A Brighter Outlook for Financial Shares by Andrew Bary
Summary: Last week's doom-and-gloom is looking a whole lot brighter in the wake of the Fed's decision Friday to cut its discount rate to 5.75% from 6.25% while hinting cuts may come to the Fed funds rate as well. The prospect that more cuts are ahead is allowing investors to look past immediate problems in the credit and mortgage markets and, Barron's says, could signal big potential for financial shares -- including many of those hard-hit by by the recent turmoil. Perhaps taking the biggest blow was Countrywide Financial (CFC), which skidded as low as $15 Thursday as it was hit by liquidity fears and many feared the mortgage-originator was headed for bankruptcy. Should Countrywide make it through the turmoil and mortgage markets stabilize, fund manager David King thinks shares could reach the high-$20s by year-end, and could emerge as an acquisition target next year -- with potential buyers including Bank of America (BAC), which reportedly was interested at at $45/share price not too long ago, and Warren Buffett's Berkshire Hathaway (BRK.A). Another possible bargain, according to King is mortgage-insurer MGIC Investment Corp. (MTG), which at $36.64 trades for a fraction of its $54 book value or the $50 book value it would have even if it fully wrote off its substantial investment in subprime mortgage company C-BASS. King argues that mortgage insurers stand to benefit from a tightening in lending standards, because it is getting more difficult to secure alternatives. Thomas Kahn, a partner at the Kahn Brothers investment firm favors well-capitalized thrift institutions that could be taken over such as Dime Community (DCOM), Flushing Financial (FFIC) and First Niagara (FNFG).
Related Links: Credit Market Chill Provides Opportunity in Marshall & Ilsley -- Barron's • How to Deal With the Current Crisis of Confidence in the Market • Blackstone Seeks To Capitalize On Market Downturn