Financials Offer Patient Bulls Many Opportunities

by: Investment Capitalist

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 (NYSE: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 (NASDAQ: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 (NYSE:WDR), Apollo (NASDAQ:AINV), Fortress (FIG), Blackstone (NYSE:BX) and Cohen & Steers (NYSE:CNS) look very attractive at current levels.

On the major money center banks, I am still a table pounding bull on Bank of America (NYSE: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 (NYSE: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 (NYSE: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 (NYSE: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 (NYSE: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.