Are Any Bank Stocks Safe For Investors to Buy Yet?
Topics:Banking | Stock Market
Companies:JPMorgan Chase and Co | Hudson City Bancorp, Inc. | Bank of America Corp | Citigroup IncBy: Jeff Cox, CNBC.com | 25 Feb 2009 | 02:58 PM ET Text Size Investors looking to pile back into bank stocks Wednesday drew a warning from investment pros: Watch your step.
Taking a cue from Federal Reserve Chairman Ben Bernanke, investors turned around massive losses in bank shares after the central bank chief told Congress that the government has no desire to nationalize the financial institutions and said small banks for the most part were on solid ground.
But the move was greeted with skepticism toward an industry that is operating with little clarity regarding its future.
"At this moment all the signals we've been getting are basically telling us that common stock of banks is incredibly vulnerable," says Emily Sanders, CEO of Sanders Financial Management in Atlanta. "Until the government actions are determined, and I'm not even talking about nationalization, just really solvency issues and the result of the stress tests...I wouldn't touch them with a 10-foot pole." (Mikey says thank God)
To be sure, there's division within the investment community about just how far away the banks should be kept.
Cherry-picking certain financials, such as those that have shown they have the staying power both to avoid government help in the short term and to prosper in the long term, is advocated by some as a sound strategy.
"There are a couple of banks you could own," says Michael Cohn, chief investment strategist at Atlantis Asset Management in New York. "You're playing a little bit of a dice game."
JPMorgan Chase [ Loading... () ] has emerged as one bank that could rise above the others. The firm on Monday slashed its dividend but said it was doing well so far this year.
"They've actually said they're profitable this quarter, and they've done the right thing by cutting the dividend," Cohn says.
Another bank stock Cohn likes is Hudson City Bancorp [HCBK 10.62 -0.14 (-1.25%) ], which though near its 52-week low has low exposure to the subprime loans that have done in other banks. The savings and loan also has refused government bailout money.
Of course, there are more ways to invest in banks than through common shares.
Preferred shares are one option. Though they limit investor opportunities to catch sharp moves to the upside, preferreds offer dividends and something resembling a safe haven in difficult times.
While few would advocate buying Citigroup [C 2.75 0.15 (+5.77%) ] shares at this point, the company's preferreds are paying in excess of 8 percent. While the risk that Citi could default on its debt somewhere is ever-present, the rewards to investors otherwise are great.
Similarly, senior debt of other too-big-to-fail banks, such as Bank of America [BAC 5.25 0.52 (+10.99%) ], are attracting investors looking for an alternative play.
"Shake hands with the government," Paul McCulley, managing director of the Pimco bond fund, said on CNBC. "Capitalism is in the intensive care ward and the government is there as the attending physician, and we're seeing asset class after asset class be supported by the government and we want to be a co-investor with the government." (Mikey says right on)
Bank stocks seesawed through Wednesday trading, turning mostly higher later in the day.
Still, many remain unconvinced.
The news is turning slowly in the banks favor. As long as they remain uncovenced I buy...Mikey
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