The market has shunned virtually all financial companies this year, but that very punishment has created some interesting values, says Jason Tyler, Ariel Investmentâ€™s head of research operations and the Chicago investment firmâ€™s in-house financial stock analyst. Tylerâ€™s not looking to jump in with the big banks whose bailout needs make headlines daily. His mission at the value-investing firm is to sift through the heap to find good businesses that are lumped with the groupâ€™s derelicts.
Ariel has always had a soft spot for financials. Tyler says both the companyâ€™s Ariel and Ariel Appreciation mutual funds have approximately a 33% weighting in the industry. Arielâ€™s taken a shine to companies at all levels of the financial services industry, too. The firm has stakes in banks with a stock market value as small as Private Bank, with a $400 million capitalization, and as big as J.P. Morgan Chase, with a market cap of $100 billion.
Black Enterprise: Whatâ€™s your take on the maelstrom in the financial industry?
Jason Tyler: In many ways, itâ€™s an exciting time, a once-in-a-generation opportunity. Donâ€™t get me wrongâ€”weâ€™re in a big, big storm and you want to avoid 99% of the companies in the financial industry right now. The storm is real, and financial services companies face a tough time in the next year. Still, if you do your homework, thereâ€™s a chance to pick up some great bargains.
So where do you draw the line between good and bad in a business thatâ€™s so wracked in turmoil?
For starters, weâ€™re focusing more than ever on companies that took a conservative route when everybody else was getting greedy. A few years ago, there was a fork in the road; many banks took the path into risky investments, but not everyone went down the same road. The quickest example is J.P. Morgan Chase, Citigroup, and Bank of America. Three years ago, all three were about the same size and stock market value. Fast-forward and you see two in trouble:Â One, Citigroup gave up control to the government. Another is the severely weakened Bank of America; and J.P. Morgan Chase seems to have the conservative makeup that has helped it hold on. There are conservative banks out there with sound businesses that can do well relative to their peer group and that can stay positioned to outperform when the economy finally gets on firmer footing.
What survival signs are you looking for?
If I had to generalize, there are certain characteristics that they have in common. Weâ€™re looking for institutions with lots of capital on the books. Weâ€™re drawn to companies that havenâ€™t taken on a lot of debt. Weâ€™re impressed by well-run operations in steady sectors, too. And let me say that many of the same criteria apply to the broad market as well.