Investing: Are bank stocks a bargain?

Financial stocks are not for the faint of heart, said Norm Alster in The New York Times. Indeed, in light of the “near collapse of Bear Stearns, a stream of enormous write-offs by banks, and the freezing of a large portion of the credit markets,” many investors are running from them. But some intrepid investors see value in those bloody waters, particularly among regional banks that “stuck to conservative standards that now position them to gather capital at low rates and lend it locally to the worthiest borrowers.” The Federal Reserve’s string of rate cuts is bene­ficial to banks that follow the borrow-low, lend-high mantra. “The Fed is just throwing free money out there,” says Anton Schutz, manager of the Burnham Financial Services and Burnham Financial Industries funds. “It’s fantastic.”

But the long-term outlook for most financials is hardly rosy, said Tom Lauricella in The Wall Street Journal. Even if financial services companies make it through the credit crisis intact, the sector “faces a business environment unlike anything it has seen in more than a decade.” During the housing boom, they drew much of their income from mortgage originations, loan servicing fees, and home-equity fees. Now, according to David Kostin, market strategist at Goldman Sachs, “the earnings power of financials has been bruised and the question is: How fast can it come back?”

“Great investors have a habit of rushing in where others fear to tread,” said Aaron Pressman in BusinessWeek. If you’re set on buying financial stocks, look to stocks whose firms have hard assets. Horacio Valeiras, chief investment officer of Nicholas-Applegate Capital Management, likes real estate investment trusts (REITs) that have solid holdings and good balance sheets. “The real estate market has yet to hit bottom, but Valeiras suggests accumulating a position slowly over the next 12 months.” If you would rather buy through an exchange-traded fund, Vanguard’s “$9 billion behemoth” was recently trading at a 5 percent discount to its fair value.

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