I hope everyone is holding up okay.  We’ve seen some encouraging employment numbers coming off those massive layoffs, but clearly the economy still has a lot of work to do to get close to recovering from where it was.  This month we should see a new stimulus bill negotiated, which will surely be very contentious.  The key is to keep bridging the gap until we can get close to full employment and a normal business operating environment.  As we approach 2nd quarter earnings season, I want you to have a good understanding of the types of securities that you own, and how attractive they look moving forward.  Here are just a few quick breakdowns.  I can tell you, the long-term opportunity set hasn’t been this good in quite some time, but the market is very bifurcated.  There are more companies trading at over 10 times sales than in 2000, indicating bubble territory in tech.  Meanwhile, we are able to scoop up out of favor companies at immense discounts.  Remember when I’m talking about dividend yields, the 10-year Treasury is only yielding 0.65%, so we are literally collecting 5 times as much at a minimum from dividends alone, plus we have massive appreciation potential.

Bank of America (BAC) trades at $23.04 and has a dividend yield of 3.03%. It’s tangible and common book values per share are $19.79 and $27.84, respectively.  The company can easily earn upwards of 11% on its book value, putting low-end normalized earnings power at $3.06.  The earnings yield even at this low level of earnings would be 13.3%.  This means that we own a business that is growing long-term, extremely well-funded and vital to the country, paying an earnings yield of 13.3% normalized and a 3.03% dividend.  The stock is at least 50% undervalued over the next 2-3 years.

Citigroup (C)) trades at $50.88 and has a dividend yield of 3.88%.  Its tangible and common book values per share are $65.55 and $77.09, respectively.  The company can earn at a minimum 8% on book value, putting low-end normalized earnings power at $6.16 per share.  This puts the earnings yield at 12.1%, with substantial excess beyond that as the environment normalizes.  The stock is at least 50% undervalued over the next 2-3 years.

Wells Fargo (WFC) trades at $24.55 and has a dividend yield of 7.97% but that dividend is likely going to be cut.  If they cut it to $0.20 per quarter, it would have a dividend yield of 3.25%.  Its tangible and common book values per share are $32.90 and $39.71 respectively.  The company can easily earn 10% on equity, putting normalized earnings at $3.97.  This equates to a normalized earnings yield of 16.17%.  The stock is at least 50% undervalued.

ALLY Financial (ALLY) trades around $19.67 and has a dividend yield of 3.74%.  It has a tangible book value per share of $32.8. It can easily earn 12% on that, putting low-end normalized earnings at $3.93 per share.  That equates to an earnings yield of 20%.  The stock is at least 50% undervalued.

While financials have had a terrible year due to the pandemic and the economic destruction of the lock-down, most should be profitable over the year.  The 2nd quarter will likely be the worst quarter and some will show losses, but most of the credit impact will be handled by pretax pre-provision earnings.  Book values and earnings power should stay solid.

The sexy names such as Tesla and Amazon have earnings yields less than 1% in many cases.  They have done exceptionally well and all of the money has flowed into the most expensive names.  Keep in mind, the only time we saw a market like this for tech was 2000, and when that bubble crashed the stocks lost 75-80% and it took over a decade to get back to even.  While the last 6 months have seemed like a decade, it has been 6 months.  Volatility is still high and slowly but surely, the economy is inching towards normalcy.  We will get there, but I’d suggest trying to drown out the noise as much as possible.  This being an election year and with everything going on in the country, I know it is hard.