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Banking on Value

09/02/2005 12:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

"Heaven help us; we are boring, and we're never going to win any beauty contests," jests Kelly Wright. "We just want to protect our principal, earn a return on investment, and grow our capital over time. Nothing flashy." Here, he looks at some undervalued opportunities. 

"The way that we look at the stock market universe is by dividend yields. When we look at the number of stocks that actually fit the criteria that we have to determine value, there’s the smallest number of undervalued stocks in the history of our newsletter, which is nearly 40 years. Something has to break. Either prices have to come down or dividends will have to rise dramatically. Either way some value has to make its way into the market.

"Meanwhile, we continue to pour the universe of stocks into a system based on our criteria. What comes out at the end is a very, very small group. Usually we are contrarians. What is usually undervalued in our world is usually out of favor and hated by everyone else. One sector where we are still finding undervalued opportunities is in the banking category.

"Of the 683 stocks that fall within the banking category, only three are undervalued. One of these is Citigroup (C NYSE), which the market absolutely abhors right now. The financial giant has roots extending back to 1812. The company remains a key area of value in the financial sector. It is important to note that Citigroup’s price far below its Undervalue levels has not resulted from drastic declines. The company’s many dividend increases have raised its Undervalue prices steadily above its current trading range. Very low downside risk, combined with an excellent record of dividend increase and an almost 4% yield should insure that Citigroup remains a profitable proposition for the long-term."

"Meanwhile, Washington Mutual (WM NYSE) just raised their dividend for the 28th quarter in a row. Their board of directors is either highly deluded, or they feel really good about the future of their company. Because they just continue to raise the dividend all the time. So we see those this stock as a value.

"Over the last 170 years, Old National (ONB NYSE) expanded its regional operations to 120 banking centers from Indiana to Illinois, Kentucky, Tennessee, and Ohio. Banking expansion is expected to continue throughout urban areas in the Mid-West. At a recent price of $20, ONB continue to be undervalued. From current levels the company has an almost 138% upside potential to an Overvalue price of $48, low yield of 1.6%. Of continuing concern to us is ONB’s loan portfolio and its ability to withstand further changes to interest rates and the housing market. A high payout ratio leaves little room for further earnings decrease before the current 3.7% dividend would be placed in danger."

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