Shopping around is a foundation of smart investing. Independent research allows investors to go beyond the stocks featured in the news and shop lesser-known alternatives. As simple as it sounds, you are better off shopping around than using the media as a filter that selects for popular or glamorous stocks.
Much attention has been paid to First Horizon National (FHN) in the press and its trading volumes spiked recently with 10.8 million shares traded last Friday alone. FHN was recommended by Jim Cramer on Mad Money as a great way to play the housing market. Mr. Cramer even interviewed FHN's CEO. Despite this good press, FHN was recently downgraded by Evercore. Should investors trade FHN based on media attention or trading volumes?
No. As a financial institution, the book of FHN's assets is questionable because of slow sales in the foreclosure market and mark-to-model Level 3 assets. Even its earnings are subject to interpretation based on how prudent its loan loss provisions are relative to the riskiness of its loan portfolio. Unfortunately, the financial statement analysis of a financial company requires more faith in the accounting standards of the firm than would be required for a firm in another sector.
Fortunately there are many stocks which can be bought as surrogates to First Horizon National stock, providing industry diversification with better financial metrics. The future potential of a stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.
As alternatives to FHN, consider the following stocks with solid credit scores:
10-Year Average ROE
Alpha & Omega Semiconductor
Semiconductor - Specialized
CRA International Inc.
Ingles Markets Inc.
Nash Finch Co.
Natural Gas Services Group
Oil & Gas Equipment & Services
National Healthcare Corp.
Long-Term Care Facilities
Perry Ellis International Inc.
Textile - Apparel Clothing
Schnitzer Steel Industries Inc.
Steel & Iron
Strattec Security Corp.
Oil & Gas Refining & Marketing
First Horizon National Corporation
Regional - Southeast Banks
These alternative stocks are all categorized as "safe" according to the Altman Z-score, indicating that they are not considered alarming bankruptcy risks.
What's more, these stocks are cheaper, and have better growth prospects than First Horizon National:
EPS growth past 5 years
EPS growth next 5 years
Based on lower price multiples, these stocks are cheaper than First Horizon National at current market prices. Better yet, they have higher growth prospects according to historical trends and analyst projections. Thus FHN's price would have to drop significantly to become competitive with these stocks, because at current valuations they are simply better deals.
Why invest in the controversial banking industry when there are non-financial stocks that are more attractive?
Please read the article disclaimer for this article and Altman z-score calculations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.