Today the market indexes fell a lot causing all profits that investors have made so far this year to be wided out. The Dow Industrial Average earlier plunged 460 points and ended the day down 173 points. The S&P 500 and the NASDQA fell 2% and 1%, leading to tech companies like Apple (AAPL, Financial) and Google (GOOGL, Financial) being beaten down. Clearly the spread of Ebola, the global economic slowdown and a potential third recession for Europe. The plung in market indexes has created opportunities for investors to acquire stakes in great businesses at and below fair value. Companies like Wells Fargo (WFC, Financial), JP Morgan (JPM, Financial), Citigroup (C, Financial), and Goldman Sachs (GS, Financial) at or below these companies' fair value thanks to the plunge in the markets today. These are the kind of companies that you want to acquire in market downturns and put into your 401k and especially in your IRA to hold for the next 20 years.
Wells Fargo is one of the most sound and profitable financial institutions in the world and is now selling for $47.85 per share and selling at 12.6x its after tax earnings. The company currently has $6.07 per share in pretax earnings and selling for about 7.8x its pretax earnings. Wells Fargo should trade at 10x its pretax earnings which is a reasonable and conservative multiple to sell at. Which means that the company would sell for $60.70 per share an produced in investor with at least a 10% pretax earnings yield. Warren Buffett has said that companies should sell for a premium above book value if it has a return on asset of 1.00% and above. Wells Fargo has a return on asset of 1.40% and selling for at least 1.4x its book value.
JP Morgan is one of the largest and best managed banks in the world. Dimon has sucessfully led the bank through the financial crisis profitably. Currently the company, because of the plunge in the market, is selling for $55.50 per share and 10.3x after its pretax earnings. JP Morgan has $6.79 per share in pretax earnings and is selling for 8.2x its pretax earnings. The company should trade at 10x its pretax earnings, which then JP Morgan would sell for $67.90 per share. JP Morgan has a return on assets of 0.75%, which means that the comany should sell for less than 1.0x book value. The company is currently selling above book value and selling below 10x the firm's pretax earnings and offering potential investors at least a 13% pretax earning yield.
AIG is clearly undervalued and has underperformed the financial sector the last few years but recently the company stock has been moving upward to reflect the firm's real value on a per share basis. The plunge in the market today has given investors the opportunity to acquire a stake in a highly undervalued company like AIG. The current price doesn't reflect the real worth of the business and should trade higher. AIG is currently selling for $49.70 per share and 8.3x its after tax earnings. AIG has pretax earnings of 6.32 per share and now sells for about 7.8x its pretax earnings. It should trade at 10x it pretax earnings, that $63.20 per share and would sell for about 0.92x its book value. With the company selling for 0.74x its book value of $68.62 per share and having a return on assets of 1.67% its should sell at a premium above book value. Even selling at 10x pretax earnings, AIG will still be selling below book value, when the firm should trade at a premium to book value. The company should trade for 1.1x to 1.2x book value.
Citigroup, like AIG, has been underperforming the financial sector as well. After the fall in the market today, it is selling for $49.70 per share and at 11.8x its after tax earnings. The company has pretax earnings of $6.41 per share and is selling for 7.6x its pretax earnings. Citigroup should sell for at least 10x its pretax earnings, that means the firm would sell for 64.10 per share. At 10x pretax earnings Citi would be selling at about 0.99x book value, which is reasonable since the firm has a return on asset below book value. Citi has a fair value of $64.10 per share.
Goldman Sachs, the most hated investment banking firm in the country, has gotten a bad rap with mainstreet investors. The firm is one of the most successful investment banking firms in the world and has been around for over 145 years. Goldman Sachs has traded a lot higher since the lows of 2009, but it is still undervalued. Today's plunge in the market has created an opportunity to acquire shares if you don't have any or add to your stake. Now the firm is selling for $177.20 per share and selling at 11.6x its after tax earnings. The company has pretax earnings of $23.49 and now selling at least 7.6x its pretax earnings. Goldman Sachs should trade atleast 10x its pretax earnings, that would put the share price at $234.90 per share.
Conclusion
The plunge in the market has given every investor an opportunity to acquire stakes in these great companies at lower prices then they have been in awhile. All of these companies are undervalued and are giving anyone who invests in these firms a pretty good margin of safety. Acquiring shares of these companies for your 401k and IRA for the next 20 years is a smart move for any investor.
Warren Buffett (Trades, Portfolio) says, "Be fearful when others are greedy and be greedy when others are fearful."
Today was a day for any smart and rational investor to be greedy while others are being fearful.
