Today I want to address one of my favorite sectors of the market, and the cheap-enough to buy stocks that can be found within it. I love the financial names, and I suspect I've made more money in this group than in any other. As a broker in the early-to-mid-1990s, something like 90% of my business was in trading bank and financial stocks for customers. I am a huge fan, not just of the banks, but all financials, including insurance companies and brokerage firms. For the most part, the stocks I'm going to talk about today are not part of my small-bank "trade of the decade portfolio." In my mind, that's a whole separate business and entity. Most of them are too small to talk about here anyway.
I will start with the insurance companies. Not too long ago, I mentioned Hartford Financial (HIG) as one of the cheapest stocks on the planet. In spite of some improvement in price, Hartford is still one of the cheapest stocks on the basis of price to tangible book value. The company is still in the process of transforming itself by selling its life-insurance operations and letting its annuity business go into run-off mode. This will allow the firm to focus on its core property-and-casualty business, as well as its wealth-management operations. The stock trades at just 50% of tangible book value -- well below not only its own historical average but also its peers in the industry.
Among life insurers, I like Lincoln National (LNC), which is priced at 70% of tangible book value. The company has made huge strides in cleaning up its balance sheet. With individuals slowly making their way back to the stock market, the bank's equity-linked products for retirement should begin to pick up and help grow the bottom line. National Western Life (NWLI) is trading near 52-weeks highs as business has improved, but the stock still sells for just 50% of tangible book value and can be added to long-term portfolios at this price.
As far as brokers are concerned, I like the current price of Cowen (COWN). The firm engages in investment banking, research and sales and trading. It also has fairly large operations in hedge funds and alternative assets that the firm added last year. In addition, it just completed the purchase of an investment-banking firm that increases Cowen's exposure to the energy, mining and agricultural industry. At 70% of tangible book value, I think you can buy the stock here and see large gains over the next several years.
Although this is not my bank-specific "trade of the decade" portfolio, banks will still be present in all of my portfolios. I am a big fan of First Financial Northwest (FFNW) at the current price. While the Washington State-based bank has higher loan losses than I normally like, it has cut problem assets by almost two-thirds in the last two years, and it has more than enough capital to navigate its way to a healthier balance sheet and a higher stock price. The stock is priced at 80% of tangible book value, with an equity-to-assets ratio of 15x, so it can be bought at this level.
I usually like to buy at around 80% of tangible book, but I am willing to establish initial positions in Capital Bank (CBF) at 1x tangible book. This bank was established to roll up smaller and troubled institutions into a large Southeastern bank, and it is off to a strong start. The bank has adequate capital, and a significant portion of its problem assets are covered by loss-sharing agreements with the Federal Deposit Insurance Corporation (FDIC). From scratch a few years ago, Capital Bank now has 165 branches and more than $7 billion in assets.
I like what's going on at First PacTrust Bancorp (BANC), as well. The bank has been transitioning to a full-service commercial bank, and it's been doing so by buying up other California banks at bargain prices. California has been one of the poster children for the credit crisis, as well as for the political morass that followed, but the state will eventually recover and thrive. First PacTrust has a strong balance sheet with low loan losses and plenty of capital. At the current level of 70% of tangible book value, the stock can be purchased by long-term investors. Insiders apparently share my opinion, as they have been heavy open-market buyers in recent weeks. As a bonus, the shares yield more than 4%, so you'd get paid to wait for the stock to appreciate.
The recent market rally has moved many of my financial stocks slightly above my buy zone. These are the ones that I think are cheap enough to buy right here, right now, with an eye toward scaling into more shares if and when we see a broad decline in the near future. I am a very patient buyer, and would probably wait until a down day to begin establishing positions.
