Am I nuts or are financials way oversold?

Question

Call me crazy but as I look at the landscape at the financial market, I really think that there are tons of stocks at huge discounts, particularly in the big banks. Don't get me wrong, it is still a risky sector but while we may continue to see a rash of bank failures, especially among smaller regional banks. But someones has to rise up from the ashes and I can only think this will give the bigger bank corporations even more market share once the whole subprime mortgage mess runs its course.

Just a couple examples of bank stocks I'm considering:

Bank of America - Still turning a profit, insists that its dividend is safe and acquiring Countrywide means that it'll become the dominant mortgage lender in the nation.

Wells Fargo - Relatively little subprime mortgage exposure compared to the other big banks, Buffett thinks it's the best run bank in the country

Anyone else agree or disagree?

Answer 1

Right.  But there is nothing that says that they can't get more oversold or that they can't stay oversold for a long time.

"Still turning a profit" may mean that they they have a pile of loans that they should write off but haven't yet.  This is a form of barely legal accounting fraud.  I used to work for a bank and how they manipulated their loss reserve account was amazing.  "The dividend is safe" is another classic lie.  A place will say that until they announce they cut the dividend.

Why do you want to bottom-fish the financials instead of buying things that are going up?  Look at the chart for RBN for example.  There are plenty of others.

Answer 2

The market in general is way over sold.

Financial still have much more downside to go due to the unforeseen problems that are obvious to any able minded person.

Just be extremely defensive on those type of stocks.

Answer 3

As a whole sector its in the oversold range since they are selling for below book value. However, individual bank stocks may be susceptible to severe problems and perhaps bankruptcies. So just play the XLF (which is what I am doing).

Answer 4

Good points.

Banks will definitely go back up.. its just a question of WHICH BANKS? That's where the research and guessing comes in.

Answer 5

No, you're not crazy.  Banking will continue even if a few more banks go under.  A number of banks are trading under tangible book value right now, though who knows for sure how accurate the book value is.  I've been looking at banks for a few weeks now - Wells Fargo heads the list.  I'm a little wary of BOA since I don't think they even know the worth of the assets they got from Countrywide.

On my own radar - WFC, C, USB, RBS.  On the riskier side I'm also following NCC, SOV.  I haven't started buying yet, but probably will start slowly buying 1 or 2 of the above once I can look over the 2Q financials.  Considering the current volatility & market sentiment I probably won't buy outright, but will sell puts in the hopes of establishing my position.

It's a long-term play, though.  I think quality financials will do great over 5 years or so.  Not sure about the next year however.

Answer 6

Yes, they are.  But as the saying goes, stock markets (in the short term) run on greed and fear.  Right now, fear prevails.  "Fundamentals" mean little unless you're willing to invest with a multiyear eye.

Answer 7

The losses the banks are taking on mortgages have most of them near bankrupt. This is a "technical" insolvency, as they are still doing business and some losses are a result of the mortgages being undervalued because they had been WAY ovevalued.

They are still doing business, although less, and they still are earning money while taking these losses. Over time they can earn their way back if they can stay alive.

But I was hearing somebody saying that we shouldn't expect banks to earn in the future what they were earning before because those profits came from the overleverage and small reserves that helped cause the problem.

i.e. If the Fed decides to increase the reserve requirements for the banks to make them more stable, then some of the profits they make will have to go to investments as reserves and that means less money to loan or pay dividends.

Answer 8

Generally, I do not think you are nuts, but financials are not "way" oversold.

I fear that you are under-estimating the amount of damage the banking industry has not yet discovered or reported.  The extent to which they gorged themselves is difficult to assess and the degree to which they depend upon each other is difficult to exaggerate.

Don't get me wrong -- I am generally an optimist and a bull.  I am buying financials indirectly through broad purchases of US Stock Indexes and Wells Fargo is on my radar screen.

BAC will have to wait until operating results from the Countywide merger are fully absorbed...

Answer 9

I would strongly agree, especially if your time horizon is a ways off in the distance; some of the financial services mutual funds have been especially battered, and represent tremendous bargains currently.

How could they NOT creep back up to where they ought to be? Only one way I can think of, and that's if the economy NEVER recovers, in which event all the cash & gold in the world will be of no value!