Get to the Party Early

 | Dec 19, 2012 | 12:30 PM EST
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On Dec. 27, 2011, I penned a column for RealMoney readers titled Financials Lead the Way, in which I stated: "Financials will likely outperform the broader market in the year ahead because rarely has an industry been so hated and loathed over the past couple of years. That sentiment has led to a price-to-value distortion that exceeds any level of rationality. Specifically, both Bank of America (BAC) and Goldman Sachs (GS) offer the most attractive opportunities."

While I was completely comfortable with calling Bank of America my top pick for 2012, my opinion was clearly in the minority camp. Even noted value investors who I admire were harboring concerns about BofA. BofA's tangible book value was a murky calculation at best, so a low price-to-tangible-book ratio was not a signal to buy, the opposition claimed. No attention was given to the fact that Bank of America was trading for $60 billion with an earnings engine that had the ability to churn out $10 billion or more in annual profits. Instead, the focus was on the here and now, the short-term rearview mirror approach rather than looking out into the future.

So here we are a year later and BofA is up 95% year to date, Goldman is up 34%, and JPMorgan (JPM) -- which suffered $6 billion trading loss -- is up 25%. The S&P 500 is up 14%, year-to-date. And the guy with the biggest smile on his face? Warren Buffett, who owns gobs of warrants to buy Goldman at $113 and BofA for around $7, respectively. Today, Goldman and BofA trade for $127 and $11.30, respectively.

Not surprisingly, financials have now become a screaming a buy. On Tuesday, Meridith Whitney, who gained fame by issuing warnings on Citigroup well before the financial crisis, has now upgraded BAC to a Buy saying that BofA is now offering the "best opportunity" in years. More so, Whitney claims that BofA could quadruple its dividend in 2013 due to a stronger capital position. Whitney also bestowed praise on her former target, Citigroup (C).

Fortunately for investors, even after climbing from $6 to over $11 this year, BofA is still an attractive investment that could perhaps be sitting at $20 one year from now. That's precisely why it was such a screaming bargain a year ago at $6. Personally, I no longer hold BofA common stock because I opted to transition out of it a few weeks and buy the Class A warrants. The Class A warrants expire on Jan. 16, 2019 and have an exercise price of $13.30. If you are a long-term bull on BofA, the warrants offer an incredibly attractive proposition.

As 2012 winds down, use the lessons from the financials as you look ahead to 2013 and behind. The absolute best time to invest is when the industry or company is hated because you will likely find an inefficient security price. Look at the rapid movement in housing securities today. In all likelihood, the prices will become more inefficient before they start climbing back up. Perhaps 2013 will be the year for Hewlett-Packard (HPQ) , retailer J.C. Penny (JCP), or some other high quality names that I will be adding to my  2013 Winning Value Portfolio.

The proof is in the pudding here: When stocks are declining, the consensus will be avoidance. But once they are climbing higher, the mood often shifts to a more optimistic tone. The key is to get to the party early and leave before final binge. There's plenty of room left for the financial stocks to flourish, but I think the lessons Mr. Market provided this year are lessons to take into 2013 and beyond.

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