Financials are taking quite a beating these days, not only price-wise, but also in the esteem of stock pickers, dividend investors, the buy-and-hold crowd and pundits alike. And for good reason. The brokers, banks and insurance companies are generally quite suspect. There is no way to know if another shoe (or a bag of shoes) will drop for any one of them.

Bear Stearns was in desperate straits - though well known to the industry - long before we of the public knew. Banks are exposed on subprime, Alt-A mortages, contruction financing on projects that are going to be slooowww sellers. Many large and regional banks, if forced to value assets properly, would have to close their doors. Regulators are looking the other way, and have no choice, in order to give the banks a couple of years to raise capital and outrun their current problems. Insurance companies also have exposure to many of these things. We have a severe information deficit about the financials in general. You and I have no way to know the true extent of these companies’ woes. At this point, I view an investment in most financials the same as diving into an unknown lake - we have no clue where the stumps are, or how many.

As if all this weren’t bad enough, the market has zero tolerance for mystery or goofiness in financials. A financial will sell off on the slightest whiff of negative news - even if not about that company directly and even if not particularly applicable to it. Unless you are intimately familiar with a company, it is healthy and not cutting its dividend, tread carefully. I do have a couple of suggestions below.

While some stocks like Wells Fargo are being touted as recovery plays, I definitely would not go long the stock without SuperPut protection. If truly convinced that a financial has been knocked down to a fire-sale bargain price level, consider instead buying an OTM (cheap) call with an expiration perhaps 3 to 6 months out; or whatever time frame you envision. If the stock recovers as expected, you’ll profit immensely. If it does not, you’re not out much.

Trading Possibilities:
Perhaps it’s one of those fractal things, but every rule has its exceptions, and there are a few good financial stocks. Here are a couple, both of which recently increased the dividend and are not beset by many of the problems afflicting most financials:

Bank of Nova Scotia (BNS) - This Toronto-based megabank operates well over 1,000 branches outside Canada and make a lot of money. It has seriously outperformed its peers and the S&P 500 since 2002. And since 2003, it also has increased revenues, earnings and dividends, with revenues, earnings and dividends expected to continue increasing in the future.

BNS has been falling of late, like most things. It’s no surprise that a financial would have been whacked recently with the market. Technically, the price has touched the 200-MA on a weekly chart and is clinging to the 50-wk average. If if breaks back above the 50-week average (which is also the middle of the Linear Regression channel), it’s a buy.

Banco Santander (STD) - this highly profitable Spanish bank has increased its dividend significantly since 2003, growing revenues and profits as well, and since 2004 has beaten the snot out of both the Large Bank industry and the S&P 500. Technically, it’s at the bottom of its trading channel on both daily and weekly charts…

As Yogi Berra said, you can look it up. Translation: do your own research.

This entry was posted on Tuesday, July 29th, 2008 at 10:26 am and is filed under Trading Tips, Sector/Industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.