I’m taking this stock off Jim’s Watch List and adding it to the Jubak’s Picks portfolio today, March 26. Unfortunately, the stock is up roughly 18% since I added it to the watch list, climbing from $22.01 on December 15, 2009 to $26.13 as of 1 p.m. ET on March 26. But with this one I haven’t been waiting so much for a pull back in the stock’s price as for convincing evidence that the turn in what has been a rising tide at banks of write offs and reserves for delinquent and bad debt is only a quarter or two distant—and not way off in 2011. (A buy of U.S. Bancorp also increases my exposure to the U.S. stock market, which I think will outperform the rest of the world’s markets over the next few months. See my post https://jubakpicks.com/2010/03/19/how-long-can-this-last-the-u-s-stock-market-is-out-performing-the-world/ )
I saw signs of that turn in bank earnings reports for the fourth quarter and in credit trend reports for January. The numbers showed that banks that had maintained decent credit quality controls even as peers granted loans to anyone who had a pulse were either seeing an actual improvement in the delinquency rates or seeing the increases in that rate drop significantly.
Today’s report out of Fitch Ratings on February trends in credit card debt pushed me to this buy.
For the credit card market as a whole in the month credit card charge offs dropped and delinquency rates continued to improve.
Measured by Fitch’s 60-day delinquency index, late payments fell another 0.06 percentage points to 4.44%. Charge offs on prime-rate credit cards dropped 0.1 percentage points to 11.27%. The drop would have been larger except that some banks, Citigroup (C), for example, continue to see rising charge off rates even as other banks show improvement.
Why are charge off and delinquency rates—and the turn in these rates—so important? Well, think what happens to a bank’s earnings when the bank stops increasing reserves for future losses out of current earnings? You’ll see a big spike in earnings as these deductions shrink on the bank’s income sheet. That’s the turn I’m looking for and that, for some banks, I think is only a quarter or two away.  For the turn to arrive, the U.S. economy doesn’t have to get stunningly better. It just has to stabilize.
 And why US Bancorp? The bank has one of the industry’s best returns on equity before the financial crisis and I think a return to the days of 20% return on equity is certainly possible in the not too distant future. During the crisis the bank has remained committed to its goal of increasing its reach and it has been one of the FDIC’s (Federal Deposit Insurance Corp.) best customers for the assets of troubled banks. In the first quarter of 2010, January, for example, the bank closed its deal with BB&T (BBT) to buy the Nevada branches of the failed Colonial Bancgroup. Also in common with most big banks US Bancorp has relatively little exposure to the commercial mortgage problem that still hangs over the country’s smaller community banks.
 As of March 26 I’m adding these shares of Jubak’s Picks with a target price of $31 a share by September 2010. This buy reduces the cash position in Jubak’s Picks to roughly 12%.
Full disclosure: I own shares of US Bancorp in my personal portfolio. I will buy more shares three days after this buy is posted.
Quite frankly I am puzzled by Jim’s buy decisions of USB and UNP. These and others are great companies but aren’t we supposed to be in selling mode, considering that an Armeggeddon is waiting for the investors? Wasn’t it Jim who told us things would be ugly in the 2nd quarter? Don’t we have a time horizon of 12 to 18 months? Then what is the point of mentioning ” I think will outperform the rest of the world’s markets over the next few months” as part of a buy decision?
Are we supposed to be buying and selling all the time? I think Jim doesn’t follow his own advice. I, for one, am sitting on my hands. No buying until Fall!…
Lonehunter… I totally agree. I question Jim’s timing for certain stocks, but if they sound good I willl do my own dd and try to identify what I think is an appropriate entry.
Other times, I just keep going, like with USB. I have no interest in financials at this time. If the economy slows or unemployment does not improve, they will be punished again.
I am reading everytime comments about the timing of Jim’s picks: “buy high, sell low” etc
Jim has several times pointed out that he is not a good “market timer”… but who is a good market timer over the long term?????
I use the great insight from his postings but do not buy or sell at the time of his postings: I buy when markets go down and sell after a run-up.
I check the charts resistance/supports, volume, RSI, etc before acting.
If we do this, we actually find out how difficoult it is to beat Jim’s performances over the long term and we will appreciate his great efforts.
Great job Jim, lets everybody elese try to do better.
Thanks very much.
I, for one, feel perfectly happy with what I get from Jim: great research, good thinking, food for thought. I look after the timing.
For all those who are looking to buy into C, wait till April , Govt will sell its stake @ around 4$.
C is hyped up by a certain Jim’s name sake, otherwise these is little share holders equity in C. I think LYG is much better value than C.
“If you wait for the Robins, the spring will be over”
— Warren Buffet
If you guys don’t believe then ask yourself why the big fund managers like John Paulson, David Tepper, Bruce Berkowitz, George Soros, to name a few bought billions of dollars of C in the fourth quarter ? I think Jim will eventually recommend C when its charge off rate starts to leveling off and it is more clear that its business starts picking up and of course when C is already at $8 …
Francolargo
I agree. It is all about reward/risk. C may not be the best fundamental bank but with the lowest valuation. If you can see through its troubles its best days are ahead. When those bright days come buying C at $3.31 will look like a steal …
It is the sharp reversals that make you the largest profit
In my family we had a friendly competition last fall. We each picked banks for investment and held them until Christmas. I still have the watch list (and the USB). If you still held from last fall, the winner among our (~15) choices would be ZION. Well… Talk about toxic stock… Last place: GS. My wife won the contest with GGAL, I was second with C. My point is, this trend played out: the better the starting fundamentals, the worse the bank did in the ‘race’. It’s not only about reward, it’s reward/risk.
Seattle
You may be right. It’s not that one should not invest in banks, it is that it is difficult when you may not know what you are getting.
For the record I bought US bank on Jim’s first recommendation and sold with a nice profit.
I agree with Henry. I think Jim’s timing is not good. I heard Warren Buffett point out that if Berkshire Hathaway was allowed to purchase additional shares of Wells Fargo, they would have loaded up a year ago. I assume to a lesser degree that was true with US Bank too. What is that Mr. Buffett sees in a Wells (or US Bank for that matter) selling in the single digits that makes him want to buy when everyone else (including Jim Jubak) wants to run from? US Bank is probably still a good buy now, but why wasn’t it recommended when it was selling around $10 a year ago? What’s changed other than the fear factor?
I think $40/share for USB will take significantly more than a year, but $34 this year seems plausible. IMHO, Citi’s loansharking ways will take significantly more time to repair. Can they do it before the fed’s punch bowl runs dry? I made my money on C in the first 2009 run up – the redux seems much less compelling.
IMO USB has more upside potential of around $40 within the year. Jim has marked the conservative and short term target I believe to go along with his thesis that after 6 months everything needs to be re-evaluated. I’m looking to get into this stock on a short-term pullback to around 25. If the market gets choppy I don’t see it falling to below $22.
COH hit the target price of $40 Does this still have some room to run?
Thanks Jim,
When do you think they’ll start paying a dividend?
Henry; I agree with you. I am playing with what you guys may call chump change, although it is real money to me. $200 in days sure beats the beatings I have been getting. So, would I sell the winner, loser, half of each, or hold on???
NUTS TO MOST OF YOU..
SINCE I ALREADY OWN 200 USB @ 33 SINCE 2008.
I WILL NOW ROLL THE DICE ON GOOD ADVICE AND BUY 100 MORE @ 26 AND SELL ALL @ 31…
HOPEFULLY I’LL DIG MYSELF OUT, AND HAVE A $100 LEFT OVER FOR DINNER. AND THAT WOULD
BE THANKS TO JAMES I MIGHT ADD…
YES THE DIVIDEND IS ”pathetic” BUT,,,,
A POTENTIAL 20% RETURN IN 6 MONTHS IS
WELL WORTH THE RISK..! (for myself)
nocnurzfred
You should not have sold C. C is not a small fish. It is a WALE. Small banks have huge exposure to domestic commercial mortgage loans which are not doing well. C is a huge bank with 60% of business in booming emerging markets.
Do me a favor and read Dick Bove’s recent research note on C
Folks; I bought C 3 weeks ago @ 3.50, sold a week later @ 4.13 + $$. Now, I own 400 shares of NAL & PBCT, bought 4 months ago. NAL is up 6%, PBCT down 6%. Both equal 40% of my money. Would like to trim down. Should I hold awhile? That’s my gut feeling. Dividends are 2 & 4% respectively. Help!!
USB is the best bank in the US. Again Jim’s timing is poor. What took him so long to buy ? And buying at this moment is like buying a short term top. As I mentioned before Jim is great source of information and analysis but not as good investment guide as per timing. I know short term timing is hard and I am not a day trader. But buying USB 6 months ago and NOT buying the current short term top is pretty obvious to me. The general market is looking for a breath after 9 days of consecutive run. The last two days of outside reversal day lower is very obvious topping sign. I admire Jim’s research ability but I really hope he could improve his timing.
The only stock that I think we can buy now is Citi group. I said this this two weeks ago when C was at 3.50. Now I am telling you C is still a great buy at 4.30. I know the charge of rate of C increased not decreased. If the general economy is improving C’s charge off rate will go down. It is a question of when not will. A tide will lift all boats including C even if it is heavily loaded. If investors can look pass through the current trouble that C has they should buy now not later when it doubles. C will easily double to $8. C has 193 billions of NET CASH and is the least possible bank to go under if there is another financial crisis on the horizon. Vikram Pandit is great CEO that is turning around of the ship. He has fundamentally transformed C to a international bank. Dick Parsons, the chair man, won’t praise him if he is not doing a good job.
If you wait until C finally decreases its charge off rate the stock will be at $8. ( I guess Jim will recommend C at that time)
The stock to buy now is C not USB. The time to buy C is now at $4.30 not 6 months later at $8.4
Cut my words in stone.
As an aside, Warren Buffet understands banks and Berkshire Hathaway has large investments in both USB and Wells Fargo.
Sourlemon, Ihave a hard time investing in banks also when you here of all the off balance sheet crap banks have. Roll the dice?
————
I suspect by the time many people consider it safe to move back into banks the big money will have been made, not unlike those who bought in the weeks after March 9, 2009. Some of these names will be much higher in the years ahead assuming we don’t suffer through more financial debacles.
bruce:
USB is not UBS!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKc45cA8Daso&refer=home
With US Banks history of shafting the investor I could not concur with your recommendation. The reduction of dividends and watering down of the stock two yers ago to provide for multi million dollar increases for their executive staff is imexchusable. Since then US Bank has picked up several investment partners such as Blackrock that seem to perpetuate this unfriendly attitute toward stockholders and their accountants are the same that cooked the books for Lehman Brothers. I’ll continue to sell as the hype continues.
Salmoned,
Pardon me, USB is in the banking industry so if I say Banks, I mean to include USB.
Appreciate your vigilance.
I bought USB last Sept. ($19.49) after attending a social engagement including a nice couple, one of whom was with USB mortgage and the other with WFC mortgage. I asked the ungracious question: how much crap is *really* on your books? WFC: sideways thumb (which I suspect was ‘generous’ at the time). USB: thumbs up. (USB passed on Wachovia before WFC bought it.) Then as now, as Jim so clearly states, USB was wisely positioning itself for the future resumption of normal liquidity. When that happens USB shareholders will be rewarded. For me, this is one of my ‘foundation’ stocks to lower overall portfolio risk so I can more comfortably play in the riskier arena of commodities. Jim’s eagle eye on those markets as well has been an incredible help.
Opinion: criticism here is fine, but totally gratuitous unless supported by additional information or an alternative rationale.
sourlemon and ogowan – Jim isn’t evaluating all banks/financial companies, he’s picking this one. So any generalization you care to make about the group is off-topic, at best. I’m sure Jim is using his usual methods of evaluating stocks when he chose to add this one – else he’d explain how this choice is a flyer of some sort (outside the realm of Jim’s usual stock selection criteria).
Sourlemon, Ihave a hard time investing in banks also when you here of all the off balance sheet crap banks have. Roll the dice?
Here we go again…buy high, sell low.
I get better picks from vestorsage.com, plus portfolio allocations that match my risk tolerance.
in a very target rich environment, you chose this?
Jim,
How do you evaluate financial companies? Especially when earnings are convoluted by loan loss reserves, write downs, and charge-offs?
I’m going to have to take a pass on this stock. High P/E and pathetic dividend.