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 he’s been scooping up lately: Chimera Investment Corp. (NYSE: CIM), a real estate investment trust that buys mortgages. “The company has been acquiring loans at a discount to their net asset value,” says Schutz. 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 company’s stock price.
What about insurance companies? “Our top holdings include MetLife (NYSE: MET) and Travelers (NYSE: TRV), both of which have excellent financial strength,” Schutz says. Both insurers’ stocks are off sharply from last year’s highs so they could bounce back when investors are convinced the financial sector includes winners as well as losers.