Are the financial stocks worth a second look?
November 8, 2007
It would seem that after this weeks sell-off of financial stocks, some might now be considered a buy. After all, the average price/earnings ratio is around 11.9, down from 12.2 in April. That makes the financials the lowest valuation of the 10 sectors that make up the Standard and Poor 500 index, according to S& P of New York.
Could they be attractive to investors looking for some value in the price? One would think so, but many analysts are not so sure. The lower valuations are just not enough to compensate for what could be a long-term slowdown in earnings.
So what is the problem in the financial sector? One concern is that banks just are not in a position to expand their earnings. With all the bad news about loan defaults in the housing sector, banks are having to write down losses due to all the subprime mortgages that were hot just a few years ago.
Banks like Citicorp have had to stop their share repurchase program and are doubtful about being able to raise their dividend due to the large amount of loans coming off the books as uncollectible.
Just when you think that the worst is over, there is another financial warning about more losses to come in the future months. The problems are not just in mortgage defaults but in underwriting new mortgages as well. With such a big slowdown in home sales and tougher standards for qualifying, the financials that rely heavily on their mortgage division are experiencing a twofold problem.
With all the bad news that subprime mortgage defaults are causing, is there any reason to invest in financial stocks any time soon? That is hard to answer. Many financials did not get downgrades until the bad news had been made public, so selling of the stocks just made matters worse. But again, are they a buy?
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Now, you have heard about throwing the baby out with the bathwater? Many financials have little to no exposure to the subprime market and are trading at 52-week lows right now.
Other industries that have nothing to do with the financial sector are also experiencing the same pressure. We may not be at the bottom of all of this mess, but absent perfect timing, it might be a very good time to give some of the beaten-down financials a second look.
The subprime lending write-offs will not last forever and even in this difficult market, asset managers have a lot going for them as the baby boomers continue to invest for retirement. We have seen the financial sector go through turmoil before, just to reemerge stronger. I for one am going to keep my eye on some of the financials . The prices are almost right, and I love a good sale.
• Carol Perry, of Carol Perry and Associates, has been a resident of Northern Nevada since 1983.The opinions expressed by Carol Perry are her own and may not reflect those of LPL.
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