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:
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:
Gain from March 2009 lows
|Bank of America||~ 300%|
|General Motors||N/A (back from bankruptcy)|
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.