably produce the best quality domestic car. Own an older Ford truck and drive a Camry. Ford is positioned best to be very profitable when the recession ends.

  • Report this Comment On December 27, 2010, at 6:26 AM, uupdnn wrote:

    I'd hold off on bac as wikileaks is rumored to have something 'pretty ugly' coming out on bac fairly soon.(ie or not),,, citi always seems to survive and phoenix itself,,,alawali still has two feet in...although he did trim....jpm is the sure bet,,over time?

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