Financial Stocks to Buy When the Market Reverses

by: Howard Sun

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 (NYSE:CS) and Bear Stearns (NYSE: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.