Financial Stocks to Buy When the Market Reverses

There is always a bull market, and I’m always trying to stay ahead of the game to find out where that bull might be. Although I do believe financials is 3-6 months longer-term bearish, there is also no doubt that they will eventually bounce back, and very quickly. The earlier you get in the boat the better, not only from a return standpoint, but also from a risk standpoint. Hence, I’m doing my analysis now to figure out exactly what stocks to play when this reversal does happen.

What I’ve done is compiled a list of banks that had major losses from write downs and credit loss. I then calculated the price change using the closing prices of May 1, 2007 and March 21, 2008. May 1 2007 was used because that was generally the highest point that financials reached last year. Finally, I created a value index, which is the absolute value of the price change divided by % share of total loss.

The following list of companies is ranked by the value index:

What the value index attempts to reveal is which of these financial banks had the highest price change versus lowest share loss. In other words, holding everything else constant, which of these companies was most affected by the condition of the financial market, without accumulating too much in losses themselves?

From this list, we can see that there are three clear candidates National City Corp (NCC), Credit Suisse (CS) and Bear Stearns (BSC). Of course, Bear went belly up so it shouldn’t even be on this list; nonetheless, I’m including it here for comparative reasons. The other two companies, NCC and CS should certainly be on your watch list for the next few months. When the market reverses, these two stocks will likely be the ones to shoot up the fastest.

Keep in mind that the value index is only looking at the write downs and credit losses. There may be other reasons why some of these stocks are at the top of the list and some are at the bottom. Evaluating those other factors is out of scope for this article. I will attempt to take a deeper dive into some of these companies in future articles.

Comments

[marshgerda:]

I think your analysis is biased. Yes NCC only had 1% of the total loss, but it is a smaller bank than say BCS which had 2% of the total loss. NCC is worth about 7b, so on May 2007 it was worth say $24b. BCS is worth 60b, so was about 97b in May 2007. So while BCS had 2x the write-offs as NCC, it was worth way more than 2x in market cap and thus has done better, not worse than NCC on a relative basis.

2008 Mar 25 05:54 AM

[jimmy46:]

Your methodolgy is so flawed I don't know what to say.

2008 Mar 25 12:29 PM

[Msrpaul:]

What many don't realize is that this is a credit contraction, and when the write offs are over, we will be in deep recession. That will not be a good environment for banks/brokers, whose balance sheets are in dire straights. I can think of only 2 banks worth a look, Hudson City, and USB. When the dividends are cut on the banks, it will be near time. For the brokers, how are they going to replace all that fee income from M&A and mortgage hustling?

2008 Mar 25 08:58 PM

[DSX Lover:]

UYG is the Double Long ETF

2008 Mar 25 09:50 PM

[Chemist29:]

I agree with DSX. Plus, Bank of America hasn't eaten very much in losses relative to its size, it's still chugging away making making profits...yes profits, and paying out a fat dividend (thats safe), along with WB and C, which hopefully wont cut its dividend...eh (i'm long WB, C, and BAC)

2008 Mar 26 10:34 PM