3 beaten blue chips for the next decade
Have you ever heard the story of the Chinese bamboo tree? Here’s how it goes:
You take a little seed of the Chinese bamboo tree, plant it, water it and fertilize it for a whole year, and nothing happens. In the second year, you water it and fertilize it, and still nothing happens. The same thing happens in the third and fourth years — you water it and fertilize it, and become very discouraged!
But sometime in the fifth year, if you continue to water and fertilize that little seed, the Chinese bamboo tree sprouts and grows 90 feet in six weeks!
This is what I think will happen with these three stocks. Sure, there will be many discouraging moments over the next five years, but I believe these three big-name stocks have a better than average chance of returning to their former positions of dominance and helping Main Street investors prosper.
Some of the biggest money made in the market happens when the price of very influential stocks fall to ridiculously low prices. What makes these three stocks so attractive in my eyes (besides their political influence and low stock price) is that you probably couldn’t find three stocks more hated and shunned.
There is an old saying in the investment world: "When everyone is lining up their deck chairs on the sunny side of the boat, it may be wise to go to the other side of the ship. The sun will eventually come around to you."
We all are aware of the problems faced by Citigroup (C), Bank of America (BAC) and General Electric (GE) (and the problems the big banks helped create.) But that’s why their stock prices are as low as they are today. I believe all three will eventually work their way through those problems and earn much higher stock prices in the years ahead.
The Citi story
Citigroup will probably take 10 years to get back to its days of glory. Those of you who remember the savings and loan crisis of the 1980s and 1990s may recall that Citicorp, now Citigroup, crashed then as well.
But I do believe it will return to better days — or merge with another investment bank like Goldman Sachs, a deal I think might be in the works. Here’s why:
In October 2008, when the credit crisis was in full force, news broke that Treasury Secretary Hank Paulsen tried to get Citigroup and Goldman Sachs together. The story, as told by the Financial Times, was that Goldman CEO Lloyd Blankfein did indeed call Citigroup CEO Vikram Pandit to discuss a merger. But the banks needed to make several strategic moves to clear the way before a deal could get done.
First, Goldman had to become a bank holding company. It has.
Second, Goldman has no interest in owning a retail brokerage operation. Citigroup has since sold 51% of Smith Barney to Morgan Stanley.
Third, there are the intriguing connections between the two. Former Citigroup adviser Robert Rubin was once chairman of Goldman Sachs; he’s also a former U.S. Treasury secretary. And former Goldman CEO Hank Paulsen, who at the time was U.S. Treasury secretary, provided TARP bailout funds to Citigroup — but not Bear Stearns or Lehman Bros.
Certainly, many have speculated that the lack of Goldman alumnae hurt Bear Stearns and Lehman Bros. chances for federal rescue, and even that Paulson was happy to let those Goldman competitors die. If Goldman bought Citigroup, another big competitor would disappear.
In addition, in August 2009, the CEOs of Citibank, N.A. and Citibank Latin America bought 1 million Citigroup shares each, at $3.41 and $3.21 respectively. Other insider purchases have taken place as well.
In November 2009, we learned that hedge fund manager John Paulson had made a mammoth purchase of Citigroup stock. His fund purchased 300 million shares while selling all its shares in Goldman Sachs.
Citigroup has also begun returning the TARP money it received from the U.S. government, which also says a lot about its future. I would say this picture warrants taking a chance in Citigroup stock.
Bank of America
Bank of America is another interesting turnaround story. Recently the company paid back its TARP loan, but even more interesting are the assets it owns.
Recently, Sen. John McCain, R-Ariz.,introduced legislation that would ban investment banks and commercial banks from engaging in retail brokerage activities. Bank of America owns the largest retail brokerage in the nation, Merrill Lynch.
Merrill is very powerful and politically well-connected. Former Merrill Lynch CEO John Thain was at one time a co-president at Goldman Sachs. And it does seem that Goldman protects its alumnae.
To keep the political connection theme going, note that former Merrill chairman and CEO Donald Regan was Secretary of the Treasury and Chief of Staff to President Ronald Reagan.
If the legislation introduced by McCain passes, Merrill Lynch could eventually be spun off to existing Bank of America shareholders. This would be windfall No. 1 for shareholders.
Potential windfall No. 2 is more obvious. Prior to the financial crisis, B of A paid a dividend of $2.48 per share. Its history of dividend increases was impressive. Since I believe Bank of America will not only survive but thrive, I am betting in the years ahead it will begin issuing and raising its dividend again, as well as buy back shares.
Apparently, the insiders agree. Director Robert W. Scully bought 62,000 shares at $16.79 in the open market on Oct. 23, 2009. Sallie Krawcheck, president of Global Wealth Management, bought 63,000 shares at $15.97 in the open market on Aug. 13, 2009.
These and other key insider purchases raise my faith in B of A even higher.
General Electric is very well connected, too, with powerful friends among the political and financial elites. Despite being a major blue chip, GE does a really good job of staying out of the limelight. In fact, until the mortgage crisis imploded, you rarely heard anything controversial about GE.
What really perked up my ears was the recent global climate summit in Copenhagen and GE’s involvement. With so many governments present at these high-level meetings, I realized that GE will be a major beneficiary of the move to install new clean energy technologies.
GE’s environmental, health and energy divisions stand to profit handsomely from its lineup of energy-efficient products.
Read more from the author at JohnMugarian.com.