Financials: Be Patient, the Opportunity is Coming

A few weeks ago, I cut my losses and sold all my Citigroup (C). It was the only financial stock I owned. I have no doubt it is going to get ridiculously oversold. However, I think it will eventually bottom in the low- to mid-20s, and I will re-visit the stock at that time.

It is still too early to buy the financials. We have just started cleaning out the excesses from the system. If you look back at the bear market of 2000-2002, the financial stocks moved sideways, even as valuation got cheap. Part of that was due to litigation arising from conflicts of interest in sell-side research and inappropriate investments, and part was also due to the credit crunch in 2001 and 2002 when the commercial paper market dried up, and spreads exploded. However, we lost few financial institutions.

The difference between then and now is that the problems now threaten the balance sheets of financial institutions. This is more serious than five years ago, although I don’t believe things are as bad as the S&L crisis - balance sheets are stronger, management is better, technology is better, risk is more dispersed - banks will be lost. (Citi will not be one.) We have not hit that stage yet, and until that happens, banks and other financial companies will struggle.

However, I do believe a once in a generation opportunity to buy the financials is coming. I think the market is going to throw the baby out with the bathwater. When this happens, some banks will go under, and some will be unjustly marked down below tangible book value.

I have compiled a list of 582 banks for when that happens. Only two banks - Beverly Hills Bancorp (BHBC) and Citizens Bancshares (CZBS.OB) - are trading at or below tangible book value. I think that at the bottom, there will be dozens, maybe hundreds at that level. Currently, 60 banks are trading at 1.5x tangible book value or less.

Be patient. The opportunity is coming.

Comments

[jayinbaker:]

Am I missing something here? I've found dozens of banks, mostly regionals, that are selling for way under book value. BBX, PFB, FBTX, CBHI, WM, IFC, and RF to name a few.

2007 Nov 22 05:15 PM