Banking Trio: A "Popular" Pick

12/16/2005 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Popular, a Puerto Rican bank, is indeed a "popular" pick. Three leading advisors - each with a different approach to stock selection - have issued buy recommendations. Here, Kelley Wright, Doug Hughes, and Charles Carlson offer their reasons to bank on this stock.

"Having recently seen drastic declines, Popular (BPOP NASDAQ) is once again becoming the stock du jour," notes Kelley Wright, editor of IQ Trends. "The company is based in the Commonwealth of Puerto Rico and has roots dating back to 1893, the year in which its Banco Popular subsidiary was originally incorporated. Banco Popular de Puerto Rico operates BPOP's commercial and retail banking primarily within Puerto Rico, where 95.5% of its branches are located.

"Popular is priced to yield 3.0% and almost exactly at its level of historic 'Undervalue'. The company has faced problems from interest rate changes (along with many other banks), and also announced a move to dilute shares with an additional equity offering. Both moves have displeased the market and initiated drastic declines in shares. Investors that are not already heavily invested in the banking industry should find shares an attractive opportunity. BPOP remains poised for growth with its exposure to the Spanish-speaking markets. The bank maintains a low payout, insuring a safe dividend and also an A+ quality ranking from S&P."

Adds Doug Hughes, editor of The BankStock Letter, "Popular has more than $45 billion in assets, with operations in Puerto Rico, the US, the Caribbean, and Latin America. In the US, it has the largest Hispanic financial services franchise, which we think is worth something to someone. They have over 110 years of experience in the region and 15%+ growth over the past 15 years.  Insiders own over 12% of the stock, which they were buying even at much higher prices over the past few years, something we like very much.  Book value is almost $12 a share and the p/e is only 11 or so. Their 3% + cash dividend also looks very safe.

"The bottom line is that with this stock you have more than average downside risk, with ‘headline news’ potentially affecting the price. However, asset quality is good and management is smart, and perhaps a suitor could make a run at them for around $30 a share. Thus, this stock has more risk than we normally take, but more upside potential than other banks in this market. They are the number one player in their market and the recent slide in the stock has created a buying opportunity."

"Popular is suffering from a variety of factors," notes Charles Carlson, editor of The DRIP Investor. "One major influence is the disaster that is occurring in other Puerto Rico-based banks. Competitors such as Doral Financial and R&G Financial have blown up over the last year. Doral has fallen from a 52-week high of $49 to $10. R&G Financial has plummeted from a 52-week high of $41 to $12. Accounting concerns and financial restatements have crippled both companies.

"Popular has felt the ripple effects from the huge declines in these stocks, although Popular’s drop from its 52-week high of $29 has been nowhere near as damaging. Also, concerns about a slowdown in the mortgage market have hurt the stock. Wall Street is also a little skittish over the firm’s recent acquisition spree. On the plus side, corporate insiders have been buying recently. I am holding my shares and would feel comfortable adding at these levels provided you are not over weighted (not more than 5% of your portfolio) in the stock."

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