Bank of America shares trend higher, still riding off of this morning's earnings beat, while global automotive part supplier Cooper-Standard could stand to benefit from rising demands in new cars. Great Hill Capital Chairman and Managing Member Thomas Hayes discusses his latest stock picks. Hayes identifies tech giants Apple and Nvidia as "two of the greatest businesses in the world", but notes that the stocks may not see much growth potential at the already high prices they stand at now.
Video Transcript
SEANA SMITH: Well, big banks coming out strong so far this earning season. Bank of America shares trading higher up just about 4%. The company beating on profits and revenue for its most recent quarter. Net income up 19% from a year ago. The bank is a top stock pick for our next guest we want to bring back in Tom Hayes great hill capital chairman and managing member.
Tom, we just heard from Bank of America Chairman and CEO, Brian Moynihan earlier in the hour telling us that he's not surprised about the fact that the consumer has been and will continue to be resilient. What's going to be the catalyst here for Bank of America? Is it the consumer from here on out?
THOMAS HAYES: I think, it's a few things. I think, expectations are very low and I think the stock has already been derated. So Bank of America trades historically at about a 12 and 1/2 times multiple below the below the S&P on average, it's now trading at about 8 and 1/2, 8.8 times as of this morning. We bought this stock during the mini-banking crisis in late March.
We were looking in the rubble for dislocation, and we said when there's periods of dislocation we benefit by buying the highest quality, and that's what Bank of America is, and that's certainly what Brian Moynihan is as the CEO for sure. So first off, it's been derated it's trading at about one times book, which these stocks throughout a cycle can trade from one time at trough to two times at peak. So there's a lot of runway for the valuation rerating.
And I think generally, the other thing that he didn't really talk about that they didn't touch on is, they took their loan loss provisions were lower than expected this morning. Everyone thought it was a foregone conclusion, they would have to take them up a little bit because people are so panicked about commercial real estate, about credit cards. And in fact, they took them, took them lower than expected.
So I think, the quality of their business, the quality of their book is good. And as that 10 year gets bid, which we talked about before, all their mark to market with their loans, with their portfolio holdings are going to go up, so that's going to be an additional benefit for Bank of America, so it's best in class, we love it, we think Brian Moynihan is a tremendous leader. And you know having seen how he worked the bank through the financial crisis, he and Jamie obviously, are the best two in class. Yeah.
AKIKO FUJITA: So you know that's kind of my natural follow up here Tom, you talk about B of A being best in class, but is this a play that you know maybe those who are watching can say, look, should I be looking at other financials too? How much of this is a B of A specific story? How much of this is about a second look broader financials?
THOMAS HAYES: Yeah. So what we like to do is we buy high quality when it's on sale. So JP Morgan is high quality, but it's not quite as discounted as Bank of America is, we like it trading right around book, we like it like it trading at 8 and a 1/2, 8.8 times earnings. We like Brian Moynihan.
However, the second, we did, we did three financial plays during the mini crisis in March. One was Bank of America, one was Vornado, which we came on and talked about, Seana remembers very well. And we also put on a trade with the KRE, we couldn't pick which small regional bank would do well so we decided to buy the whole basket while it was dislocated, and that started to work out nicely.
We think that's going to persist because as the 10 year gets bid, all the mark to markets on those banks are going to go up, and you're going to see a bid into small caps which is 21% financials and we think that group is going to continue to perform. So as it relates to the smaller banks, we like a basket as it relates to the large money center banks, we like one pick and that is Bank of America in terms of upside relative to price.
SEANA SMITH: All right. Tom, let's switch industries just a bit talk about your next pick and that's CooperStandard, a stock that has actually done very well since the start of the year. What's the bull case going forward?
THOMAS HAYES: OK, this is a little known stock. We actually modeled this off of Charlie Munger, who did a similar trade during the recession of 2001. He bought a company called Tenneco. Tenneco had fallen from $16 down to $1. CooperStandard during this recession had fallen from $146 in 2017, 2018 at peak auto production when they were earning $7.21 a share. They fell all the way down to 350.
We initiated a position last May around 550. The bad news is, it's up 3X about 200%. The good news is, we believe it's just getting started. Why do we think that? Because they were able to refinance their debt out to 2027, so that the solvency risk is off the table, which was a key factor stock doesn't go from 146 down to 350, if that's not a real risk. So they took care of that, and now auto production is starting to normalize. And we believe it's going to normalize, if it gets to 85 to 90% of 2017 levels, we believe this stock can earn $7 to $8 a share again.
Now, at its peak it had a 20 times multiple on those $7, that's why it traded up to 140. Let's say it doesn't get a peak multiple again, and it gets to $7 of earnings power, and it trades at a trough multiple of 10 times, you still have a 70 stock. This stock is trading at $16.24 today. So yes it's up a lot since we went public with it, and we think it's just getting started because all the risk is now out of the stock, and now you just wait quarter by quarter for margin improvement.
And more importantly because management is delivering they can deliver all you need to see is the industry volume production, and we saw it General Motors sales were up 19% last quarter, industry sales are up, we saw a little bit in retail sales today. And in, you're going to see more and more incentives from the OEMs. So in a 7, or 8, or 9% environment we think used cars are going to struggle, but when you're seeing it all over the TV 0% APR, 0.9% APR, 1.9%.
Before the pandemic, no one cared because money was free. Now that money has a significant cost, rather than buy the used car, you're going to buy the new car and get free financing, and that's going to do very well for CooperStandard which provides all the ceiling systems around the windows and glass, fuel, brake delivery systems, fluid transfer systems, all to the new car producers. So we're pretty excited about this and we're going to ride the wave in a leveraged way for the pent up demand because the average car on the road is 13.7 years old, so people need new cars.
AKIKO FUJITA: And Tom, let's talk about some stocks that you're not as excited about. Apple at one of those that you've picked out. Is this a valuation issue because this is-- I mean, Apple is one of those, sort of those steady stocks. Right?
THOMAS HAYES: Yeah.
AKIKO FUJITA: I mean, is this just about the run up that we have seen in tech overall?
THOMAS HAYES: Yeah. So these are two of the greatest businesses in the world. So we're not shorting these stocks. Our base case is that, we're going to continue to see a rotation in the second half where the stocks that ran up the most in the first half are going to perform less well. It doesn't mean they're going to crash, it doesn't even mean they're going to go down, it means that they're going to underperform relative to the catch up trade, some of the groups we talked about financials, small caps, et cetera.
You know, when you look at apple though objectively, they're growing earnings, their long term earnings growth rate for the next five years is expected to be about 7.9%, they're trading at 32 times earnings. Now you can say well, it's the greatest company they should have a premium. Yes, they should have a premium. But over the last decade, most of the time they traded their multiple was in the low teens because they had the low earnings growth rate.
And that implies a three times price to earnings growth rate peg ratio, which is a little rich. So all we're saying here is, for new money we wouldn't be chasing this stock, we would certainly be strongly considering it if it came down at a lower price, but you may never get that big discount we're just saying underperformance for the second half on this front.
SEANA SMITH: Tom, I'm guessing, you're going to have a similar stance as to why you're not liking NVIDIA given the price evaluation, and the massive run up that we've seen over the last several months.
THOMAS HAYES: Well, look again, NVIDIA is a great business and going to continue to do well as a business. And they're growing earnings actually at 21% long term expected growth rate. So the 59 times PE is slightly more justified. But at 24 times sales, I literally just can't stomach it, maybe I'm old fashioned, but I can find better things to do. I look for you know very simple businesses that I can understand for doubles and triples over a reasonable amount of time, 12, to 24, to 36 months, and I'll leave the shiny new objects for others to discern. But great business just a little too rich for my blood.
SEANA SMITH: And those who got in early are certainly having the last laugh now with that massive run up since the start of the year over 200%. All right. Tom Hayes, always great to have you, thanks.
THOMAS HAYES: Thanks for having me.
