Lou’s Picks

We are really excited to announce our new blog series – where periodically, we will share market commentary, investment theses, and opinions – we figured that this would be a dynamic and exciting way for us to keep you informed beyond the newsletters and print content we distribute. If there are specific topics you would like us to write about, questions you have about our posts, or any comments at all, please let us know! You can email us at info@catmg.com.

facebook-ipo-stocks-001-640x480As part of the series, we will periodically be highlighting Lou’s favorite stock picks in a series of posts. Today, we are highlighting Facebook (NASDAQ:FB) and Bank of America (NYSE:BAC).

 

With a mix of new features, businesses, and opportunities, we expect Facebook to have a great year in 2017. Here is why we are bullish:

  1. Cheap Valuation based revenue growth (56% in 3rd quarter year over year[i]) (will add specifics and elaborate on P/E when we are going to actually post this so that the #s current)
  1. Facebook has the potential to be a dynamic and large player across the e-commerce landscape. Over the past year, FB has made had strong entrance into several e-commerce markets via partnerships with companies like Uber, Domino’s, Kayak.com, and more.[ii] These partnerships enable Facebook users to communicate and transact with these brands within Facebook Messenger. Additionally, FB has created its own version of Craigslist, a marketplace native to Facebook where users can buy or sell items with each-other. FB will take market share across the e-commerce landscape over the coming years and ultimately increase its revenues.
  1. Instagram’s “Stories” feature is both an attack on Snapchat’s market share in the teen demographic and a significant addition to Facebook’s advertising inventory. In 2016, Instagram effectively copied the Snapchat stories feature and did well incorporating it into the Instagram interface. Stories enables users to broadcast photos & video clips to their followers; these photos & videos expire 24 hours after they have been posted. Stories also enables users to live stream video content. Instagram has been incredibly successful in driving users to this new feature, and, having demonstrated strong engagement, Instagram is partnering with large brands such as Nike (NYSE:NKE) to distribute branded video content and ads.

Coming off a strong 4th Quarter in 2016, where EPS (earnings per share) bank-of-america-is-preparing-big-layoffs-in-investment-banking-and-tradingregistered $0.40, Bank of America should to continue to do well in 2017. In particular, BAC stands to benefit from President Trump’s promise of deregulation and the FED’s intent to raise interest rates.

  1. The Dodd-Frank Act and post financial crisis stress tests, both intended to safeguard the broader economy, have limited Bank of America and its banking peers in their ability to generate returns on capital. These regulations prohibit the banks form being illiquid, which effectively means that they need to keep lots of cash on hand and limits the assets that can be tied up in illiquid things like loans. Currently, BAC has ~$500 billion of cash on hand. If Trump is able to relax or even dismantle Dodd-Frank, BAC will be able to allocate a portion of that cash to its loan portfolio which yields ~4% annually – this redistribution of cash would boost BAC earnings significantly.[iii]
  2. Almost half of BAC revenues are tied to interest rates and a 100 basis point (1%) upward move in interest rates would yield an additional ~$5 billion in revenues. Of the big banks, BAC most benefits from rate hikes because it has the largest portion of its earnings tied to interest rates. If rates rise and are coupled with a cash redistribution into its loan portfolio, BAC would dramatically increase its annual earnings.

“The information contained within this blog is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research everything you read here and seek professional representation before acting on any information you may have found in this blog.”

[i] http://www.fool.com/investing/2017/01/24/facebook-inc-earnings-how-long-can-this-monstrous.aspx
[ii] http://seekingalpha.com/article/4036551-remain-bullish-facebook
[iii] http://www.fool.com/investing/2016/11/24/chart-how-bank-of-america-would-profit-from-deregu.aspx