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Gone Bottom Fishing
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Of the handful of market mavens who predicted this financial crisis, perhaps no one nailed the fallout better than value investor Whitney Tilson of T2 Partners.
Before everyone else, he told you to start betting against the financials. In fact, it was slightly over one year ago – March 20th 2008 – when he said on Fast Money, “We're short across this financial sector. We're short mortgage insurers - were short bond insurers- we've re-shorted Lehman. We think there are a lot more shoes to drop.” (Click here to see that interview)
Flash forward to 2009 and we see the stocks he said to short have been reduced to pennies or driven down to zero.
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Whitney even out-traded the most legendary value investor of all time - Warren Buffett - who's Berkshire Hathaway [BRK.A
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] is now considered to be more at risk of default than the debt of Vietnam.
But it wasn't just the trade that Tilson got right - it was the political prescription as well. He also said on Fast Money, “I think ultimately Congress is going to have to come in and so some sort of multi-hundred billion dollar program to try and help the homeowners.”
Considering he was spot on last year we thought you might be interested in hearing what he says now.
When it comes to the big picture Tilson tells us he anticipates a lot more losses to come in the financial sector. However, the environment has created some interesting opportunities from the long-side.
Tilson tells us these days he’s bottom fishing for banks. “Valuations have compressed so much we actually flipped around and went long some financials such as American Express [AXP
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] and Wells Fargo [WFC
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] .”
That’s right he’s long Wells Fargo.
Of course there are no certainties, but Tilson likes the odds. "I think there's a 70% chance Wells Fargo makes it without any kind of catastrophic outcome in which case it's a $40 - $60 stock. And at current levels that's a pretty attractive risk/reward."
In fact he thinks investors are making a major mistake when they play financials. "People often look at what the losses will ultimately be and then compare it to today's balance sheet and make a decision."
In other words, if the losses are higher than the current reverseves they assume the company is toast.
"But the mistake is the losses will come in over many years. As long as profits keep up with losses they're going to make it."
And in fact, it's that thesis which lies at the heart of Tilson's Wells Fargo trade.
“I think Wells Fargo will have losses of $8 billion a quarter for many quarters to come but they’re making $8-$10 billion of profit per quarter. As long as profits keep up with losses they should win the race.”
What's the bottom line?
If you decide to go bottom fishing Tilson has a few words advice, "look at companies with strong balance sheets, real franchises that you think can survive without doing highly dillutive equity raises or get bailed out by the government."
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Trader disclosure: On Mar. 27th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (AAPL), (POT), (WMT), (SDS), (GE), (GS); Macke Is Short (BRK.B); Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Seymour Owns (AAPL), (BAC), (FXI), (EEM), (TTM), (RIO), (TSO), (WFC); Finerman's Firm Is Short (IJR), (MDY), (SPY), (USO), (IWM); Finerman's Firm Owns (BAC) Preferred; Finerman's Firm Owns (MSFT); Finerman's Firm Owns (WFC) Preferred; Finerman's Firm Is Short (BPO)
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