A Value Investor Goes Out on a Limb

 | Dec 13, 2012 | 2:30 PM EST
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Today's column and suggestions are not for everyone. If you are risk-averse or if volatility keeps you up at night, this is probably not going to be your cup of tea. If you are among the subset who believes we will suffer a global financial crash and a total breakdown of society, this is not for you. In fact, you should stop reading right now and head out to stock up on bulk foods and ammo.

The ideas I am putting forth today are based on an optimistic view that we will work our way through the current mess and that the global economy will chug along for years to come.

I have written about this topic in the past, but was it bought to mind by a conversation with Jesse Stein. Stein is a trader and investor who has a new book coming out later this month, and he often owns the same stocks I do. Interestingly, he arrives at his stocks with a technical approach and hopes for fundamental improvement -- almost the exact opposite of the way I look at stocks. No matter which approach, we both look for areas where the point of maximum pessimism has arrived

Nowhere is this more true right now than in foreign banks. As crisis and economic weakness of one form or another have made their way around the planet, banks in Europe and Latin America have seen their prices plunge for a couple of years now. If the world does not end, many of these banks will eventually recover, and at current prices they are something of an undated option on the global economy.

The most obvious example is a stock I traded a few years ago for some rather large, quick profits. I don't know if shares of National Bank of Greece (NBG) will recover quickly again, but since it is the nation's largest bank, if Greece survives, the bank should do OK over the long run. It should certainly trade higher than the current quote on any news or hopes for a fix to the troubled nation's severe economic problems. The bank has recapitalized and merged with EuroBank in recent months, in a response to the ongoing debt issues in the nation.

This is a simple, asymmetrical long-term bet. If Greece survives, the bank survives in or out of the euro zone. If that happens, you strand to make a lot of money as a long-term investor. If it doesn't, you will lose a few bucks.

I have owned shares of The Governor and Company of the Bank of Ireland (IRE) for a while now and actually have a little profit in the stock. I expect to make a lot more over the next five to 10 years. I am in good company in this stock, as both Wilbur Ross and Prem Watsa have substantial investments in the bank. Both noted investors are on the board and are committed to turn the bank around as Ireland struggles to deal with its own fiscal problems. They have been selling bad loans and property portfolios to improve the balance sheet and better position the bank to benefit from an eventual recovery. Again, it is something of a bet on Ireland, but I like the odds for the long term.

Banco Santander Brasil (BSBR) is the third-largest bank in Brazil, and it has seen its share price plunge along with that nation's economy. The bank is seeing some reduction in problem loans, and default rates appear to be leveling off. The company has adequate reserves and should be able to earn its way out of the mess when Brazil's economic conditions improve. That may take some time, but the government is scrambling to reignite growth and attract investment capital to the former emerging-market leader. It is also a bet, but the kicker here is that because of its natural-resource-rich economy, Brazil is very much a bet on China and India in the long run.

I do not have room to outline all of the cheap money-center and large regional banks around the globe that represent strong speculative opportunities. It is worth taking the time to search them all and evaluate their long-term prospects. You need to own a package of these banks and be patient and disciplined. It's a pretty safe bet that most of these stocks could drop 50% or more from current levels in the whirlwind of news and political development. This investment is a long-term play on a global economic recovery. It should be wildly profitable over the next five to 10 years, but it is not a ride for the faint of heart.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
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