Wednesday, August 27, 2008

Bank Stock News: Winning by Losing?

We read and hear news every day on how poorly banks are fairing in the current environment. I think a lot people fail to realize is that most of these same banks are making a profit. Granted the profits are not as high as they were a year ago but most are still making money.

I found an interesting article on MarketWatch by Mark Hulbert called Winning by losing? Here are the highlights.

Banking industry profits may have been 86.5% lower in the second quarter of this year than they were in the comparable quarter a year ago, as indeed the FDIC reported Tuesday. But note carefully that the industry still did produce a profit, of no less than $5 billion. And that profit came even after the banking industry increased it5s total loan loss reserves to more than $50 billion, compared to only $11 billion in the year-ago quarter.

In other words, despite the perfect financial storm over the past year involving plunging housing prices and the subprime mortgage mess, the banking industry as a whole still turned a tidy profit.

Contrarians become interested in a sector, of course, when everyone else is engaged in an orgy of pessimism. And George Putnam, editor of the Turnaround Letter, is one of the newsletter industry's genuine contrarians.

As Putnam wrote in the August issue of his newsletter, "There surely is money to be made in some of the financial stocks, particularly if you are patient. Many financial companies still have good franchises and good balance sheets."

Among the country's biggest banks, Putnam's favorites for more conservative investors are Bank of America Corp. (BAC) ; J P Morgan Chase Co. (JPM) , and Wells Fargo & Co. (WFC) . His rationale: "They have managed to avoid most of the mortgage problems that have brought down some of their competitors. As a result, they should pick up business and perhaps acquire weaker players."

Putnam hastens to add that he is not predicting that the bottom has been seen for the financial sector generally. "We are concerned that there is more bad news ahead for a number of financial institutions," he wrote. "In baseball terminology, we may be in the middle or late innings of the subprime mortgage mess, but we're probably in the early innings for problems with other real estate loans and different types of
business loans."

But the banks he is suggesting have generous dividends "that will compensate you if you have to wait a while for the stocks to rebound." Bank of America's current dividend, for example, is 8.8%; the yield's of the other two banks Putnam mentions are 4.2% and 4.7%.

To be sure, it takes no small dose of courage to even consider investing in banks when the news is so bad. But Putnam's long-term record shows the rewards that can come to those who are willing to buy when the "blood is running the streets."

Over the past 20 years, for example, according to the Hulbert Financial Digest, Putnam's portfolios have produced an average annualized return of 11.5%, in contrast to 10.4% annualized for the Dow Jones Wilshire 5000 index.

Disclosure: The Div Guy owns shares of BAC at the time of this post.

3 comments:

Compounding-Dividends said...

Thanks for the article. I've been looking at BAC recently but I'm going to wait to see if it falls back down into the 25 range.

The Div Guy said...

I have been buying BAC and other banks on dips in the market.

PENNY STOCK INVESTMENTS said...

Nice stock