John Buckingham on Financial Stocks

I’m a big fan of John Buckingham. He’s a value investor and the president of Al Frank Asset Management. In this morning’s WSJ, he has some thoughts on why financial stocks look good despite the flattening yield curve:

The yield curve is flattening. While that may surprise the occasional World War II aviator dug out of a California glacier, by now most investors are well aware there is little difference between short- and long-term interest rates.
Conventional wisdom argues that a flat yield curve is detrimental to the earnings of banks and other financial companies, since their ability to profit from lending at relatively high long-term rates and borrowing at relatively lower short-term rates is diminished. But investors with an investment horizon longer than a few weeks shouldn’t let these concerns dissuade them from holding financial stocks.
The lion’s share of selling because of the yield-curve has already happened. And it isn’t even certain that a flattening yield curve will wreak havoc on financial-sector profits. History shows most banks, savings and loans (those that survived the turmoil of the late-1980s) and brokerage firms have been able to smoothly navigate through all sorts of interest-rate environments. Be it their ability to hedge interest-rate risk with derivatives, reap significant recurring income from fees, or diversify into complimentary businesses, earnings for financials haven’t been that interest-rate sensitive for a decade or so.
That doesn’t mean financial stocks are immune to shifting rates, but it does mean that because so many investors are convinced otherwise — and, more importantly, have adjusted portfolios accordingly — opportunity knocks for investors looking for bargains in the sector. Two examples: Bank of America, the No. 2 bank in terms of stock-market capitalization behind Citigroup, trades at 11 times its earnings from the past 12 months, and has an annual dividend yield of more than 4%. Countrywide Financial, a diversified bank and leading home lender, has a trailing P/E of nine and a 1.7% dividend yield. (Al Frank funds invest in Bank of America and Countrywide.)
More industry consolidation is likely to be a positive catalyst going forward, and investors could soon warm to the relatively consistent growth exhibited by most players in the sector, the below-market P/E ratios and the generous dividend yields. Most folks have shown little interest in midsized and large-cap names that dominate the financial space — small caps, with great growth potential, have been all the rage — but in the long run, value almost always gets recognized. This thinking goes against the grain. But after all, as J. Paul Getty once said, “If you want to make money, really big money, do what nobody else is doing!”

Posted by on December 2nd, 2005 at 6:23 am


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