Richard Bove, analyst at Rochdale Securities, has been pounding the table on bank stocks for nearly two years. On May 25 of last year, he predicted Citigroup and Bank of America would sextuple by 2015. Since then, Citigroup is up by more than 19%, but Bank of America, which has been besieged by mortgage-related setbacks, has seen its shares fall by nearly the same amount that Citigroup has risen.
Bove, meanwhile, has turned decidedly more bearish. He says he has recently downgraded some 25% of the stocks he covers. He is concerned a massive bout of inflation will cause a repeat of the 1970's when bank earnings surged but stocks went nowhere because the earnings were in devalued dollars.
The stocks Bove expects to suffer the most during this environment are regional banks like BB&T Corp. (BBT)
"The companies that are going to see big increases in earnings and no increase in stock price are the regional banks. Ninety five percent of their assets are financial in nature and they're going to go down in value as inflation and interest rates go up and people will care not at all about their earnings the way they did in the 1970's. I think we're back to that environment," Bove says.
Nonetheless, Bove has high hopes for most of the big players.
"I don't see any reason why Bank of America is not going to double from the current price," Bove says. He knowds investors are concerned about the bank's exposure to housing-related issues, but he expects the bulk of the problems to have cleared up in the next six to 12 months.
"Once they're gone, you've got the earnings power of a company with close to 6,000 branches and--depending on whether you believe Wells Fargo
As for Citigroup, Bove believes the plan to execute a 10-for-1 reverse split is hurting the stock because retail investors are obsessed with the low sticker price.
"Retail investors are selling. They don't want to have 200 shares go down to 20 shares just because
However, Bove says, once the reverse split-related noise is complete, "Citigroup's earnings power is growing meaningfully." The analyst point s to a surge in junk bond prices as an indication that Citigroup will be able to get a much better bid for soured assets they have been trying to unload since shortly after the crisis hit.
Bove's predictions on Citigroup and Bank of America may sound bold, but he is even bolder when it comes to inflation. He argues that once regulators tell banks they have satisfied new capital and liquidity requirements, they will begin lending again, which will be "the match that lights the fuse" of inflation.
And, just as is the case with Citigroup and Bank of America, Bove is thinking big.
"It's going to happen in the second half of this year, and I think you're going to see inflation rates get to five, six maybe seven percent. I think by the end of 2012, the Fed Funds rate is going up from 10 basis points to three percent or 300 basis points. I think by the end of next year you're looking at the Fed jumping interest rates 50 basis points every meeting because inflation is now starting to freak 'em out."