Investing in the Housing Crisis Aftermath: Stock Picks and Pans

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Includes: BAC, C, FMCC, FNMA, HD, JPM, LOW, MER, NCC, WFC
by: Chris Gottschalk

Trying to select stocks from companies that got caught up in the housing crisis is a lot like trying to determine what can be salvaged from a house fire. You might find something worth saving, but it'll take some time and work. For investors, the work consists of finding something worth saving.

Depots at a Lowe Point

The first stocks I'd like to point out are not, oddly enough, bank stocks. Let's start with companies such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), the places that make their living out of selling building materials. As you might expect, 2008 has not been kind to these companies.

Lowe's stock has been declining since 2007, sitting now at $24.52, down from $30 at this time last year.

It's not a great price, but since Lowe's lowest stock point was at $18.90 in July, investors can breathe a sigh of relief that Lowe's is finally starting to turn around.

Lowe's stock over the past few years has hovered around the mid-30s in price point, and its mid-July jump gives the impression that the company is on the right track.

Home Depot's stock, though, is even worse off than its competitor's - it has finally risen to $26.93, when it was about $35 a year ago.

These numbers are better than Lowe's, but the problem is that Home Depot has suffered more in the housing crisis. Its little fiasco with previous CEO Robert Nardelli has only exacerbated the problem, especially given Home Depot's lackluster performance as compared to Lowe's.

Morgan Stanley apparently agrees, as it has given Lowe's a more favorable rating compared to Home Depot's. Give this retailer some more time to get their financial feet back on solid ground before you consider investing.

A Banking We Will Go

Let's leave the world of retail behind for a moment, and discuss the world of banking. IndyMac Bancorp has crashed hard, with its stock sitting at just six cents a share after the federal government seized the bank. Not to mention that Fannie Mae (FNM) and Freddie Mac (FRE), two companies that should not need the lifeline the federal government is offering.

However, with the government offering Frannie and Freddie a bailout, both companies are effectively insured from themselves. Prices are rising slightly and now Freddie Mac's stock is up to $3.97 a share, while Fannie Mae is sitting at $5.62 a share. I'd recommend you to get in on this action.

Stocks for both companies have ranged between $60 and $80 a share, and while both Fannie Mae and Freddie Mac will take a few quarters to reach their former greatness, the government bailout pretty much guarantees they won't stumble.

Wells Fargo (NYSE:WFC), on the other hand, seems to be recovering nicely without government assistance. It's stock has risen meteorically in price since early July, and is currently selling for $28.69 a share.

Of course, you should also take into consideration the fact that Wells Fargo has a more diversified portfolio of services than Fannie or Freddie. They may have suffered during the housing crisis, but they've managed to land on their feet.

The Losers in the Game

It's a shame you can't say the same about National City (NCC). Their once-mighty shares have fallen, and you can now pick their stock up for $4.69 a share.

Of course, they've got other problems. National City is facing an SEC probe, albeit an informal one. The SEC has requested that National City turn over all its documents regarding the 2006 sale of First Franklin Financial Corp, a subprime mortgage unit, to Merrill Lynch (MER).

The SEC has also requested all documents concerning bank regulation, dividends and loan underwriting. There's also the small matter of a lawsuit filed against National City by Berman DeValorio, whose clients, National City shareholder, are accusing the corporation of violating securities laws. There seems to be no end to National City's troubles, and I've got a hunch things will get worse before they get better.

Another bank in trouble is Bank of America, (NYSE:BAC) who acquired Countrywide Financial Corporation (CFC). The SEC also has its eye on Countrywide, and the Bank of America too. Since the Bank of America has been subpoenaed over their sale of securities, I'd say they're in more trouble than National City.

They're also in trouble with the state of Indiana, which has sued Countrywide over its "deceptive and misleading practices."

Their stock rose significantly from its mid-July slump, but it appears to be on the decline again. It's only a matter of time before the stock becomes radioactive, and I'd advise the average investor to run away before Bank of America's losses become so severe it'll take years until the stock recovers.

Another radioactive stock is Citigroup (NYSE:C). For a stock that routinely soared above $50 a share, Citigroup's stock now stands at $17.84 a share.

While part of this is due to their involvement in mortgages and loans, Citigroup has also paid out $18 million in order to settle allegations that they took $14 million from the accounts of about 53,000 customers.

Once Citigroup recovers, their stock will be a fine purchase. The only question is when.

Roller Coasters and Good Lynches

Speaking of recovering, JPMorgan Chase's (NYSE:JPM) stock has been pretty active recently. Their stock has been on a roller-coaster ride in 2008. It's climbed up to $50 a share, only to drop to around $30 a share.

If you're an investor, your stomach is probably doing flips that an actual roller coaster would be hard-pressed to match. It's hard to predict where JPMorgan Chase will land, so if you haven't bought stock in the company now is not the time to start. If you've already invested, though, you might as well hang on for the ride.

Finally, we come to Merill Lynch (MER). This is a company I feel comfortable recommending, especially with its stock at its price of $24.10. Merill Lynch's stock is usually pretty strong, and despite its stumbling with the housing crisis it should revitalize. It has a head start on companies such as Bank of America and Citigroup, since its only issue with the law is its buyback of auction-rate securities, a result of its settlement with the SEC.

With so many other banking corporations facing probes and lawsuits, financial corporations that are unencumbered with these struggles will have a better reputation, and benefit from consumer confidence in their practices.

All things considered, the housing crisis hasn't destroyed companies. In fact, it's opened up some opportunities for an enterprising investor. All that's required is a little patience.

Disclosure: none

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