The recent economic meltdown started with the implosion of a handful of big banks and Wall Street brokerage firms. The financial sector continues to feel the pain. Shares of Citigroup (C), for example, traded as high as $50 a share in mid-2007 but now sell for about $3. American International Group (AIG), once considered an outstanding investment, has seen its stock plunge by 97% in the past 12 months.
Shell-shocked investors are fleeing financial stocks in droves. Intuitively, that means the industry is now a place to look for bargains. Surely there must be banks, brokers, and insurers who avoided the traps that snared the big players. Finding them, though, isnâ€™t easy. â€śShifting through the data can be complicated,â€ť says Anton Schutz, manager of Burnham Financial Industries Fund (BURFX). â€śYour best chance is to invest through an actively managed fund, where someone is picking stocks. If you buy a financial exchange-traded fund, or ETF, which tracks an index of financial stocks, youâ€™re buying bad companies as well as good ones.â€ť
In general, actively managed mutual funds havenâ€™t been as hard hit as Citi or AIG. Still, according to fund tracker Morningstar, financial sector mutual funds lost nearly 44%, on average, in 2008. Schutzâ€™s fund is an exception, though: It lost only 7% in 2008, followed by a gain of nearly 13% in the first half of 2009. Under Schutzâ€™s guidance in 2008, Burnham Financial Industries Fund Class A received the Lipper Performance Achievement Certificate for its No. 1 ranking, while Burnham Financial Services posted the best performance results out of 91 funds in its category.
So what is Schutz holding now? â€śAmong the major banks, we see opportunity in Bank of America (BAC). When things get back to normal, the company could earn as much as $4 a share. Itâ€™s trading at only $12 now, so the stock could double or triple in the next couple of years,â€ť Schutz says.
Bank of America isnâ€™t the only financial institution Schutz likes. Heâ€™s touting smaller players such as Peopleâ€™s United Financial (PBCT), which has branches throughout New England, and TFS Financial Corp. (TFSL), parent of Third Federal Savings and Loan Association of Cleveland. â€śThese are among the banks that have excess capital now,â€ť says Schutz. â€śTFS is buying back its own stock because the values are so compelling now, and Peopleâ€™s is looking to make acquisitions.â€ť
Historically speaking, savvy investors like to buy shares in institutions that are likely to be taken over by larger firms. Given the state of the financial industry today, says Schutz, â€śthe winners might be the buyers.â€ť Buyers know the industry, the logic goes, and are likely to know which companies represent good value at currently depressed prices.
The major reason for the depressed share prices in the financial sector, of course, has been weakness in real estate, which led to increasing defaults on mortgage loans. Even so, Schutz sees opportunities in the mortgage business for one company whose shares heâ€™s been scooping up lately: Chimera Investment Corp. (CIM), a specialty finance company that invests in mortgage-backed securities. â€śThe company has been acquiring loans at a discount to their net asset value,â€ť says Schutz. He reminds investors to remember that â€śmost homeowners are still making their mortgage payments.â€ť His overall reasoning: If it becomes apparent that the loans acquired by Chimera are relatively sound, values could move up sharply, thereby driving up the companyâ€™s stock price.
What about insurance companies? â€śOur top holdings include MetLife (MET) and Travelers (TRV), both of which have excellent financial strength,â€ť Schutz says. Both insurersâ€™ stocks are off sharply from last yearâ€™s highs, so they could bounce back when investors are convinced the financial sector includes winners as well as losers.
This article originally appeared in the September 2009 issue of Black Enterprise magazine.