Financials are off to a banner start this year. And for two good reasons.
First and most valid is valuation. Mass market hatred for financials in 2010 and 2011 led to a selloff that was not based on any fundamental merit. Second, it seems to be the belief that Europe, despite the terrible situation it is in, will get its act together and do what needs to be done to avoid an all-out catastrophe. Germany is on the verge of a recession and when push comes to shove, Germany will step up and do what is needed for the European Union before sending its economy into a tailspin.
With this belief that Europe may do what it needs to do, investors have wasted no time piling into Bank of America (BAC), my top pick for 2012. Day in and day out, shares are accumulated on significant volume. So far this year, shares are up over 20% and BofA has outperformed both the S&P and peer Wells Fargo (WFC). Even at $7, BofA is still a very attractive stock and in this environment should easily be sitting above $10 a share. BofA's current valuation more than discounts a European crisis, high US unemployment and lower lending volume. The stock price also discounts CEO Brian Moynihan's plan to eliminate $5 billion in expenses, the stand lone value of BofA Merrill Lynch and the fact that EPS could exceed $1 in 2012.
Wilbur Ross is betting big on financials. To be sure, Ross feels the smaller banks are more attractive than the mega banks due to the regulatory restrictions that the Fed is putting on the country's biggest. But that hasn't stopped Ross from buying the Bank of Ireland (IRE), a big bank by Irish standards and one that is arguably in worse shape than some megabanks in the US.
One of the smaller banks that Ross is piling money into is Sun Bancorp (SNBC). His average share cost is $2.85 and shares today trade for $3. Sun Bancorp operates Sun National Bank, a bank that Forbes magazine has named one of the country's "Most Trustworthy Companies" for five consecutive years. Sun Bank operates in New Jersey and is the preferred lender of the NJ Economic Development Authority. This bank is not going anywhere. As of Sept. 30, 2011, the bank had assets of $3.2 billion, $675 million in cash and equity of $308 million. The current market cap is $258 million.
After fears about its exposure to Europe sent shares in investment bank Jefferies Group (JEF) below $10 in December, shares have rebounded back to nearly $15. Even so, Jefferies is one of the best managed of the smaller investment banks. The bank quickly disclosed to shareholders the extent of its exposure to Europe and then moved to reduce that exposure. At current prices, the shares are good for a 2.2% yield and trade at book value. One of the most successful investment companies, Leucadia (LUK), owns nearly 30% of Jefferies and it bought more back in December and has no intentions of selling any shares anytime soon. In fact, the reason they aren't buying more is because the came to an agreement with Jefferies to cap their ownership stake. CEO Richard Handler also owns over 5% of the company.