Monday, November 15, 2010

Be Fearful When Others Are Greedy (NYSE: AIB)

NEW YORK - Warren Buffett owns two financial institutions in Ireland but the legendary investor known as the "Oracle of Omaha" has never said which two. He has said that he made a mistake in buying them.

Shares of Allied Irish Banks have now rallied 57% since hitting a low of 76 cents on November 8 but it is very puzzling that its cousin theBank of Ireland is flat. As Buffet would say "be fearful when others are greedy." Investors appear to be filling up their bowls on AIB stock.

AIB has seen several 40+% rallies in the last year, in December 2009 the stock rallied from $3.17 to $5.00 or 57% in 2 days. In April 2010, the stock went from $3.20 to $4.49 or 40% in two days. In June 2010 the stock rallied from $2.17 to $2.94. Unless you are lucky enough to time the run, you would have lost almost all of your investment during this time.

Investors are currently rallying the stock around possible European bailout plans of Ireland. Not only is this new information but it was likely never factored into the valuation of AIB over the last year. What is important to note is most people felt Ireland could survive the crisis without European help which would intuitively be better. But now there are reports they need help, which is worse but has sent the stock rallying.

The bailout of AIB is different than that of National Bank of Greece which stock is down significantly since the announcement of the bailout in Greece. AIB is poorly capitalized while NBG has a strong capitalization in a poor country. In AIB's case the bank is in crippling condition and the state has already made every overture to save it. The bailout will ensure Ireland's survival if it comes but it does next to nothing for AIB since the state was already trying to save the bank.

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