The man with a plan

I am a man with a plan - armed and dangerous.

I recently noticed that RBS is on a 2008 PE of about 5 and is yielding about 10%! Barclays is on a 2008 PE of about 6 and has a yield of about 8%.

Another company I own - Gilead Sciences (GILD) - is on a 2008 PE of 25 and has no yield.

I think at these levels the UK banks offer a far better risk / reward ratio than GILD. GILD has been fantastic for me, gaining 30% last year when most of the market was going down. But now it is relatively richly priced compared to the market and I don't see anything on the horizon that will stimulate the share price. Obviously GILD has great defensive qualities as its HIV drugs are needed whatever the economic climate but on the other hand a company like United Utilities has similar qualities and is on a 2008 PE of 13 and yields 5%. At times like this a decent yield is most welcome. GILD has growth of course but its HIV drugs can't gain market share forever.

RBS and BARC on the other hand just need to recover to previous levels to double in price! Even if that recovery takes 4 years that is 20% annualised and a chunky yield on the way.

So the question is, are RBS and BARC heading for some kind of meltdown or will they recover in the medium term? If you believe that this is not the end for UK banks then they are a fantastic bargain.

However the current share price may not be the bottom so I am going to drip feed the proceeds from selling GILD into BARC and RBS over the next 8 months or so. Hopefully I have learnt something from previous experience of rushing to buy "bargains" only to see the share price continue to fall a lot further.

Happy hunting!