Tom Brown's Financial Services Picks

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

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 (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:

• 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 (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."

Related: Bank of America: Impressive Numbers Prove We Were Wrong -- Barron's • Bank of America, Citibank Takeover Targets On Paper Only • Banking ETFs May Be Short Candidates In This Rate Environment • Two Midcap Bank Stocks Worth a Look • Insurance Stocks: Wall Street's Biggest Secret

Comments

[BamBam:]

As usual, Barron's muddled the message on the Citi breakup.

Mr. Brown estimates that a breakup would boost the share price by about 30% over today's price (of 49 and change).

www.bankstocks.com/art...;id=9880936

2006 Dec 03 12:55 PM

[FIG trader:]

the link you had showed an April date on Tom Browns report a $49 target and possible $60 with breakup. Since the stock has achieved the former price without breakup, they must be doing half way decently, though clearly not as right as some of the other banks, and for the most part just being in the right sector has worked. But go back ten years C (under Weill) has still outperformed everybody over the ten year period (even BAC, WFC, BRKA, JPM), with most outperformance coming in the first five years. Any short period of time can tilt toward any one business, say mortgage (WFC) insurance (BRK), investment banking GS; But, I'm not sure Brown's conclusion (selling assets) is the right medicine, or whether its just water cooler talk. Clearly trying to time entry and exits into specific lines of business was the sine qua none of Sandy's magic, but few other major bankers can make that claim, nor can one of the smartest ex sell side banking analyst do so without providing more detail as to how what the company will do with cash, and how secure the returns will be in the next few years (not just quarters), after he sells for top dollar today.

2006 Dec 05 04:07 PM