Investors in the financial stocks arena are probably nervous that the record string of Federal Reserve interest rate increases will hurt bank earnings. I fall in the d o n ‘t – fi g h t – t h e – trend camp, but there are some interesting situations surfacing.
If you are strictly a value investor and I threw this on your plate, you’d be running to buy the stock. A company consistently growing earnings at 12 percent a year trading at a 10 price-toearnings multiple. The company pays a 4.6-percent annual dividend, and is one of the largest in the sector.
Well, that company is Bank of America, and for all of 2005 the stock has not been able to buy an uptick. Almost the same can be said of Citigroup. Or J.P. Morgan.
These monstrous money centers have done horribly this year, and I don’t see anything on the charts that hints at a turn anytime soon.
Financial companies make up about 32 percent of the S&P 500 index. Some investors believe you can use the sector as a proxy for the health of the overall market. That theory isn’t holding this year, though, as the S&P 500 is up 1 percent for the year, and the financial sector is down more than 10 percent. But given that banks make up such a large portion of the index, almost every investor has exposure to these stocks.
Indiana used to be a good place to have the headquarters for a midsize bank. The waves of mergers over the past 15 years has dramatically altered the landscape. There are still several small publicly traded banks around the state, and most of these stocks are showing negative returns this year.
We do have one big financial services company in town, and it is taking steps to get its ship back in shape.
Conseco Inc. is in positive ground for the year, and rating agencies have slowly upgraded their views on the company. Conseco has been a six-year tragedy and, unfortunately, the environment may not be friendly enough the next few years to allow a full-blown recovery. I still have to wait and see on this stock.
Near term, the best-case scenario for a lot of financial stocks is they won’t keep falling off a cliff. There is virtually zero upside potential, though. So I’m staying away.
As I’ve been saying all year, my indicators show we are in the final stages of the bull market that began in March 2003.
This is no time to be complacent. Investors who cast off the dead wood in their portfolios and redirect that money to cash and to stronger stocks will be rewarded for the rest of this bull market. History suggests the last few months of a bull market can be very profitable for select stocks.
Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at firstname.lastname@example.org.