Jun 7, 2008

David Dreman: "Safest plays are among the big banks" (2008)

The safest plays are among the big banks. Most of this group have taken large reserves against their losses in the various mortgage areas, hoping that the market would reward them for their candor. Wall Street's response, however, has usually been to punish the reserve-takers with further cuts in their stock prices.

Perhaps investors are spooked by memories of the 1990--91 crisis in the financial sector, when real estate losses were so huge that investors questioned the ability of some commercial banks to survive without additions to their capital bases. At the same time, scores of savings and loans were collapsing from ill-considered forays into junk bond buying and construction lending.

The story is very different today. Yes, losses are towering, yet Tier I capital--the core measure of a bank's financial strength, chiefly shareholders' equity (including that from preferred shares)--is not threatened, as was true 17 years ago. While most large banks had lousy third quarters, the worst may well be over. Bank of America (43, BAC), Wachovia (40,WB), Citigroup (31, C) , KeyCorp (23, KEY) and JPMorgan Chase (45, JPM) are five that should show good appreciation with time. While you wait for a stock market recovery, all pay above-market yields. Bank of America, KeyCorp and Wachovia pay 6% or better.

~ David Dreman, "Seize the Day," Forbes, January 7, 2008

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