Futures were pointing towards a rough open this morning as continued concerns over Europe and U.S. debt continue to plague the market. Overseas markets have traded lower for much of the morning on a weaker euro while the Financial stocks here at home continue to take a pounding.
Bank of America (BAC, $9.64, down $0.35) is at fresh 52-week lows (and a 2-year low) ahead of its earnings announcement tomorrow, before the bell. The company is expected to report a loss of 90 cents a share on revenue of $12.34 billion. BofA “preannounced” their results in late June after saying they were taking a $14 billion charge to settle their mortgage issues. Otherwise, the company would have earned near $0.30 a share or so.
Goldman Sachs (GS, $127.78, down $2.38) is also at fresh 52-week lows and will report their Q2 earnings on Tuesday, before the market opens. Wall Street is looking for earnings of $2.27 a share on revenue of $8.14 billion, on average. Analysts’ estimates range from a high of $3.36 to a low of $1.80 with revenue ranging from $7 to $10 billion. Given these numbers, there is a chance for an earnings surprise or a big disappointment.
We have covered both companies for years and we said once Goldman broke below $135, it would be a sign to back away from the sector for a few months. In mid-May, here were our thoughts on BofA:
“Bank of America (BAC, $11.99, up $0.06) broke below $12 a share on Friday and is on its way of testing its 52-week low of $10.91. At some point folks, this is a $20 stock but it might take a few years to get there. Most of the financial websites will list the “book value” of Bank of America at $20 which means shares are trading at half their book. However, we like to look at the “tangible” book value which for BofA is $12-$13.
The tangible book value is what shareholders can expect to receive if Bank of America goes bankrupt and its assets are liquidated. The higher the tangible book value, the better, as it provides shareholders with more insurance. At some point, the Financial stocks will bounce back but we are hoping shares of BofA can come down a little more.” (END)
There is still further risk for the Financial stocks and our feeling is in 3 months they will be a buy, if not sooner. At some point, we may use LEAP options to play a rebound as some of these stocks approach their 2009 levels. For those of you that haven’t been with us for long, take a look at our 2009 Portfolio Track Record inside our Members Area. If you are not a member we can email you our results but it is starting to “feel” like we are repeating a process that could payoff big-time in 6-12 months.
For instance, in March 2009, Bank of America was at $5 a share and we suggested buying the May 6 call options which were trading for 75 cents at the time. A month later, shares had rebounded and were at $10 while the call options we recommended were at $5.00. The stock returned 100% in a month while the options returned 567%!
If you would have bought 20 contracts for $1,500, you would have netted $8,500 in 30 days. At the same time, we also suggested the Bank of America July 10 call options at 30 cents which our subscribers closed out at $1.60 which comes out to a return of 433%.
Our point is this quarter will be lousy for some Financial stocks while others will come in with better-than-expected numbers. Now might be a good time to continue shorting or buying put options on some of these names but we are waiting for the right opportunity to go long both Goldman and BofA which may be 3-6 months.
As far as the market, the support levels we covered this morning are being tested to a “T” as the Dow is down 145 points to 12,334 while the S&P is off 17 points to 1,299. The Nasdaq is lower by 40 points to 2,750.
We have a lot to cover in our Members Area so let’s get to it.