Turnaround Expert's Banking Bets

03/11/2016 10:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam looks for upside opportunity among out-of-favor stocks and sectors. Here, the editor of The Turnaround Letter, looks at the banking sector and highlights a trio of stocks whose prospects, he believes, are being underestimated by Wall Street.

Steve Halpern: Joining us today is George Putnam, editor of The Turnaround Letter. How are you doing today, George?

George Putnam:  I’m very well, thanks, Steve, how are you?

Steve Halpern:  Very good. Thank you for taking the time. As a turnaround expert, you tend to look towards stocks and sectors that have suffered through difficult times and are out of favors with the investment community, and you recently issued a fascinating report called, “Everybody Hates the Banks”. Could you walk us through some of the reasons why these stocks are so out of favor?

George Putnam: I think it’s really because of short-term market sentiment. I mean the banks have been steadily improving their balance sheets and their businesses since 2009.

It’s sometimes under duress from the regulators, but the businesses are solid and continuing to improve, but the stocks are down very sharply from the last part of last year and I think there were two really reasons for that.

One is investors to always fight the last war and so they’re worried that we’re going to have another 2008 style meltdown, and I just don’t see that being the case.

Fortunately, many of the factors that led to that just aren’t present in the market, and the other reason that investors seem to be down on the banks is they sort of expected the Fed to raise interest rates a little faster than they have.

And the banks do better when interest rates are rising because they have wider margins on their loans, but I think the Fed will gradually raise rates so we will see profits improve, and so I think this downturn is really temporary.

Steve Halpern: As a turnaround specialist, you’re not just looking for trouble stocks, rather you focus on where you believe this out of favor status has creating a bargain with upside potential, and you suggested that bank stocks now in general could be poised for a recovery. Could you expand on this outlook?

George Putnam: I think it’s really sort of temporary market sentiment that is pushing them down. The businesses are solid. They’re going to continue to grow.

Some of them have decent dividends now or they will increase their dividends going forward, so I think they’re good things to own and this is a good time to take advantage of the negative sentiment in the market.

Steve Halpern: Let’s take a look at a few of the bank stocks that stand out in your mind and one that you called one among the most appealing is Bank of America (BAC). What’s the attraction there?

George Putnam: Bank of America took two very large steps at exactly the wrong time back in 2008. They bought a huge mortgage company, the Countrywide Mortgage company, and they helped bail out Merrill Lynch.

They bought Merrill Lynch, I think, with the encouragement of the Fed, and both of those companies were at the epicenter of the downturn in 08/09, but in the process they built a very strong and broad franchise across all aspects of financial services.

And it’s taken a long time and they’ve had some regulatory issues over the last several years, so they haven’t been able to really take advantage of this huge franchise that they’ve built.

But I think once they get hitting on all cylinders it will be extremely profitable, so I think Bank of America has a lot of potential, and again people remember it getting crushed in 2008 and they’re afraid it’s going to happen again, and I don’t see that.

Steve Halpern: You also note that Citigroup (C) is in the process of a turnaround and while isn’t complete that you like the progress they’re making. Could you expand on that?

George Putnam: Yes, they got two broadly extended in the mid-2000s with a wide range of businesses around the globe and they have trimmed back.

They still have a great worldwide franchise and they’re focusing more on basic banking, some investment banking, and they’ve sold off the troubled assets and the non-core businesses, and again they’re still consolidating so it’s a work in process, but results continue to improve and I think there’s a lot of upside left in the stock.

Steve Halpern: Now, finally you see a turnaround potential in Ally Financial (ALLY). Could you tell our listeners a little about Ally?

George Putnam: Sure. Ally actually came out of the General Motors (GM) bankruptcy in a way. It was part of the GMAC financing operation and finally emerged from all the turmoil surrounding General Motors and GMAC a few years ago, and it took over most of the auto lending business of GMAC.

They have really diversified. They are more globally diversified. They have cut back on their GM business and now do a lot of lending with other brands. They are good at what they do on the auto lending side, and they’re also interesting in that they have quite a large bank that has no branches whatsoever.

It’s all online, so it’s a very efficient and relatively inexpensive way of raising funds through this online bank. People are still a little concerned about it because of the taint of the old GM bankruptcy and also a few people say, well the new subprime problem isn’t real estate, it’s auto lending.

But I think they really know what they’re doing and those concerns are overdone, and when mainstream investors realize that, there’s a lot of upside in the stock.

Steve Halpern: Again, our guest is George Putnam, editor of The Turnaround Letter. Thank you so much for your time today.

George Putnam: Thank you Steve.  

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