Sy Jacobs' Picks for a Continuing Credit Crisis - Barron's

Sy Jacobs, founder of JAM Asset Management, foresaw the housing slump and subprime macro fallout. He now tells Barron’s that investors erroneously assumed Bear Stearns was a market bottom. More pain is ahead for the economy and financials in particular. Increasing defaults in banks’ core business of construction loans will cause many to disappear. Survivors, however, will gain back lending market share that they lost to “the Countrywide Financials.”

Picks and Pans:

Shorts: 

• Wells Fargo (WFC) - despite top-rated management and shareholder Warren Buffett’s stardust. Home equity loans [HELOCs] are 16% of Wells’ portfolio. When mortgages default, those lenders may recoup something. HELOC lenders will not.
• BB&T (BBT) - because loans in BBT's favored and previously high-performing states are now faltering.
• Hudson City Bancorp (HCBK) - because their 10% return on equity isn’t much, its book is overvalued and its 0.15% loan loss reserves are low.

 Long: 

• Mortgage REIT Hatteras Financial (HTS) - because of its low book value, 19% yield and expected share price appreciation.
• Contrarian bet monoline insurer MGIC Investment (MTG) - a former Jacobs short. MGIC has successfully raised capital and liquidity recently as it works down its old portfolio. It has also raised premiums and underwriting standards on new loans, based on lower appraisals. When housing eventually recovers, MGIC could provide 200%-300% returns for investors.

 ==========================

• Gary Gordon says Wells Fargo falls under Buffett’s favored ‘wide-moat’ category of stocks. Wide-moat stocks have a large share of the market, brand loyalty, provide services at lower cost and are large enough to have implicit government backing. Phil Davis disagrees with Jacobs’ Hudson City assessment. He cites 25% growth in Q1, along with growing market share as competitors fold. Davis half-jokes that if HCBK’s NY, NJ and CT markets fall apart, “you can kiss the rest of the country goodbye anyway.”
• Zack’s.com said back in April that MGIC, like all monolines, should be avoided. But David Merkel thinks MGIC is the monoline with the best chances of surviving the credit crisis.
• Barron’s mentioned that Jacobs decided to short BBT when he listened to Toll Brothers recent quarterly conference call. CEO Robert Toll always rates the cities it builds in by letters, and this time he rated the previously strong Charlotte, N.C. an F minus. Charlotte is one of the areas in which BBT is a strong homebuilding lender. For regional bank investors, Toll rates other cities here.

Comments

[campbell]

I looked up the prospectus for the IPO and the dividends up to the end of March appeared to be about 8% on a yearly basis. Could the author clarify where the 19% yield is stated.

[campbell]

My comment above is in reference to the 19% yield stated for HTS.

[Judy Weil,SA Editor]

Dear Campbell,

The information is taken directly from Barron's. If you click on the link you can access the article. I believe there's an author's email address at the bottom of the article in case you have further questions.

online.barrons.com/art...


All the best,

Judy

[Gary Meade]

Cramer had Toll on his show...don't remember the date, but I do remember his words, "from your mouth to God's ears" about the Cramer statement. And he didn't sound to enthusiastic either!