Similarly, people of a certain age — OK, young people — may have similar reservations, primarily because of ATM fees, low CD rates and the Great Recession. Some things just leave long memories.
Which leads us to bank stocks. Five years after the worst recession since the Great Depression, banks have returned from catastrophe (with government help), rebuilt their capital structure (with government help) and kept depositors safe (with government help). Now, many are soundly profitable and back to complaining about the government. Is this time to invest in bank stocks, despite Thursday's nasty selloff in technology and biotech?
If you're a long-term investor and feeling that the economy is on reasonably sound footing, yes. Large bank stocks are reasonably cheap, and pay decent dividends. Regional banks, while less cheap, are likely targets for a merger-and-acquisition wave.
NEW: USA TODAY's live markets blog
Let's start with the big banks. On Thursday, Ally Bank — once known as the General Motors Acceptance Corporation — went public with a $2.38 billion IPO. Proceeds went to the U.S. Treasury, which spent $16.2 billion bailing out GMAC in the wake of the financial crisis. The Treasury, which once owned as much as 74% of the company, now owns about 17%.
David Ellison, co-manager of Hennessy Large Cap Financial Investor (ticker: HLFNX), has beaten nearly 80% of his peers the past decade, according to Morningstar, which tracks funds. He took a pass on Ally's IPO, which fell more than $1 from its $25-a-share offer price on its first day of trading. Sooner or later, the Treasury will want to sell its remaining stake, which could require another stock sale and dilute the stock's value. "The government is going to be looking to exit Ally, so there's g! oing to be another trade coming," he says.
But other large banks are at least cheaply priced. Large banks typically sell at lower valuations than the Standard & Poor's 500 stock index, but current valuations are low. JPMorgan Chase (JPM), for example, has a 2.7% dividend yield, and sells for 1.1% of book value per share.
(Book value is a way of looking at the company's share price vs. its tangible assets, striking out such hard-to-value assets as goodwill and patents. Book values of one or less are cheap; the further above one, the more expensive the stock).
And banks aren't like, say, bookstores, where disruptive technology is making it difficult for them to compete. "The business model isn't broken: Those profits need to go somewhere," Ellison says. Should the economy get stronger, interest rates should rise along with loan demand — both good things for banks.
Smaller, regional banks have something else going for them: merger-and-acquisition activity. "We're in the early innings of the current M&A cycle," says Anton Schutz, manager of Burnham Financial Services Fund (BURKX), which has beaten 85% of its peers in the past decade. After the financial crisis, M&A activity was held back because, frankly, everyone thought everyone else's loan portfolio was loaded with nasty surprises.
"Now, everyone's troubled loans have gotten better-looking, and regulators are happy to let smaller banks merge," Schutz says.
Typically, the stock of a purchaser's price falls when an acquisition is announced, and that's because buyers usually pay too much. But in recent small-bank merger deals, the stock of both purchaser and acquisition have risen — a sign that the deal is reasonable for all parties.
"We don't have the stupid acquirer now," Schutz says. "They will emerge — they always do. But right now, we're at a stage where a lot of franchise value is being built. It's great being a shareholder in a community bank."
What could go wrong? If you've lived thr! ough the ! financial crisis of 2007-2009, you have a good idea. Your bank stock could go away entirely, as Washington Mutual did in 2008. That's unlikely: Banks are in far better shape than they were in 2007.
"The loans in the system now are best loans I've seen my career. The buyer, lender and the seller are all afraid, and they're doing the work it takes to make a good loan," Ellison says.
But a slowdown in the economy — and therefore, loan demand — would hurt banks. "Loan demand is OK right now," Ellison says. "But if housing rolls over, that's not good." Ellison worries that the housing bust, like the Great Depression, scarred an entire generation, making buyers more scarce and much less willing to take on debt.
Ideally, what you want is a gradually strengthening economy and slowly rising interest rates, which make loans more lucrative for banks.
"You want LIBOR to rise in a nice way," Schutz says. (LIBOR, or the London InterBank Loan Rate, is the basis for most commercial lending rates.) Sudden rate rises are never good for anyone.
For investors, the best way to invest in banks is through a diversified portfolio of stocks, and a mutual fund is usually the best way.
"You just want to do the group hug," Ellison says. For broad, low-cost exposure, consider a fund like the Financial Select Sector SPDR (XLF), an exchange-traded fund that charges just 0.16% a year in expenses. It's unmanaged and tracks an index of financial stocks. SPDR S&P Regional Banking (KRE) is a good alternative for those who want the more specialized sector.
During most time periods, bank stocks are reasonably stable investments with decent dividends. When banks stick to their business models, they fuel the nation's economy and keeping humming. It's the periodic bursts of madness that give the stocks their bad name.
Currently, the sector seems reasonably sane, and a good long-term way to play an improving economy. But it may take a long time for investors to forget the scars from the la! st burst ! of bad behavior.
No comments:
Post a Comment