Banking Bets

05/14/2004 12:00 am EST


Small bank specialist Doug Hughes and value investor Richard Young both see takeover potential in regional banks. Ken Kam's gurus at Marketocracy look to Cleveland banks. Meanwhile, Richard Band sees opportunity in the country's biggest banking operation.

Hughes, Doug"Kaiser Federal Bancorp (KFED NASDAQ) is a mutual holding company which just sold 5.6 million shares of common stock at $10.00 per share in a subscription offering. The stock opened at $14 and has headed south ever since, along with most bank stocks over the past few weeks. Kaiser has earned a 5-star superior rating for 40 straight years. They have four locations in Los Angeles, San Diego, and Santa Clara counties and have served this market for over 50 years. Trading at 1.70 times book for a MHC, is cheap, especially for the strong markets they are in. Their asset quality is near perfect and reserves are very strong and total assets are $448 million. Look for strong earnings growth for several years and a sale of the bank in four-five years at $26-$29+ a share. The bottom line is that they are in the right markets where there is plenty of growth and the recent market sell-off has given us all a chance to get in, at a fair price. Accumulate under $11.50 and buy all you can under $11. Downside should be limited to around $10.50 a share."

Young, Richard "Looking at the possibilities for long-term compounding, my one of the best-positioned industries for the next decade is the small- and medium-size bank group," says Richard Young, editor of Intelligent Investing . "I'm very enthusiastic about this sector. The number of banks is going to continue to decline over the coming decade. Takeovers will be rampant and most at premium prices. I have added two new banks to my list- -New York Community Bancorp (NYB NYSE) and Century Bancorp (CNBKA NASDAQ). Buy both of these conservative dividend-payers. We recommend adding them to our position in First National Bankshares (FLB NYSE). Within five years, over 70 million Americans will begin to retire. The Baby Boomers will be on the move, and state tax-free, semi-tropical Florida will be the #1 target. The bank is hunkered down in Naples, the top Florida hot spot for the super affluent and conservative."

Kam, Ken"Despite the backdrop of rising rates, the last top two buys from the m100-the top performing investors among the 50,000 monitored by Marketocracy-- are financials: Cleveland-based KeyCorp (KEY NYSE) and Charter One Financial (CF NYSE)," says Ken Kam , manager of the Masters 100 Fund. "In April, KeyCorp, which offers consumer and corporate banking, said its first-quarter earnings were 59 cents per share, up 15.2% from the year before and ahead of the average analyst expectation of 53 cents. With a p/e of 13.59 and a 1.77 price-to-book ratio, the gurus liked the value. Charter One isn't as cheap as KeyCorp, but it did raise its quarterly dividend to 29 cents per share from 26 cents two weeks ago. And the company needed it, after missing first-quarter earnings expectations of 69 cents per share with a figure of 22 cents. Charter One said, however, that the low number reflected an 'unusual' debt prepayment charge and that it otherwise would have earned 71 cents per share. Regardless, it closed April 7.3% lower than it opened the month."

Band, RichardMeanwhile, Richard Band, editor of Profitable Investing , suggests a large-cap banking issue. He says, "If coming rate hikes aren't about to wreck the economy, it stands to reason that some of the best stocks to buy right now are those that have been knocked down by exaggerated fear of rising rates. That insight steers us to Citigroup (C NYSE), the world's largest bank. Citigroup management welcomes higher rates, as the byproduct of a stronger economy. For one thing, brisk economic growth means fewer bad loans-- a banker's dream. Moreover, Citi has rearranged its balance sheet to match assets and liabilities more closely. In other words, as rates increase on Citigroup's deposits and other liabilities, the company will earn higher yields on its loans, securities, and other assets. What else is there to like? Plenty: Not only big and safe, Citigroup today is cheap as well. Citi just announced its fifth consecutive quarter of record profits. It pays a generous 3%. And at only 13 times this year's estimated earnings, Citi is trading at roughly parity with the long-term growth rate. And the company is aggressively buying back its own shares. In the past quarter alone, it repurchased 10.5 million shares. Another $2.2 billion is authorized for future buybacks. Buy at $53 or less. I'm targeting $60 by year-end."

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