Saturday, July 19, 2008

Barrons: Buy the Banks

What to Bank On

"U.S. financial stocks beckon because nearly every major company now trades for under 10 times projected 2009 profits. Though there is considerable uncertainty about '09 profits, considering the tough economic outlook, what is comforting is that many financials combine low forward P/Es with and low ratios of price-to-book value, derived by subtracting liabilities from assets and dividing by the company's outstanding shares. It historically has proven profitable to snap up major financials around book value because purchasers effectively are getting the ongoing businesses for nothing.

Regional banks, which had been pummeled until a sharp rebound that started Wednesday, have deposit bases that are so valuable that buyers of banks historically have paid sizable premiums to get them. Deposits now are being accorded little or no value throughout the banking industry as many institutions, including SunTrust Banks (STI), Marshall & Isley (MI), Comerica (CMA), Wachovia (WB) and Zions Bancorporation (ZION) trade around their tangible book values -- a conservative measure that excludes goodwill and other intangible assets.

SunTrust looks attractive because the Atlanta-based bank now trades for $34, just a small premium to its tangible book value of $30.65; stated book value, including goodwill, is $51 a share. A year ago, the stock was trading in the 80s and there was talk that JPMorgan might pay more than $100 for the company. SunTrust's allure, despite its loan problems, is its status as the last big independent bank in the Southeast, with a desirable deposit franchise and geographic footprint.

AIG has had a huge comedown in the past year, with its stock falling to 25 from a 2007 peak of 72. Analyst Joshua Shanker at Citigroup last month upgraded AIG to a Buy from Hold, citing valuation. It now trades for 76% of its book value of $33 a share and under six times Shanker's 2009 earnings estimate of $4.40 a share."

Suntrust (STI 34.70) reports earnings on Tuesday. On the June option expiration last month, STI said it wouldn't need to raise more capital, and that the dividend was secure. The stock reversed and spiked up that day. That should of marked the bottom. Instead the shorts attacked it with more naked selling, and drove it to artificially depressed prices.

The quarterly results would already of been known. The way to play Tuesday's earnings is the August 40 call. Almost 5,000 traded Friday, and they closed at a buck. STI also has a huge stake in Coca Cola. PNC Financial, which has a big stake in Blackrock, jumped from 50 to 67 last week, after it reported earnings that beat expectations. If STI just shows a pulse, I think the shorts could get majorly squeezed on this number.

Couple that with today's Barron's story, and you could get a real nice move to the upside.

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