A particularly detailed and intelligent post from Raging Bull (author: Dagger__SA):
"Why ONE?
It has come to my attention recently that a few people who know me have followed me into this stock. As flattering as that is, I feel compelled to communicate my reasons for investing in ONE since your investment style and risk tolerance may not necessarily correlate with mine. So, please consider this with respect to your own style:
I'm essentially invested in ONE as a speculative play, and not because I necessarily feel ONE is a good investment. You should also know that my position is comprised of Call options only, and not outright stock. As a result, I have a relatively small investment in ONE, but one which is at high risk of total loss due to the expiration nature of Call options.
This brings me to what the speculation is based upon:
1. As a financial analyst and accountant for a bank, I have a unique understanding of how bank accounting and reporting is done. In ONE's case, there has been a recent upheaval of upper management. In these situations, it is common for a firm to undergo what I'll term "accounting austerity". That is, when things are bad, you may as well make them as bad as they possibly can be and get it over with so there is no where else to go but up. This doesn't necessarily go against the accounting principles of GAAP. While accountants are taught to be conservative, even this leaves room for optimistic conservativism versus pessismistic conservatism. The latter is at work here. My speculation here is that with respect to First USA, ONE has indicated a worst case scenario.
2. That brings me to the lawsuits. ONE is now essentially reporting income severely lower than earlier reported, and the lawsuits seek to fine ONE for falsified statements. However, just because today ONE realizes losses they didn't realize before (or are just exercise what I discussed above) doesn't imply wrong-doing. As long as ONE can show auditors the basis for their earlier projections as well as the new basis for current income and projections, there has been no wrong-doing. It is for these reasons that I speculate the lawsuits will fail at best or be minimal at worse.
3. Speaking of income, ONE still has some. ONE continues to be the #4 bank in the country. Their losses at First USA are a blow, no doubt. But I beleive the market is over reacting to this and forgetting that ONE is earning $2.95/share and paying more than half of that in dividends. ONE is now down 50% off it's high this year, and to me this is a clear sign that ONE is grossly under-valued because it is inconceivable to believe that the number 4 bank in the nation is worth only half what it was six months ago. And yet their earnings surely are not cut in half for the long term.
4. While we're on earnings, consider that ONE's dividend yield is now 5.79%. This makes investing in ONE almost as good as investing in a CD, only with the risk of some (not all) capital losses offset by potential gains. It is my speculation thatthe upside potential is far greater than the downside potential. Furthermore, at 5.79% yield, it is nearly worthwhile to buy ONE on margin since the dividends will practically offset the margin interest expense. This is just ludricrous. Compare this with the dividend yield for T (1.72%), F (4.17%), GM (2.49%) and you'll quickly see why, although ONE deserves to be down from it's 52 week high, it has apparently been OVER-corrected.
5. ONE has over the last couple of years structured it's income to be more fee-based than most banks. This means ONE is less sensitive to interest rate fluctuation than before since much of their income is transaction-based fee income versus interest rate income based. While customers may decrease their debts, it is unlikely they'll discontinue their banking activity. As a result, it is my speculation that ONE's earnings from it's core business will outshine the competition.
6. Because of ONE's high fee income, slight incremental rises in the interest rates at this time are actually beneficial to ONE. The long term effect may not be so great, but in an economic environment featuring high employment, rising income, and continuing strong (even though decling) housing starts, the net effect of slight rate increases serves to motivate potential home buyers into action. As you may know, ONE is a leader in the mortgage product field, and to me the recent small increases in interest rates translates to good news for ONE.
7. ONE is out of favor with Wall Street analysts. ONE's management tends to be arrogant towards the people who can make or break the market for their stock, and ONE seems to be ignorant or oblivious to this fact. Because of this, Wall Street analysts have nothing good to say right now, not only because they don't want to but because they haven't been armed with the explanations they need to do so. With this, it is my speculation that the market forces will eventually see what the analysts aren't telling, or that a new CEO will have the talents to embrace the analysts and turn this lack of rapport around.
8. Since ONE began it's decline 6 months ago, daily trading volume has practically doubled.
finance.yahoo.com
This is not indicative of panic selling, but rather long term accumulation. With that in mind, I sought out to see who was buying, and you may have seen my frequent posting of links to Thompson's I-Watch charts which indicate incredible levels of institutional buying and buy orders which eclipse selling orders. The old adage goes "don't buck the trend" but smart investors know that the trend means more than looking at the price chart alone. Look at the volume (high) the money flow (still positive depending on the time horizon you use) and who is buying (the institutions). Look also at the size of the sell orders; they've been overwhelmingly small and many offset by several "super-buy" orders. This tells me the small stock holders are selling and the large smart-money investors are buying. "Don't buck the trend."
9. ONE isn't failing; it's re-building. My speculation is they will succeed.
10. The easiest one of all: buy low, sell high. ONE is low. It hasn't been this low since the summer of 1996.
I recommend 2001 LEAPS at X=40 or thereabouts. Your investment will be relatively small (but at risk of total loss) with a potential for serious gains. I believe the risk of loss is small, the potential gain is likely.-" |
