December was a great month for the U.S. financial sector and for my Financial Services model. And 2012 overall was a great year for my Financial Services model. It was not without volatility, but the positive results were above expectations.
On BAC, the market appears to have agreed with my earlier position that the previous discount to tangible book value was excessive. In May 2012, I had added to the position in BAC after the thesis appeared to be firming, and as of December 27, 2012, the stock is the 2nd largest position in my Financial Services portfolio.
I continue to like BAC going into 2013. I will reiterate my position from January 2012: the bank has taken very specific action steps to reduce non-earning assets and non-core investments to build capital ratios and simplify the business. The continued discount to tangible book value to me appears excessive, based on continued earnings, prior reserves, and ultimate long-term earnings power of BAC.
Unfortunately, on the other side of the coin, I was wrong on my outlook for 2012 for TWGP. The stock, according to Google Finance, has year to date returns of negative 10.26%. The business had reserve adjustments, Hurricane Sandy, and announced a merger that is expected to close in early 2013. Overall, the performance did not meet expectations; however, I believe the stock continues to be attractively priced, has a good dividend yield, and has a positive outlook after the closing of the merger.
Over the final days of 2012 and the likely the early days of 2013, the government will be wrestling with the fiscal cliff. In my opinion, it’s important investors to not get sucked into making portfolio decisions based on political events and macro events that are difficult to project and hard to get a full handle on all their implications. It is more important to focus on fundamental analysis on the stocks in the portfolio to understand and feel comfortable with the outlook and position sizes of each.
In 2013, the stocks to watch in the portfolio are BAC and American International Group (AIG). I have touched on BAC. AIG provides a similar story, but one that has further developed in Q4 2012. AIG has successfully separated itself from the ownership by the US Treasury and has raised significant cash through sales of ownership stakes in non-core assets.
In my opinion, the company trades at a significant discount to book value and is taking actionable steps to firm up its earnings and balance sheet strength.
These actions reduce risk and the likelihood of any repeat of the events that occurred during the Great Recession. I look forward to more market clarity on the long-term earnings power of AIG and the closing of the gap between the current price and the book value per share of the firm.
This portfolio is structured to provide dividend income with a target minimum yield of 3%. This provides a stable return of capital during the market volatility that can be redeployed into new opportunities or to add to existing positions.
Disclosures: The investments discussed are held in client accounts as of December 1. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.