What's in His Wallet? by John Kimelman
Highlighted companies: CompuCredit Corp. (CCRT), Capital One Financial Corp. (COF), RenaissanceRe Holdings Ltd. (RNR), Citigroup Inc. (C), Bank of America Corp. (BAC), JPMorgan & Chase Co. (JPM), Wachovia Corp. (WB), Tennessee Commerce Bancorp (OTC:TNCC)
Summary: Tom Brown's Second Curve Capital hedge-fund invests exclusively in financial services stocks, and has generated 20% yearly returns since its start in May 2000. Stocks mentioned:
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- CompuCredit Corp. (CCRT): A sub-prime lender that instead of focusing on credit cards, offers payday and automobile loans. Brown concedes that sub-prime lenders may be vulnerable to economic slowdowns, but sees risk assessment as a far more critical determinant. Calls CCRT's $700m of excess liquidity a "wild card" that could be used for earnings growth. Shares trade at 6x '08 earnings, and he expects earnings growth of 20%+.
- Capital One Financial Corp. (COF): Within a year credit cards will be less than half of its earnings. It trades at 8x '07 earnings. "Next year it will be perceived as a rapidly growing diversified financial institution."
- RenaissanceRe Holdings Ltd. (RNR): 2004-5 hurricane devastation led to a dramatic repricing in the reinsurance industry that will drive 20%+ growth for another couple years. It trades at 6x 2007 estimates, which Browns says are too low.
- Citigroup Inc. (C) Bank of America Corp. (BAC) JPMorgan & Chase Co. (JPM) Wachovia Corp. (WB): Due to their size, they stand little chance of having a serious earnings shortfall, but huge earnings beats are equally unlikely. If Citigroup management starts taking action like selling off some businesses, it could go up 10-15%.
- Regional banks: He's short the sector, particularly banks that bet on falling interest rates and steep yield-curves. He doesn't see the yield-curve steepening in the coming year. He likes Tennessee Commerce Bancorp (OTC:TNCC) because of its focus on the small business customer that "more than compensates for its exposure to the yield curve -- they can grow their earnings rapidly despite the difficult interest-rate environment."