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Finding bank "babies" thrown out with the bathwater

Posted by: Aaron Pressman on September 5, 2007

The financial sector has been at the epicenter of the current market turmoil. With big trouble in real estate lending, obviously a lot of lending institutions are also in hot water. The Select Sector SPDR exchange-traded fund for the financial sector (SYmbol: XLF) has dropped 11% over the past three months as has the streetTRACKS KBW Bank ETF (KBE).

That makes it exactly the sort of time for value hounds to pounce, sifting through the rubble to find stocks which may have been irrationally tarnished. Over the past few years, some of the very best performing stocks have arisen from the ashes of the Internet, telecom and power generation bubbles. With the financial sector now under pressure, even the best stocks may stay depressed for a while but over the longer-term, it’s one of those uncommon opportunities that value managers use to buy low and sell high.

There are any number of ways to sort the good from the bad. One simple way is to start with a stock screen and then do deeper research on the names you turn up. I pulled up the list of all 216 stocks that Morningstar rates 5 stars and sorted by recent performance. This gives you a slice of companies with excellent operating results that Morningstar’s various analysts view as best bets. At the very bottom of the list, down 30% to 70%, are a subset of companies in scary industries like mortgage insurance and home building. Could be some gems amongst those rocks, but we’ll look for some that are a bit easier to identify.

Among basic bread and butter banks, Huntington Bancshares Inc. (Symbol: HBAN), has declined 20% over the past 3 months despite its diversified loan book. Huntington operates in the far from sexy Ohio market and is in the midst of integrating a $4 billion acquisition. Still, even with conservative expectations and modest projected cost savings, Morningstar sees a $26 dollar stock trading at around $17. Allied Irish Banks (AIB), trading around $50 is worth more like $74, Morningstar says, despite an 8% drop in the past 3 months. Described as a “plain vanilla” bank that takes deposits and makes loans, Allied Irish is expected to benefit mightily from the impressive strength of its home country’s economy. It’s also a fav of the Motley Fool crew. BankAtlantic Bancorp (BBX) tanked as half its loans are mortgages and it even has a sizable book of business with the dreaded home builders. But there’s no subprime exposure and the bank’s management has succeeded in gathering low cost capital by attracting more retail deposits at storefront branches. Morningstar sees $15 of value per share for a stock currently trading around $8. Barron’s last month noted the bank could also be a big beneficiary if the Federal Reserve starts cutting rates. All sound like possible candidates for the tarnished gem category.

And that’s just a start. There are of course other places to dig up ideas for further research. Hedge fund manager Tom Brown’s is a good resource. Our own humble web site provides access to S&P research on banking and other sectors. And always useful stock blogger network has a channel devoted to the financial sector. With panic in the air, there’s no doubt some good bargains to be had.

Reader Comments

Johannes G Hospel

September 11, 2007 12:59 AM

Some of the finer Banks have been dumped by the investors. Wachovia Bank, WB, is one.

September 11, 2007 7:23 PM

Thanks for the tips, seems like there are some serious bargains to be had in the current market.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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