Smart Profits Issue #493
Monday, February 4, 2008 Three Ways To Invest Money In The Financial Sector By Karim Rahemtulla
Investment Director, Smart Profits Report If you're an Xcelerated Profits Report subscriber, you'll know that I'm currently very bullish on financial shares and recently recommended one of the strongest banks in the business, which is already showing signs of a recovery. This is partially why I wanted to give you this, a quick guide with three ways to invest money in the financial sector. Although there is plenty of pain in the sector, it will eventually turn into Jim Cramer's proverbial "house of pleasure."
Don't get me wrong… I'm not so gung-ho on the sector that I'm buying whole hog. But I've been nibbling week after week since about mid November. So has Dan. But what are we buying?
Three Ways To Find and Invest in A Robust Bank Investing in a battered sector like financials right now does take a little courage. But not as much as you might think if you play it correctly. Independently, both Dan and I have developed very similar criteria when looking to buy into the dreaded banking sector. And far from being a gut-wrenching ordeal, it's really quite simple… 1. Look For Strong Banks: Sounds obvious, I know. But one of the best ways to define a "strong bank" in this climate is its ability to pay and raise dividends during the current market. Remember, banks have made an awful lot of money over the past several years and if management has done its job properly, it should have plenty of cash on the books. 2. Look At The Bad Loans: What percentage of bad loans does the bank have? During any slowdown, loan loss reserves will rise. But if the bank is solid, these reserves should only increase modestly - perhaps by 20 or 30 basis points. 3. Look At Insider Activity: What are the officers and directors of the bank doing? Are they buying shares of their own company, even as the price declines? Or are they sitting on the sidelines (or worse, bailing out)? If we see a pattern of very large purchases, it confirms that the selling is probably overdone. This doesn't mean there won't be more pain, but it does tell us that the people running the show, and the directors who talk to the people in charge, know far more about the business than we do - especially at banks. In sum, when we see a bank that churns out a healthy dividend to its shareholders (and increases it), strong fundamentals, manageable loan reserves, and hefty insider buying, we'll be at the table buying with the insiders and against the crowd. And make no mistake here… we're not looking for a quick 5% or 10% pop. While that's nice, it's not enough. Instead, we're looking to make 100% or more in a few years or less. In the meantime, we'll savor the 6% and 7% dividends and the benefits of capital gains tax rates. It's not rocket science; it's just some neighborly advice. Good investing, Karim Today's Smart Profits Action Center: - Over the second half of 2007, banks saw the value of their combined portfolios slashed by $140 billion. Today, MBIA added to that, with an ugly $2.3 billion fourth-quarter loss ($18.61 per share) after it wrote off $3.5 billion in collateralized debt obligations from its poorly performing credit portfolios.
- While the bad headlines keep rolling in from the financial sector, you don't have to sit back and watch, fearful of what will happen next. As we've noted here before, rather than run away when the sector is getting crushed, smart investors use the situation as a chance to buy quality companies at bargain prices. In today's column, we've given you a few key things to look for if you're thinking about investing in the financial/banking sector. But a better option is to let us do the work for you and actually give you specific recommendations that you can make today. Karim has done this already in the banking sector - and we've got plenty more picks lined up for 2008. Do yourself a favor and get in on the action - it will only cost you $50 for a year. Get more Info
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