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Or, I guess I should say two stocks I'm rere-buying and two stocks I'm rere-re-buying over the next few days. In the real money portfolio I manage for the Motley Fool, this'll be my third nibble at Citigroup (NYSE: C ) and AIG (NYSE: AIG ) and my fourth nibble at WFC (NYSE: WFC ) and Apple (NASDAQ: AAPL ) .
Call this a modified version of buying in thirds and of looking within your own portfolio for new purchases.
Before we get to the financial companies (which are the primary focus of my real money portfolio), let's start with my rationale on the most-talked-about stock in the market.
It seems I've been catching a falling knife with Apple. As the stock price has fallen from its $700 highs, I've bought in at $529, $467, and $424... and now close to $400. I continue to be bullish because Apple and its leader, Tim Cook, continue to "think different." The financial press and armchair analysts alike have been spoiled by past success and are beating the drum for Apple to wow us. Now! But panic hasn't set in in Cupertino. Cook continues to play it methodically and close to the vest, allowing the world to speculate on TVs, watches, and cheaper iPhones.
Meanwhile, Cook broke with his cash-hoarding predecessor Steve Jobs by instituting dividends last year. He's also increased the share buyback program from $10 billion to $60 billion to take advantage of these depressed stock prices. That's in contrast to so many companies that do it backwards. The combination of dividends and timely share buybacks (as opposed to, say, ill-advised mega acquisitions) is great capital allocation -- something Apple's been criticized for in the past.
Maybe the next big Apple product will flop. And maybe Tim Cook will never fill Steve Jobs' shoes. But Tim Cook is comfortable in his own. He has so far shown himself to be product-focused, not Wall Street or image-focused. At bargain basement price multiples, that's plenty good enough for me.
AIG, Wells Fargo, and Citigroup
Now let's get to the financial companies. Unlike Apple, these three are within spitting (AIG and Wells Fargo) or shouting (Citi) distance of their 52-week highs.
That said, I believe the recovery of the financial sector isn't complete. We can see that most easily in the depressed price-to-tangible-book multiples. AIG is at just 0.6, Citi is at 0.9, and Wells Fargo is at 1.8. Their two-decade averages are 2.3, 2.8, and 3.3. It would take a fourfold stock price increase to get AIG to its historical average, and a threefold increase at Citigroup. At Wells, we're still talking about an over 80% boost.
There are many, many reasons a simple comparison with past multiples can prove problematic. For example, bears on Citi and Wells would argue that regulations like Dodd-Frank and Basel III will constrain bank profitability versus what we've seen in the past (and therefore, investors will rightly pay lower multiples of book value). Still, we get some feel for the potential upside, here.
When you are a poster child for failure, like AIG, it takes a while. The government once owned more than 90% of AIG. As of March of this year, that figure is 0%. Meanwhile, Fairholme Capital Management's Bruce Berkowitz (aka the defending Domestic-Stock Fund Manager of the Decade, as named by Morningstar) is so confident in AIG that he has dedicated almost 50% of his stock portfolio to AIG shares and warrants. In other words, he's bet his career on AIG.
Here's why. The government is now out of its business. Its balance sheet is now about half of what it was at its 2007 peak. As CEO Robert Benmosche put it on CNBC, "For now, AIG is a smaller and more focused company. It's a company that is in the insurance business. We are out of some of the financial derivatives and other things we were doing. So we're really basically going back to our roots, which is an insurance company." Now AIG can focus on its operational goals, like integration across units and better underwriting. As it achieves those goals and sentiment shifts, shareholders should benefit with multiples closer to history.
It's a similar clean-up story at Citigroup, whose balance sheet is now 20% smaller than it was in 2007. By jettisoning its non-core and/or toxic assets, Citi hopes to come back stronger. What gives me assurance that this could happen is the "Under New Management" sign. I'm a fan of chairman of the board Michael O'Neill's turnaround of Bank of Hawaii (NYSE: BOH ) at the turn of the century. His legacy of conservatism is why I own shares of Bank of Hawaii in the real money portfolio. He's been chairman since April 2012 and has had Michael Corbat as his CEO since October 2012. The proper continued handling of Citi's turnaround is key to outsized returns, and I like management here (as I do at Apple and AIG).
Let's move from arguably the worst-run big bank during the financial crisis to arguably the best: Wells Fargo. There's good reason Wells is already trading close to two times book value while Citi is at a discount. Wells has been healthy enough to more than double its size since 2007 thanks to the acquisition of troubled Wachovia (that's also why many of its loan quality metrics are depressed). More recently, it's been able to capture a mind-blowing third of mortgage activity. As interest rates rise, the mortgage pickings on refinancings will be slimmer, but banks could also have the opportunity to widen their interest rate spreads. Well-run banks can make these transitions smoothly. The reason Wells Fargo trades at a premium, and why I'm buying more of them at said premium, is that its history, management, and culture all point to it being able to thrive in most any environment. That quality of earnings and operations is worth the premium.
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