There was an interesting debate about
Hugh thinks that Citi is going to $10 per share noting that the financial sector has "endured" a bubble and that when a bubble pops you need time to get better. He cited examples of stocks like Cisco and Microsoft being way below their 2000 highs and that it took Schlumberger 16 years to get back to where it was after peaking in the early 1980s.
Bob thinks Citi is going to $40 in the next 24 months noting that the stock was at $55 eight years ago. He said there is $4 of "earnings power under the write offs." Olstein said to look at the cash flow and that the stock is down "70 or 80%." Bob closed out saying that eventually free cash flow determines values of companies.
So there are two very different schools of thoughts and both can be correct. We could see $10 and we could also see $40 by April 2010.
I don't think it will go as low at $10 or as high as $40 in two years but I expect more downside as the bear market goes through its process and I would expect that, generically speaking, there will be a stretch off the true bottom where financials do rocket up. Using Citi as an example but not a prediction there would be nothing unusual about it bottoming at $15 and doubling in the course of a year.
Yahoo bottomed below $5 in September 2002, a year later it was above $18--almost a quadruple. I don't think a financial with a $100 billion market cap is a candidate to triple or quadruple in a year but a double, coming off meaning event driven bottom seems plausible.
Cisco bottomed around the same time just above $11. A year later it was around $21.
I gravitate closer to Hugh's line of thinking. The way I view it, everything Olstein said about the stock could be true but that does not have to mean the stock goes up. If as a result of the credit event the financial sector stays down and out for four years then the valuation metrics Olstein cites are very unlikely to lift the stock while all the others stay down.
This example is exactly why I prefer top down. I find having the wind at your back makes the job much easier than making a case that a stock should go up because it is cheap.
That was a crazy beatdown BC put on North Dakota in the Frozen Four last night, 6-1 with the one coming with 1:16 left in the third.
6 comments:
Hugh Hendry is one of my favorite guru's. Staying invested the first half of last year when he was predicting problems gave me reason to pause.
No one is perfect but Hugh Hendry is excellent and honest IMO.
You are right they both could be right, but I think the banks have a lot more problems still in the closest so to speak.
this really is intellectually very interesting and would be a lot more fun if my life assets were not at risk.
seg
this really is intellectually very interesting and would be a lot more fun if my life assets were not at risk.
at a minimum that is the line of the week, maybe the year.
good stuff
Home builders provide an interesting example of stocks that can turn and rocket higher, in this case when the fundamentals are still lousy and, IMHO, the outlook isn't much better.
With respect to Bob Olstein, who is a bright guy, I don't think you can estimate free cash flow for Citi, which is a complex financial company subject to the vagaries of hard-to-estimate asset values.
Even with sound, high quality, simple financial companies, free cash flow is a tough exercise, unless you have the required capital model in front of you.
I think it was Jeffery Saut of Raymond James who I saw interviewed and was negative on banks and financials. When asked why he did not own one of the large banks he said something like "they have 7 trillion dollars in derivatives and I do not know how to valuate that"
I am sure I am at least slightly off, but the gist of it to me is he did not know what they were worth and he did not seem to know how anyone else knew what they were worth.
seg
Barry is also a contender for quote of the day - lol
I don't know what sex acts Spitzer paid for, but I suspect the interview above [Joe Kernen interviewing Jeffrey Immelt] was not dissimilar to them.
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