Time To Take Profits

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Dec. 5, I wrote an article called “3 Banks With Huge Upside Potential.” I recommended going long on three Argentinean banking stocks: Banco Macro (NYSE: BMA), Grupo Financiero Galicia (NASDAQ: GGAL) and Banco Frances (NYSE: BFR). During the last two weeks, along with the the S&P 500 (which soared 2.5%), this three stocks had tremendous returns. Not only did the general market help push these three Argentinean banks, but also two developments were key: (1) A positive ruling from a US Court Of Appeals suspending a ruling that could have triggered a technical default of Argentinean national debt and (2) Strong political signals indicating that Argentina is willing to settle its problems with 7% of its 2001 pre-default bondholders that had not accepted 2005 and 2010 restructuring offerings. If you bought these stocks what should you do now? Let's take a look at valuations first.

Banco Macro, now trading at $18.5, is still 5.2% down in 2012, but up 17% during the last 2 weeks. Impressive indeed. Now its market capitalization stands at $1.1 billion and from trading at 75% of book value, it now trades at 92%. Yes, the bank is growing fast (as I stated in the previous article, during Q3 net income grew by 31% Year over Year) but the Argentinean economy is not growing at fast rates anymore. As for today, BMA trades at a 4x Forward P/E (from 3.3x two weeks ago) which is still cheap but not as much as it looked just a few days ago. Even if Banco Macro is one of the better managed banks in Argentina it has gone up too fast and it no longer has the deep discount to book value that I like to see in banking stocks before buying. If you bought it at $15 two weeks ago, sell it and take your profit home.

Grupo Financiero Galicia, now trading at $6.60, still is my favorite Argentinean banking conglomerate. The company also had spectacular price performance during the last two weeks. Its up by 12.2% since December 5 and by 11% in 2012. Grupo (which owns 95% of Banco de Galicia) trades at a 3.65x Forward P/E and at 108% price to book value. Given its Year over Year net income growth of 26% and its 31% ROE, the stock does not look expensive but, again, a 108% book value makes me a short term bear. There is one detail that I have mentioned before that makes me want to keep part of the position alive: Grupo's controlling shareholder is EBA which controls only 23% of the outstanding shares. This fact makes the company a potential M&A candidate in the Argentinean banking industry. I would sell 70% of my position keeping 30% for the long term.

My last Argentinean bank pitch was Banco Frances, which is the Argentinean branch of Spanish BBVA (BBVA owns 76% of BFR). The stock, after soaring 15.8% since December 5, now trades at $5.20 and is up by 6.5% in 2012. Now trading at a 4.6x Foreward P/E (from x3.6) and at 115% of book value, the stock looks more expensive than the other two. If you bought this stock just sell it now. A 15% profit in less than one month is always a great return.

The aim of this post was to provide some guidance after the huge price changes that took place. My point of view is that you should be a short term bear and sell the stocks taking great profits. I would only keep 30% of my GGAL position because I am sure it has potential as an M&A candidate given its market strength and current valuation. Nobody went bankrupt taking profits smartly. I am sure Argentina is going to give you more stable entry points going forward.


Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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