Is it time to dive in to financials?
April 24, 2012, 12:04 pm
The financial sector was hit hardest by the 2008 crisis, and has had the longest and bumpiest road back. Is it finally time to start buying banks again?
It’s still pretty easy to make the bear case against financials — housing continues to struggle, consumer credit has not recovered, unemployment remains high and the latest earnings reports are showing that fixed income trading is weak at many institutions.
But if you look at the underlying picture, a bullish case starts to emerge. The fixed income story isn’t as weak as you might think. Aggressive cost cutting and streamlining over the past four years has boosted the bottom line. Housing might still be an issue, but more borrowers are making their payments on time these days, and the banks have profited from a boom in customers refinancing their mortgages to take advantage of lower interest rates.
Take Bank of America, for example. BAC was one of the most beaten down of the financials, falling from a high of over $50 before the crisis to a low of $3. The stock has bounced around since then, but caught my eye last fall when it was trading around $6. Believing that BAC’s worst problems — bad loans in the mortgage crisis, poor acquisitions, unhealthy balance sheet maintenance and damaged customer relationships — had been fixed, I recommended it to investors in November. The stock is up 35% since then. In fact, Bank of America just reported last week, saying that earnings more than doubled at the bank
So, yes, I think it IS time to dive in to financials. In fact, I’ve got a new financial stock that’s a buy. Morgan Stanley (MS) is trading in the $17 to $18 range — which is about 50% below where it should be. Get my complete bull case on financials and all the details on Morgan Stanley from my recent appearance on Fox Business News in the video below.