Before everyone else, he told you to start betting against the financials. In fact, it was slightly over one year ago – March 20th 2008 – when he said on Fast Money, “We’re short across this financial sector. We’re short mortgage insurers – were short bond insurers- we’ve re-shorted Lehman. We think there are a lot more shoes to drop.”
Tilson tells us these days he’s bottom fishing for banks. “Valuations have compressed so much we actually flipped around and went long some financials such as American Express and Wells Fargo”
That’s right he’s long Wells Fargo.
Of course there are no certainties, but Tilson likes the odds. “I think there’s a 70% chance Wells Fargo makes it without any kind of catastrophic outcome in which case it’s a $40 – $60 stock. And at current levels that’s a pretty attractive risk/reward.”
In fact he thinks investors are making a major mistake when they play financials. “People often look at what the losses will ultimately be and then compare it to today’s balance sheet and make a decision.”
In other words, if the losses are higher than the current reverseves they assume the company is toast.
“But the mistake is the losses will come in over many years. As long as profits keep up with losses they’re going to make it.”
And in fact, it’s that thesis which lies at the heart of Tilson’s Wells Fargo trade.
“I think Wells Fargo will have losses of $8 billion a quarter for many quarters to come but they’re making $8-$10 billion of profit per quarter. As long as profits keep up with losses they should win the race.”