Pick Up Undervalued Financials - Barron's Interview

by: SA Eli Hoffmann

Barron's interviews Richard Pzena, founder of newly-public Pzena Investment Management (NYSE:PZN). Shares of Pzena are down nearly 43% since going public two months ago, at least partially due to its fondness for financial stocks. Undaunted, Pzena says the current opportunity in financials is "as good as it gets."

Pzena says beaten government-sponsored mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) are selling for a mere 25-30% their worth; he sees 3-4 fold upside once the market recovers from its mortgage-lender jitters. He notes the relative ease with which the firms were able to raise capital when needed, and says they stand to earn 25-40% on equity they issued at 8-9%.

While conceding consumer credit companies' earnings will drop on bigger loss provisions, he sees value in Capital One (NYSE:COF), which today trades at "as good as it gets" 4-6x normal (non-crisis) earnings.

Among banks, Pzena questions whether Citigroup (NYSE:C) should have lost $120 in market cap on an $8B CDO writedown. He notes the firm's strong international credit-card franchise. Investors willing to stomach short-term risk are getting a "really spectacular risk/reward trade." The same could be said about Bank of America (NYSE:BAC). Lehman Brothers (LEH) and Morgan Stanley (NYSE:MS) also look interesting.

Finally, he likes Alcatel-Lucent (ALU). Once the current price war on telecom equipment abates, and the company successfully integrates, "there is a lot of earnings power here."