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Emerging markets ace Rajiv Jain, value investor Mohnish Pabrai and bank analysts Mike Mayo and Dick Bove offer up their buy and sell ideas for 2013.
Financial stocks haven’t been kind to their investors lately but that doesn’t mean there aren’t a couple of gems among them. You just have to know where to look.
Check out their short ideas below along with buy and sell ideas from value investor Mohnish Pabrai and bank analyst Dick Bove.
Rajiv Jain, Vontobel Emerging Markets Equities Fund
Rajiv Jain, Vontobel Asset Management
BUY: HDFC Bank (HDB)
The largest privately owned retail bank in India with a network of 1,986 branches in 996 cities across the country. The bank has a strong deposit franchise and technology backbone. EPS has grown at a rate of 26% per year, over the past 10 years.
SELL: iShares MSCI Emerging Markets Materials [EMMT]
Emerging markets are top heavy with energy, basic materials, industrials and telecoms. These stocks have high capital expenditure requirements, sizeable credit needs and lack pricing power. Jain won’t talk specifics but iShares MSCI Emerging Markets Materials ETF fits the description.
Mohnish Pabrai, Pabrai Investment Funds
Mohnish Pabrai, Pabrai Investment Fund
BUY: General Motors (GM)
Not your father’s GM. GM has dumped loser brands, eliminated tens of billions in liabilities and radically restructured its UAW contracts. With a market cap of under $38 Billion, cash on hand of $34 Billion and free cash flows expected to consistently exceed $10 Billion in 2013 and beyond, GM is ultra-cheap.
SELL: 30-Year Treasury
If ever there were an investment no-brainer short it is the 30-Year Treasurys. Interest rates can only go up from here. Should interest rates approach anything resembling historic averages, there would be very meaningful drops in 2012 vintage 30-year T-Bills – not to mention the havoc on Federal and State budgets.
Mike Mayo, CLSA analyst
BUY: Morgan Stanley(MS)
Mike Mayo, CLSA analyst
There is a disconnect between the progress made by Morgan Stanley into a lower risk, wealth and asset manager (now half the company) and a stock that trades at over a one-third discount to its tangible book value. De-risking is reflected by double the capital and 50% more liquidity versus four years ago. Restructuring is aided by synergies from its brokerage integration, completed in July, and progress in downsizing less favorable trading activities. Growth is possible in depressed investment banking, which remains top-tier and may soon improve. The de-risking alone justifies a price of $23 but restructuring and growth have the potential to move the stock closer to tangible book of $28.
SELL: Comerica (CMA)
US banks face a Japan-lite scenario where revenues are pressured from sluggish economic growth and lower interest rates. As a mostly plain vanilla bank, Comerica should feel these pressures via sluggish traditional banking revenues without the offsets that others have, such as in mortgage and capital markets. Net interest margin contraction will likely outweigh any positive from loan growth. The one risk in being too negative is the chance that they sell to a larger competitor, though at a nice premium to its tangible book value, the stock is not as attractive as other potential takeover candidates.
Dick Bove, Rochdale Securities analyst
BUY: Bank of America(BAC)
Dick Bove, Rochdale Securities
The Federal Reserve new quantitative easing program buys a minimum of $2 billion in mortgages every day. Bank of America is one of the largest mortgage providers in the country. It will experience higher revenues due to the Fed program and, more importantly, it will see the value of its troubled housing assets rise to the point where they can be sold at profits relative to their book values. The shift in values in the bank’s portfolios will convince investors that the bank does not need more equity and could lead to a big dividend increase in 2013. The cost of running the bank is dropping by close to one-half a billion dollars per month. This will be additive to earnings and further enhance stock holder values.
SELL: U.S. Treasury offerings (IEF)
Expect the forces driving the value of Treasury bonds higher to reverse. Why? The dramatic increase in money supply here, in Europe, and Asia is likely to stimulate a recurrence of inflation pushing interest rates higher despite Federal Reserve promises to keep them low. Second, a resolution of fiscal issues in the U.S. and Europe will give investors confidence to assume more risk pushing money back into the equity markets and out of Treasuries. Most important, by far, however, is the likelihood that the United States avoids recession and starts to exhibit real growth once again. This implies greater need for funds in the private sector and higher interest rates driving Treasury and related bond prices lower.
Halah Touryalai, Forbes Staff
I stalk Wall Street. Stopping short of phone hacking, of course.
See on www.forbes.com
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