Is It Finally Time to Buy Financial Stocks?

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.’

Reader Comments

dan

January 6, 2009 7:57 PM

wait until after the next thousand or 2 point sell-off b/4 u buy. coming soon to a broker near u. read the headlines: companies are still closing plants and laying off workers.

KK

January 7, 2009 1:46 AM

The more important question is, "Should we continue to trust banks with our money?"

The stock market has been turned into a gambler's den. The financial stocks are the riskiest of all, even riskier than Bernie Madoff, because they have the Fed on their side.

oskar

January 7, 2009 6:55 AM

We only see the tip of the ice berg. Very irresponsible of BW publishing a bullish article like this.

sam r

January 7, 2009 12:08 PM

People with vision will perceive things way before average joe does.Experience teaches us that market climbs on a wall of worries.

brien v

January 7, 2009 4:43 PM

I no longer trust the 'advisors' that say "stay in stocks...don't sell it will come back". I believed this garbage in 2001 and it took 7 years to come back and then I get wacked again. Well this dumb investor is going to be cash & near-cash for years to come. I will have the cash to pick up these crashed stocks if and when they begin a sustained climb, but not a moment before. Analysts have lied to all of us and now we must face the truth that some of our investments are forever gone! Be prudent, be careful, & believe in yourself not others.

AS MN

January 7, 2009 5:18 PM

Brien V, KK, Oskar, Dan:

I will appreciate that persons like yourselves will be available to staff the service industry hotels and restaurants I will visit in my retirement.

Sitting in cash seems like an easy choice. The reality is that you are easily going to end up broke in the long run. Long term inflation estimates run around 3-4%. You are going to bury your nickels in your coffee cans and earn nothing, or maybe put them into the bank for 1% in a "High Yield" savings account in our current interest rate environment.

Do the math, the simple rule of 72. If the cost of goods and services goes up 4% annually, and you earn 1% at the bank, you lose by 3% per year. 72/3= 24 years to double those costs in relation to your funds. So, if you live for 24 more years, you will be able to afford exactly half of what you can today.

Congratulations, I hope you enjoy a 50% reduction in your standard of living form this obvious and easy choice to pull out and go to cash forever.

The rest of us will resist the temptation to sell at losses, and will participate in the ebbs and flows of this market, just like every other market.

You know who ended up rich after the great depression? Not the guy who sold at the bottom and buried his nickels.

Penny Stocks

May 19, 2010 2:57 AM

That's really awesome.. I hope I can see more of this..

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About

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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