When a bargain’s not a bargain
Posted on April 28, 2008 by Richard Beddard
Filed Under Investing |
…we really don’t know which financial companies will survive the deleveraging, by the time share dilution is done they won’t resemble anything like they were before, and their level of historical profits weren’t based on any thing sustainable. My gut feeling is that about half the profits will never come back, or at least won’t come back while the Great Deleveraging lives in memories*1.
She’s right, we don’t know. More banks could go under. On the positive side, I don’t even know if there is going to be a ‘Great Deleveraging’, if that means levels of debt are so unsustainable, banks will have much less opportunity to profit from it for many years to come.
I think there are three rational strategies for value investors, sensing opportunity because bank shares have fallen so far in price:
- Don’t. They’re not cheap enough, and they’re too hot. That’s my current view.
- Establish which banks will survive. I’m tempted to try, though it’s tricky, and…
- …Wait to see if prices drop so low the shares are unequivocally cheap.
In fact, they all go together. You want a bank that can survive an awful storm in the credit markets trading at a ridiculously low multiple of its average earnings over the last decade or so.
That way it really doesn’t matter if only half the profits come back. The shares would still be an utter bargain.
Footnotes:
- Deborah also comments here.
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A very good blog that I read is by Mish Shedlock and this is a very good post about the cost of raising equity.
http://globaleconomicanalysis.blogspot.com/2008/04/are-low-interest-rates-fueling-price.html
Banks are going to be far, far, far less profitable moving forward for many, many, many reasons.
Thanks Deborah, interesting blog.