Your Investments: Are bargain-basement banks for you?

It is worthwhile remembering that there are always opportunities in the market, especially after it has dropped.

By AARON KATSMAN
August 4, 2011 22:11
4 minute read.
shekel and dollar

shekel versus dollar 521. (photo credit: REUTERS)

 
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I was recently speaking with a client and he asked me what’s interesting to invest in these days. He was expecting me to say technology, commodities or Brazil. When I answered that I thought regional banks in the US are pretty interesting, he made a face at me and said: “Are you joking? The economy stinks, banks are going bankrupt, and it’s their fault we had the financial crisis to begin with. Why on earth would you want to invest in them?” There is no question that this would be classified as a “contrarian” investment. Investors who go against the general market trend are called “contrarians.” A contrarian is also defined as an individual who believes that certain crowd behavior among investors can lead to exploitable mis-pricings in the securities markets.

For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its prospects for returning to profitability.

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Go back to last summer and the horrific BP oil spill. Every newscast was reporting about the total environmental devastation and that BP wouldn’t be able to survive. The stock lost more than half of its value in a short time.

During the crisis, I wrote in this column: “A contrarian investor would make the case that the company is the fourth-most profitable company in the world, and it’s already lost more than half of its value. In addition, a contrarian would assess that even the worst-case scenario would mean that the company’s litigation exposure and clean-up costs would come to maybe two to three years of its operating income. And no one expects the company to pay up immediately; rather, much of the litigation exposure will get tied up in the courts for years. It was 19 years after the Exxon Valdez oil spill until the Supreme Court made a final ruling as to Exxon’s legal liabilities. I want to emphasize that this is by no means a recommendation to buy the stock – it’s just a good example to explain the concept.”

Since this point a year ago the stock has moved up over 50 percent from its low. This isn’t about saying, “I told you so.” Rather, it’s about investors looking at things rationally and then making informed decisions – and not investing emotionally because of what the headlines say.

Making the case

I am not recommending that you run out and buy regional bank stocks. This is what I would call “idea generation,” and you should research these stocks carefully before investing. We are always taught to learn from history. If we look back 20 years we will find an interesting parallel to today vis-à-vis the state of the banks. The late ’80s and early ’90s brought a banking scandal (funny how they seem to happen every 10 years or so!) – the saving and loan crisis. Many banks went under (more than 1,000), there was a government bailout, and there was tremendous pessimism in the sector (sound familiar?).

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After all the carnage, the banks that actually survived emerged from the crisis in good financial shape.

We then saw insiders (CEOs and CFOs) start buying shares of their own stock, improved earnings growth and a wave of consolidation that lasted for the better part of a decade (think about how your local bank was bought and then that bank was bought and that one...etc.). Fast forward to 2011 and things seem similar. While hundreds of banks closed, many of the survivors are actually in very good financial shape.

Whether or not the bailout was a good idea is irrelevant. What is relevant is that many banks have clean balance sheets, have repaid the government loans and have reinstituted or increased their dividends. The Bank of Hawaii (BOH), Keycorp (Key) and Peoples United Financial (PBCT) – which just raised its dividend for the 14th straight year and now yields 4.6% – are among many examples of this.

According to recent regulatory filings, banks such as Huntington Bancshares (HBAN) and Regions Financial (RF) have seen recent buying by both insiders and hedge funds. I want to reiterate that this is not a recommendation to buy any of these stocks mentioned above; they are just examples of what is starting to happen in the sector.

While buying and selling constantly and trying to time the market are not always advisable, it is worthwhile remembering that there are always opportunities in the market, especially after it has dropped. Analyze investments objectively without getting caught up in the hysteria and speculation that scares panicked investors, and you could potentially profit when both common sense and fundamentals return.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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