"Bank" on Germany
05/12/2006 12:00 am EST
For those not familiar with the German market, Nick Vardy likens Deutsche Bank to its US rival investment bank, Goldman Sachs. Here, the editor of Global Bull Market Alert offers his assessment as to why investors should bank on Deutsche Bank.
"Goldman Sachs gets a lot of press these days, such as being the subject of a cover of the British weekly The Economist . That's unfortunate for Goldman, as the appearance of a company on a magazine cover is often a strong sell signal. Fortunately, our latest Global Bull Market Alert pick, Deutsche Bank (DB NYSE), attracts much less attention than its higher-profile investment banking rival.
"Absence of magazine covers notwithstanding, there is no doubt that DB's recent performance has thrust this German Goldman Sachs into the top ranks of the world's ‘bulge bracket’ investment banks. DB has also gone toe-to-toe with Goldman Sachs in terms of stock performance over the last six months. Here's why I think it will continue to do so:
"First, DB reported blowout numbers last week. First-quarter revenue rose by 21% and net profit rose by an eye-popping 55%, both numbers fueled by sharp increases across a wide range of businesses. DB's return-on-equity (ROE) of 40% blew past its own internal target of 25%. That's not only a 10x increase versus the 4% it made in 2002, but also bests Goldman Sachs' ROE of 38.8%, reported last week.
"And DB does not rely on volatile trading profits as much as Goldman Sachs, making it a much safer bet. Yet amazingly, DB still trades at a PEG (price earnings-to-growth) ratio of less than one (anything less than one screams buy). That's about a 40% discount to the industry average. And DB also recently received a tip of the hat from US rival investment bank Bear Stearns when it upgraded this Teutonic champion to ‘outperform’ last week.
"Second, DB's stock has been a strong and steady performer for shareholders over the past year, as has the overall German market. Yet despite its sluggish reputation, Germany has actually outperformed Japan by more than 5% over the last six months. And Germany versus the S&P 500? No contest, with Germany trouncing the broad US averages by more than three to one over the same period.
"Finally, holding DB in your portfolio is a terrific hedge against the US dollar's relentless decline. Because DB is a euro-based stock--even though the stock you'll buy is quoted in US dollars--every time you hear about the ‘bad news’ of the falling dollar, it'll be ‘good news’ for you. So buy Deutsche Bank at market, and place your stop at $114.90. If you want to play the options, buy the Deutsche Bank October $125 calls."