1. Select historically "Cheap" or "expensive" markets.
- BAC is within uncertainty range level 1.
- Financial sector is cheap, relative to tech. BAC has an 18.19 PE ratio vs 585 PE ratio of TSLA .
- BAC is neither cheap nor expensive relative to rivals in the financial sector ( JPM , GS , by ).
2. Develop a critical eye for what is "important" fundamental information to a particular market.
- Important fundamental information in the financial sector is the longer-term Treasury yields, which I expect to rise this year. Long .
- Macro trend in Quad 2, excess capital generated will be used to buy back shares.
Get (1) neutral, (2) , or (3) bearish:
Some Warren Buffett Tenets:
Is management rational?
- BAC’s Brian Moynihan expects the bank will increase its dividend and boost its share buybacks once its passes its Fed stress tests. Last month, it announced a $25Bn share buyback plan with its excess cash.
Focus on return on equity, not per share.
- ROE on a rising trend, 7.58% from 6.14% last quarter.
Calculate “owner .”
- Owner = Net Income + Depreciation, Amortization +/- Other Non-cash charges - Full Capex +/- Changes in Working Capital (Assets – Liabilities or Shareholders Equity)
- 17.1B + 2B – 6.2M + 16.2B = 34.7B/8.7B = $3.99 owner per share.
- Price to owner earnings: Current price = 42.36/3.99 = 10.62, vs. 18.19 PE Ratio ( TTM ), this is undervalued in the short-mid term.
Look for companies with consistent and high profit margins.
- Profit margin of 0.18 vs 0.1396 historical average (increasing trend).