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Investing Ideas Buy These Trampled-Down Stocks… in 90 Days
Investing Ideas Buy These Trampled-Down Stocks… in 90 Days 
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| August is traditionally a weak month for Asian markets. And given the turmoil surrounding the global financial system, this weakness has been understandably magnified in 2007. | |
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| Buy These Trampled-Down Stocks… in 90 Days |
| Thursday, 10 January 2008 | ||||||||
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John Dessauer, of Dessauer's Investor’s World newsletter, says, “I believe the best strategy today is to buy stocks -- especially the banks that Wall Street is downgrading.” Hmmm… certainly some contrarian food for thought there. An analyst friend of mine and devotee of discounted dividend valuations (who also prefers to remain anonymous due to his affiliation with a large Wall Street firm) argued with me a few weeks ago: “They yield 7%! You’re not going to find that too many other places. They’ve gotten trampled. Banks are a screaming buy right now.” I responded, “We’re not out of the woods yet. Banks are disliked, but not quite hated…yet. And any value hunting investor who follows a rationale like that is about to get burned…again. Those dividend yields are based on past payouts, the future cash payouts are what matters. There will, however, be a time to buy within the next 90 days.” Here’s how we’ll know exactly when they hit bottom. I can’t say it enough; the subprime-lending debacle has got a lot more shoes than you and me. Three or four shoes totaling more than $100 billion in write-downs (a much more pleasant term than loss or blunder) have already dropped and the biggest is about to drop. Within the next three months, as companies report their annual earnings, the banking sector is going to experience the next (and what should be the final) wave of selling. The major banks like Citigroup, Wells Fargo, Bank of America and JP Morgan Chase are starting to attract a lot of attention from investors. The stocks are way down and the yields are up. How can you go wrong, right? Well, there are a lot of ways. Most investors looking for current income are starting to pick up shares of the beaten-down banks. After all, these banks are paying out historically high levels of cash to shareholders. The attractiveness of 6%, 7% and 8% yields are, I’ll admit, quite enticing. But they are completely unsustainable. Let me explain why.
Take a look at Citigroup (C:NYSE). The largest bank in the United States provides savings accounts, credit cards, mortgages and other products to retail customers; investment research and investment banking services to institutional clients; insurance, currency trading services to other financial institutions… pretty much everything in the banking business. And it provides all of these services to millions of clients worldwide. That’s a big reason why its market value is still more than $140 billion, even though its share price is down more than 45% in the past four months. We’ve got to take a deeper look. Its subprime-lending losses are in the billions. Things have gotten so bad they’ve had to sell off a good chunk of their future to the Abu Dhabi Investment Authority (ADAI). But the ADIA is no dummy for placing a big bet on Citigroup right now. Not in the least. However, the odds are stacked in the ADAI’s favor and we shouldn’t follow its lead into banks like Citigroup quite yet. The ADAI, with somewhere between $500 billion and $1 trillion under management, got a special deal from Citigroup that’s not normally available to investors like us who don’t have $7.5 billion to put into a single investment. The ADAI didn’t buy shares of Citigroup; it bought convertible bonds. This type of bond (of which hedge funds own about 95% of all those publicly traded) pays the holder an interest at a predetermined rate just like most every other bond, yet is convertible into common shares. In this case, the ADAI is getting an 11% interest rate paid by Citigroup. Meanwhile, once shares of the beleaguered bank recover (which they will do), the ADAI will be able to exchange its bonds for common shares of Citigroup. But here’s the unique part: Since the ADAI owns the bonds, it has to get its interest payment before any common shareholder is paid a single cent in dividends. Pretty good deal for the ADAI, eh? Therein lies the problem. When Citigroup inked the deal with the ADAI, the bank added an extra $825 million cash expense to its annual budget. When you consider Citigroup created an average of $3.4 billion in net free-cash flow per year over the past three years, already pays out about $9 billion a year in dividends and is anticipating another write-down of between $8 billion and $11 billion this year… $825 million is a pretty big check to write, even for such a huge bank. And Citigroup is just one example. With most of the major banks taking billions in losses -- and more multibillion-dollar losses are in store this quarter -- cash to pay dividends to shareholders is going to be in short supply. Banks will be forced to slash their dividend payouts. Many investors own bank stocks for their high dividend yields and not for growth. (Citigroup’s 8-10% annual earnings growth just isn’t going to get growth stock investors remotely excited.) So when they cut their dividends at fourth-quarter earnings announcements, these stocks will get hammered one more time. And when that happens, proving that even the patient investors looking for sizable dividends for income are no longer willing to hold on to their bank shares, it will be the time to start picking up bank stocks. Until then, there should be quite a few ups and downs in the banks stocks. Big ups and downs will be created, which active traders can turn into piles of cash. Learn how to trade banks and other stocks like a pro . Good investing, Andrew Source :Fear and Greed This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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