Stocks Still Hammered by the Recession Are About to Surge
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the recession, I have based my large-cap stock purchases on whether or not the companies have reached their pre-recession prices. Of course, I consider many other factors before buying, though comparing the current and pre-recession prices have triggered major gains in my portfolio. But is it too late to pick up shares of a stock that is undervalued due to recession pessimism? In short, no.
People still have hard feelings about stocks that either caused them personal grief (such as those in the banking sector), or companies that received a bailout as much of the rest of the world struggled to keep food on their tables. These persisting hard feelings have kept prices down, and show stellar buying opportunities. But that trend is waning, with many major banks such as Bank of America (NYSE: BAC) gaining about 100% in the last year. Furthermore, nearly five years after General Motors (NYSE: GM) and American International Group (NYSE: AIG) received massive bailouts, they were once again added to the S&P 500 recently after being kicked off about four years ago. That isn't enough to buy the companies, but it brings credibility back to these billion-dollar firms.
Uncork the campaign
Rejoining the index marks a major accomplishment for the companies, as they try to shed the negativity felt by those who were sour about the bailouts. This is certainly a victory for GM and AIG, which have been working diligently to return to the respected index.
The firms listed on the S&P 500 are perceived as leaders in the industries they represent, so GM and AIG look like they are finally out of the dog house. While there were slight surges in prices after the announcement, that bullishness will likely last due to the confidence the S&P 500 has shown in these companies, and that makes for sound long-term investments.
GM could rise sharply if it gets a better handle on the electric vehicle market. On June 10, the company announced a $5,000 discount for the Chevy Volt. GM is definitely in the running for selling the most electric vehicles. In May, the firm sold 7,157, compared to the Nissan Leaf sales of 7,614. With prices beginning to drop, there could be a surge in those buying electric vehicles. However, HybridCars.com reported electric vehicle sales only represented 0.5% of total car sales in May.
GM's revenue has increased by nearly 46% since 2009. Profits returned to the company in 2010, but investors should be cautious, as sales dropped from $7.6 billion in 2011 to $4.9 billion last year. Watch for increasing electric-vehicle sales before picking up this stock.
GM has also recently recalled 480,000 vehicles due to fire risks. Originally, the recall was 249,000 vehicles last August when GM SUVs had a short in a circuit board. However, an additional 231,000 sport-utility vehicles with an apparent danger of having an electrical short were recalled on June 17.
AIG turns a corner
With AIG selling its Asian life insurance division, the company is attempting to optimize performance and that has resulted in many hedge funds picking up the stock. In fact, the company is now the most-owned stock by hedge funds, replacing Apple. The refining process is sure to help AIG grow, and the company has been improving its return on invested capital in the process, showing business savvy and a likely ability to increase in share value.
AIG hasn't had quite as an abrupt increase in revenue as the other two companies -- actually, annual revenue fell by 15% since 2009, but revenue did increase by 27% last quarter over the previous period, which is a sign the tables could be turning. I consider buying this stock to be moderately risky, but the long-term upside could be huge.
While General Motors and American International Group celebrate reuniting with the S&P 500, Bank of America has its own reason to pour the bubbly. The company is finally able to address many of the mortgage problems that have plagued this stock. A court date has been set that will address the $8.5-billion settlement between investors and the corporation. The company allegedly owes investors money for the bonds that were purchased when Bank of America's Countrywide Financial was selling them.
Finally paying off those debts will make the stock more attractive to buyers. The bank is also making an effort to change public perception about the company by initiating an "express your thanks" campaign. The effort aims to raise $1 million for military members who were wounded in service.
B-of-A continues to perform well with net interest income after loan-loss provision (bank revenue) at more than $32 billion last year, compared to negative $1.4 billion in 2009. Furthermore, the company's loan-loss provision is decreasing as people are better able to pay off their loans. In 2009, the provision ate up nearly all of the company's $48.7 billion interest and fees on loans. Last year, however, loan-loss provision only amounted to $8.1 billion, or 21% of interest and fees on loans. Total debt at the company was also less than $600 billion at the end of 2012, which is down from more than $763 billion in 2009.
Gains are still ahead
While investing in great companies that were hammered by the recession would have been a better idea in early 2009 before share prices started to recharge, these companies still have a lot of room to grow. With all three stocks, significant gains are likely in the next month, so now is the time for the long-term investor to buy before these stocks are fully valued. The recent news at these companies is arguably the most significant positive development since the recession, and the companies look poised take back the roles for which they were once respected.
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Phillip Woolgar owns shares of Bank of America. The Motley Fool recommends American International Group, Bank of America, and General Motors. The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group. 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!