Countrywide, Banks Look Like Good Buys

03/15/2007 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, president of John Dessauer Investments and editor of John Dessauer's Investor's World, takes a contrarian view of mortgage lender Countrywide and other banks, finding good opportunities there.

Countrywide Financial (NYSE: CFC , $35.89) can continue to increase its market share, but it is not likely to double its share in the next five years.

Its growth opportunities come through diversification. Countrywide recently bought a Chicago-based futures broker. Growth in the housing market and mortgage industry is another source of opportunity. And there is always the possibility of a merger or buyout.

Last month, rumors of talks between Bank of America and Countrywide surfaced. There may have been some talks, but the possibility of a joint venture or merger has faded. Countrywide reported fourth-quarter earnings of $1.01 a share, down slightly from the $1.03 earned the year before.

For all of 2006, earnings were $4.30 a share. For this year, management has a very wide range of guidance, $3.80 to $4.80. Wall Street is divided. Standard & Poor's has a "strong sell" rating on the stock. Argus says buy. Standard & Poor's sees earnings at $4.37, about flat with 2006. Argus sees earnings up 6% to $4.55. Countrywide is financially strong, with all their regulatory capital ratios above the "well capitalized" level. There is no fundamental risk with Countrywide. Standard & Poor's seems to be mirroring the crowd's fear with its "strong sell" rating.

There is always room for a modest pullback in any stock, but that is not a reason to sell a stock with such a fantastic record and above-average prospects. Next year's earnings should be above $5.00 and the stock should be $50. CFC is a Buy.

Over the last year, [net interest spreads-the difference between their cost of funds and the rates they charge]-have improved for the banks. With fed funds at 5.25%, the basic spread is back to 3%, below the 4% banks enjoyed in the past, but better than the 2.25% spread of just a few months ago.

Wall Street still has low expectations for the banks, as well as the mortgage bankers. In the case of banks, I think the problem is lingering worries about the consequences of the inverted yield curve on bank profit margins. The best opportunities are usually found when the Wall Street crowd has low expectations.

I see major opportunity for Citi (NYSE: C , $49.81) in cost control, international growth and expanding the U.S. branch network. In the case of Wachovia (NYSE: WB , $55.20) the acquisition of Golden West Financial opens significant new opportunities to sell the Golden West products across the Wachovia network. Regions Financial (NYSE: RF , $34.59) has opportunities, thanks to the acquisition of AmSouth. All are Buys.

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