Financials Offer Patient Bulls Many Opportunities

Without looking at a single chart, solely from the tape action of the Dow and all the various headlines and commentary, it feels like stocks are coiling up, building up energy for a major expansion move in the very near term. So let’s get straight to the stocks…

FC Stone Group (FCSX) has been a favorite trading stock since the day it floated. Although it took patience to find this stocks rhythm with plenty bruises to prove it, once you get the dial on this stocks intentions, she can be very rewarding. The stock is building support in the low $40 range as this was the prior overhead all time high. It’s always nice to see price compression like this, bringing all the major short, medium and long-term moving averages of all kinds into convergence.

As these lines converge from above and below prices, one is forced to look at the macro fundamental picture to get a proper gauge of what drives this stock. As the largest OTC exchange for commodity derivatives that don’t trade via a centralized exchange (about 10 times the size of all centralized exchanges combined), this company is not only in the eye of the tornado when it comes to the ethanol explosion, but she also sits in a sweet spot that is literally cycle proof. Producers are always looking for long-term hedging so the explosion in grain prices explodes this company’s cash flow. The company operates as an extremely shrewd trader as well: their hedging services are in incredible demand. I would be building up a position right here in the 41 to 43 range, using a stop somewhere in the high 30’s. Remember, this is a trading stock so take profits and buy into the shakeouts. $57 is a high probability in the near term.

Holly Corp (HOC) was a big gainer in 2007 but has pulled back almost 50% from its high last July. The stock found a bottom in November and has been confirming it ever since. Last week, she spiked and left a big trading gap behind it. I fully expect that gap to be closed, thereby completing this bottom and embarking upon her next major leg up to test previous highs. With crude prices closing above $100, if prices hold firm above this level for several trading sessions, I expect the energy complex to really light up. If HOC pulls back to $49, I would be an aggressive buyer all the way down from $51. This is a stock I am comfortable buying and putting away in size.

Morgan Stanley (MS) has rewarded us for being patient. In my last post on January 21, I suggested she would trade down in the low 40’s. If you missed the idea, this stock is looking very attractive as a long term investment for so many reasons that I don’t want to even bother discussing them all here, but I will list them: Forward P.E. in the single digits, Fed is in aggressive cutting mode and lending margins are expanding, sub-prime is expected to get much worse from here and thus priced in. Therefore the risk is to the upside. Oppenheimer has rallied significantly since late January so it wouldn’t be a bad idea to rotate some funds into Morgan Stanley.

If you have the stomach for some higher risk, T. Rowe Price (TROW) could make a run for the $60’s but beyond that retail is going to have a tough time in 2008. In general, all of the large asset managers including Waddell & Reed (WDR), Apollo (AINV), Fortress (FIG), Blackstone (BX) and Cohen & Steers (CNS) look very attractive at current levels.

On the major money center banks, I am still a table pounding bull on Bank of America (BAC). This company is going to come out of the current credit crisis looking at her competitors in the rear view mirror. Bank of America has not only managed its way through this debacle relatively unscathed, but has been quite the “vulture capitalist”.

If you missed the January 21 call to buy with both hands during that panic and missed an easy 20% gain, fret not. Just buy here in the low 40’s and continue to buy. This is the point in the rate cut cycle where the Wall Street mantra becomes “don’t fight the Fed”. So many indicators illustrating fundamental, macro and quantitative bullish signals not only for BAC, but also for several others in the money center banks.

Just about the only stock I’m more bullish on than Bank of America is Bear Stearns (BSC). The reason is that the risk/reward appears to be exponentially higher in this stock. Every decade or so, there’s what I refer to as a “changing of the guards” in the major financial stocks. One generation that has already cashed out just before the “crisis” leaves, and a new generation brought in to solve the “crisis” comes in. This is how wealth changes hands from one generation of leaders to the next in multi-national financial companies, and we are right in the middle of a cycle now. I keep rubbing my eyes and I can’t believe BSC is printing in the low $80’s after being close to $185 late last year. If you are not building a large line in Bear Stearns then you should probably find a good fund to park your money in and go play some golf. Seriously!

On the other hand, if you are willing to take some risk, Blackstone (BX) went public in the $40’s and is now around $16. I can’t help but to think that this is probably a good contrarian play right around current prices. If you know the history and culture of this financial powerhouse, then I’m sure you would also agree that the current price is now very attractive. But if you really want me to tell you why I think The Blackstone Group is a good buy, I will: P.E. of 1.34. Current yield of 7.4%. Institutional Ownership of 35% (implying lots of accumulation potential). With $80 Billion in assets under management and a market cap of $4 Billion, BX is cheap, in my opinion of course.

Of course I can’t go anywhere without mentioning Citigroup (C). I love this stock every time she goes through turmoil and conveniently helps the US Treasury recycle some of those petro-dollars back into the country. At 50% of its highs, paying a 5% yield, the market has priced a dividend cut to probably coincide with the ongoing shrinkage of Citi’s global footprint. It’s time to shed off the fat from the go-go era and come out leaner and stronger. Besides, buying C at current levels gives you the floor near $25 to act as a natural stop. Although don’t be shaken out in a classic shake out. Expect it and buy into any irrational selling.

I’ve gotten a lot of emails asking about Credit Suisse Group (CS) because it was in my last write up to wait for $41 before buying. It’s hard to imagine CS oscillating $10 from the panic low but there is a tremendous amount of overhead supply looking to exit this stock because $60 was like a the Great Wall of China. I would be afraid of holding CS here and I really do see it going to as low as $35 per share near term.

Fortress Investment Group (FIG) is another reason why I’m a table pounding bull when it comes to the financial sector. The panic low on January 21 put in a floor in this stock. The changing of the guards is complete. With a 7% yield, a P.E. of 16 and institutional ownership of 9%, the numbers on FIG jump out at you. The technicals have been screaming BUY for a few weeks now but now the fundamental and macro variables have come into agreement, thus making the risk/reward very attractive for long term investors looking for a price to cash flow multiple of less than TWO for a company with a 5-year earnings growth rate of 101%, a pre-tax margin of 191% [TTM] and 318% (5yr avg.) In other words, their effective tax rate is .47 and .27, respectively for those same periods. I wonder who they know. Fortress Investment really is a fortress when quantified in this manner. Sometimes it does courage to be a pig.

More to come… I wanted to get this out there for now.

Comments

[oceandude]

What are you bearish on?

[blah-blah]

So few contrarians on this site willing to look past the nonsense and scoop the bargins. Nice Read

[BarryRobbins]

I read today that 10% of the homeowners in the entire country have negative equity in the their home. This is terrible because when people need to move, then they will have to take money out of the stock market, just so they can "sell" their house, if they are even able to find a buyer.

Home prices have risen far above the historical average. Until home prices come down by 20 to 30%, I can't buy any financials. Also, hundreds of billions in writedowns have essentially been hidden in the monoline insurers (MBIA & Ambak).

I know eventually financials will be a great buying opportunity. I just think the time is still a year away.

[Daniel S]

I agree there are some great plays out there, especially for conservative type investors. I bought AINV last week at 14.82 and it is looking good. I also own PCAP with a very nice yield on it also. A lot of stocks were taken down on the interest rate and credit scare, but some were done so very unjustly. PCAP, for example, rates their credit risk each quarter on a scale of 1-5 with 1 being the best 5 the worst. They have never said they even have a 4 or 5 so the stock selling off on credit risk is completely unfounded. Oh well it gave me an opportunity to add at a cheap price and get a great dividend.

[prospector]

Now really IS the time to be getting into the financials. Most of the financial stocks are 1/2 OFF!! When my wife goes shopping for those 1/2 off sales in the name of "saving money", I fear that I may go broke from all of the money she's about to save me!

I tell you, in June of '07 every single financial stock was properly valued.... every single one. Whether it was priced at $400 per share or if it was priced at $20 per share, the stock was priced correctly.

Sure, Aweful August rolled around and cut the financial stocks at the knees and those holding bank stocks got hurt.

If you're new to the game, you almost have to take advantage of the opportunity to snatch up some financials now. At the very least, scale into them buy as the price comes down. What this affords you is the opportunity to play in this down time. If you keep waiting for the bottom to arrive, you'll miss the opportunity to double your money.

In 1990, the financials lost half their value. In 1991, 14 months later, they had made a full recovery. In 2007 financials lost half their value. In late 2008, you can expect the same thing.

Now is the time to go shopping for financial stocks. If I bought a stock at 1/2 off yesterday and today it's on sale for 75% off, I'm not mad that I over paid yesterday, I'm thankful that I get to save more money t oday!

[User 152318]

Good article and find. I have been waiting to purchase some of these stocks and now that they are all on sale, the time is getting closer.

[thesession]

I think you Need to focus on the future profits and revenues of the financial companies... which is fairly dead. Where are those going to come from? Who cares if price is down 50%. Earnings likely to be down even more and will be depressed for next several years. I think prices have to go down further to reflect that.

They are experiencing major hits to future earnings from vast majority of their businesses (with the exception of maybe brokerage and advisory business, most others are dead). That will hurt.

[thesession]

Don't forget the E in the P/E. These companies have almost no viable/ profitable businesses right now. I think prices need to go down further to reflect the future prospects of not generating nearly as much revenue and profit. I think almost all their businesses are shut down and will likely not come back anytime soon.

[NARSpin]

uber spin at it's finest.

[Chemist29]

This is a financial meltdown in magnitude just like the early 90s, and late 90s, right on schedule. No reason to believe they wont bounce back quickly just like they did back then. Maybe its not the bottom, maybe it is. I got bac at 42, wb at 33, and citi at 25. Citi's the riskiest probably, if it goes down more I'll just buy more. The economy will bounce back, too many doomsday armageddon predictions. Earnings will be fine once the major losses are done being written off, which is presumably already priced into the stock at this point, no?

[TPoise]

I believe C has more upside potential than any of them. I believe it is undervalued (Future P/E of 10) than any of the others in the XLF index. Plus with a 5.1% dividend yield, that provides some cushion.

I also agree with the article on BX, however it would be a 5-year play. I don't see it doing anything but trading sideways until they the credit crisis gets worked out.

[daffy]

Earnings will be fine once the major losses are done being written off, which is presumably already priced into the stock at this point, no?

With all of the doomsdaying nellies out there, I would say that it is more than factored in.

Prospector -

I am new to the market (investing wise). I could not see a better time to buy into financials. I still see no better time over the next three months. Although I am breaking even on everything right now (which says a lot since I started buying in early November), I see that in the next 8 - 16 months I am going to be very happy I put my money where I thought it should go. I have only fallen once when I chose not to buy ETFC at 2.08. I have had C on a watch for awhile and I will continue to watch. Unfortunately, I still think C has a huge write down coming, or a couple. I am going to wait until the next beating (or two), then buy.

One thing to remember is that we have an election year and the fear mongering in the media is going to be many fold. The economy, in the eyes of the media, is going to be the worst in decades for the time until at least late November, then the party that wins will decide how quickly the market will turn around. If the naysayers win, well, it might be May of 2009 before we see beauty in our current investments. If the yeahsayers win, well, probably beginning right away and a banner Christmas (compared to this last one) will be had, sending confidence through the market. Either way, does it matter? Doubling your money (or even quadrupling it) is no losing game in a few months over a one year investment.

Agreed . . . putting all disposable money into the market when I get it. Oooops, there goes the retail sector.

Cheers

[nyka]

Start learning to use apostrophies to indicate possession, e.g., this stock's.

[nyka]

Some classic losers here, starting with Bear Stearns, and including Citigroup and Blackstone, all paving the way to the poor house.

[swissfinancezone]

Funny to read this today "Just about the only stock I’m more bullish on than Bank of America is Bear Stearns (BSC). The reason is that the risk/reward appears to be exponentially higher in this stock. If you are not building a large line in Bear Stearns then you should probably find a good fund to park your money in and go play some golf. Seriously!" Seriously? ;o)