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Why Financials Are a Good Play

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  • Description

    Ariel Investments Vice Chairman Charles Bobrinksoy argues financials are a cheap investment.

  • Duration 3:35
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This transcript is automatically generated

Wall Street's to the markets in positive territory just for -- trading days left in.

In 2011.

Member -- a day off for Christmas for the markets on Monday.

So well maybe you want some hot stocks it can't possibly be the financial -- everybody hates these big banks.

Not our next guest Charles urban school enjoy this area investments vice chairman -- Co portfolio manager of the aerial focused funds in Chicago it's always good to see you do like the banks time.

Yeah it's absolutely a contrarian play it's sort of the opposite of a crowded trade you heard the -- crowded trade which means everybody is and it.

This is the un crowded trade this is -- got -- gain in October there's nobody at this.

But we think that Morgan Stanley and Goldman Sachs in particular.

-- Citicorp as well are extremely treat cheap.

Either way you measure an investment bank is by book value it's always hard debt.

Talk -- PE's for a bank but Morgan Stanley is right now trading at about point five.

Times book value over the last twenty years Morgan Stanley his averaged two point eight times book value.

-- -- had never traded below two in fact until the mid part of last decade so it's extremely cheap now -- there were big losses coming at Morgan Stanley mortgage securities they were about to blow up.

You could maybe see -- should trade for less than book but we don't see any of those explosions coming forward in fact we think Europe is probably gonna fix itself.

Near that that Bill Clinton leads me right to question you on Morgan Stanley by the way right now you guys on -- yes we did.

So the media you might make a great trade on that over already made one and it may shoot higher and obviously that's the bet you're making.

And the other side of it is you know Jon Corzine thought Europe look pretty undervalued and that didn't work out so well so there's there's there's a big risk -- these kind of things right.

Right but that is because IMF global went very long European securities on a leverage basis and we don't think Morgan Stanley's portfolio looks anything like that.

They have net exposures to.

European sovereigns that are less than 2% of assets so.

It's a tiny portfolio.

It's already been marked to market that's one of the wonderful things about an investment bank.

The book value you get is marked to market so if they have some losses.

-- are already reflected in book.

What's the the biggest risk to all this next year do you thing and the obvious answers your to blow up I know that.

But is it is there is there anything else out there that worries you even here in the United States -- we've passed Dodd-Frank already but.

-- always the chance that there's more pressure on the regulatory front this for some of these banks what worries you when you put your money at risk and and in -- what Morgan Stanley.

The reason this is section on.

How did trade and why so few people agree with me on this is because they say fundamentally the investment banking business has changed it's not as -- -- business -- it used to be.

You can't make the money in fixed income trading that you could before investors are skittish so they're not putting money in the stock market.

All of that is true.

But it does not mean that investment banks are worth.

Half of their book value.

That's one of the tenants of and value investing going all the way back to Ben Graham if you can buy something at a big discount to its intrinsic value.

To its liquidation value.

You have a huge margin of safety and we think you've got a great margin of safety.

In Morgan Stanley it can't go in the absence of big.

Calamity we cannot go a lot lower.

Well it's a gutsy call but it's also well reasoned and well explained as -- so people can make their own decision on -- that and we'll have you back so if you're right Charles -- -- -- so happy.

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