Posted by: Ben Steverman on January 6, 2009
“Should I be buying financial stocks?” For more than a year, that question has kept investors up at night.
To some value-oriented investors, financials have looked like a steal. Again and again, they’ve been proven wrong.
See Legg Mason’s Bill Miller, who bet on Countrywide Financial and Washington Mutual among others. By contrast, Morningstar’s domestic-stock manager of the year, Charlie Dreifus of Royce Special Equity (RYSEX), won that honor partly by avoiding financial landmines despite having a value focus.
Though the last year has been tough, fund managers know that eventually a lot of money can be made in a rebound for the financial sector. No one wants to be early, but no one wants to be late.
Is now the time to be buying financial stocks?
When I talk to professional investors, I hear a wide range of views. Some previously pessimistic managers are now jumping into the financial sector. Some of them are seeking out the strongest players, betting on the survivors. Other brave souls are looking for firms that may be damaged but are wildly undervalued.
A large number of stock managers still are avoiding the sector as much as possible, figuring the financial system might not really recover until 2010 or 2011. They argue the financial sector is in the process of permanently shrinking as a portion of our economic output.
In the past month, financial stocks as a group are more or less flat (as represented by the XLF ETF for example). But results have varied widely. Goldman Sachs (GS) rebounded 27% in the last month, while and Wells Fargo (WFC) is down 6% and JPMorgan Chase (JPM) has slid almost 10%.
Stifel Nicolaus (SF) analysts on Jan. 2 released their “best bank picks” for 2009. Stifel analyst Christopher Mutascio writes:
Despite the negative sentiment, we believe a class of ‘survivors’ has emerged. Though not unscathed by the credit cycle, these institutions maintain adequate capital levels, in our view, and, in many cases, will capitalize on weakened competitors.
One merit to Stifel’s approach here is they’re not claiming to predict when the financial crisis will end and earnings will return. Mutascio focuses on those firms that will do well in “an eventual turn in the economy,” even as the sector “will remain troubled from an earnings perspective for the next several quarters.”
Stifel’s list of bank stocks to buy: BancorpSouth (BXS), City Holding Company (CHCO), Danvers Bancorp (DNBK), First Horizon National Corporation (FHN), People’s United Financial (PBCT) and TCF Financial Corporation (TCB). Not on the list is BB&T Corporation (BBT), which Stifel rates as a ‘sell.’