Here's What I Traded Last Friday

The FDIC takeover of SVB Financial Corp. last week ended with an all-out panic in banking and financial shares. Losses were dramatic across the board. Nothing was really spared including ultra-safe and high-quality names. Moments like that only come around occasionally, and it usually pays to go against the crowd on stocks you felt good about prior to their markdowns. If you had free cash to employ, you could simply buy what others were frantically dumping, regardless of their low prices and valuations. Fully invested accounts could be triaged to see what was holding up well, or had already achieved good gains, to see if they were worth swapping out of to make room for the bigger bargains than available. I did a bit of each of those things last Friday. Regular readers of mine know I favored Comerica , U.S. Bancorp , Axos Financial and Citizens Financial Group recently. Brokerage house Charles Schwab is an old favorite that got really inexpensive over the past month or so as well, hitting a new almost two-year low on March 10. Why even think about owning banks when most people are desperately selling? When people are crazy to exit, regardless of value, shares can get very mispriced. The entire fractional reserve banking model is based on faith. Banks rarely if ever confine themselves to simply lending out depositors' money. They typically create credit worth up to 19 times that amount if demand warrants and borrowers appear to be good risks. No bank can withstand having 50% to 100% of its depositors remove their cash at the same moment. Those funds are simply not available if they exceed the liquid assets backing up all those loans. FDIC insurance, which now covers up to $250,000 of each depositor's assets, takes any fear away of having their money at risk due to bank failures if they remain under the limit. What brought down Silicon Valley Bank was the fact that about 95% of its deposits occupied uninsured status. When management announced almost $2 billion in realized losses on their bond holdings, a run on the bank to get out before the real sh** hit the fan is what brought down the house. The combination of enormous uninsured deposits and waning confidence in the Silicon Valley Bank's survival was a special situation which is unlikely to affect most other banks or financial firms. The four graphics that follow are my previously published takes on the shares I added to last week after they were knocked down with virtually all other banks. Comerica carved out a new two-year low of $56.90 intraday on March 10 before closing at $58.81. Axos ran from my recommended price of $37.48 last December all the way up to $51.46 on Feb. 3, 2023. It touched $37.50 last Friday and closed just 16 cents higher. U.S. Bank got to $63.60 just over one year earlier. It gave traders a chance to buy as low as $39.62 last week before closing at $40.82. I was lucky enough to get shares in all four of those at close to their lows last week. I last wrote about Charles Schwab on April 5, 2022. At that time it appeared overpriced. As things turned out, almost a full year later earnings per share came in well above estimate. The year 2022 saw EPS of $3.50 GAAP and $3.90 adjusted versus Value Line's April 2022 estimate of $3.15. Dividends were boosted twice since then also, from 20 cents to 22 cents, and now to 25 cents quarterly. Value Line's latest estimate for Schwab in 2023 was just published over the weekend. They now see Schwab posting $4 in EPS this year (GAAP). Schwab hit $96.20 during January 2022. It carved out a new 2-year low of $56.90 intraday last Friday before closing at $58.81. Its forward price-to-earnings ratio is a now just 14.7 times versus a 10-year median multiple of 24. The share's 1.7% yield is well above its 10-year average level of 1.1%. All five of the stocks mentioned appear very underpriced. Four of them provide solid yields. Comerica not only yields 4.63%, it goes ex-dividend for 71 cents per share on March 14. If you purchase right away, you'll get paid that amount on April 1 even if you sell it rather quickly. Many folks think Comerica can bounce back sharply. I took advantage of that sentiment by shorting some July 21, 2023, expiration date $67.50 calls on shares I bought last week collecting $2.85 per share in premium. If Comerica gets called away in July, total return would be about $13.16 per share based on an average cost of $57.90 and a net selling price of $67.50 plus the 81 cents dividend earned. In my world a maximum 22.7% gain over about 133 days would be quite acceptable. I did not sell any calls on the Schwab shares I picked up yet. The June 16, 2023, expiration date calls were also paying generous premiums at strikes ranging from $65 to $75. That expiration date was just 98 days away based on last Friday's quote at the time of my screen shot. Naked put sales on any of the stocks mentioned look attractive, too, for traders brave enough to go where most people fear to be right now. The failure of a large bank might be just the thing needed to give Fed Chair Powell the cover he needs to pause further rate increases or even to begin lowering them to save us from a major collapse. ------- Update on Signature Bank NY Signature Bank NY has been taken over by the New York Department of Financial Services. As with Silicon Valley Bank (parent SVB Financial Corp. ), all depositors will be made whole by government agencies, both insured and uninsured alike. It is possible that there may be some value left for shareholders and or bondholders of the banks affected, but there may very well be little to nothing left for them after a full liquidation. There is not much we can do right now as trading is suspended and that may be permanent. There is no further information available yet. The bank failures of Silicon Valley Bank and Signature were both due to runs of the banks caused by fear of losses for depositors. Had the Treasury department and/or the Fed acted sooner to announce make whole actions, both liquidations could likely have been avoided. No bank, not even the best-capitalized one, is capable of issuing withdrawals of huge percentages of deposited money in super short periods. I am still long SBNY shares and short SBNY options. I am suffering along with any readers in the same position.

Here's What I Traded Last Friday

If an investor has free cash to employ, they could simply buy what others were frantically dumping, regardless of their low prices and valuations.

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