The Article of the Week

Financials have had without a doubt one of the worst years in recent memory.  From the first hint of trouble in February to the credit markets near collapse in August and the continuous write down of assets by banks from August to the present, it has proved to be a very bad year for banks and their stockholders.  Investors who bought financial stocks in August were likely under the impression that they were getting deep discounts on their shares, and they were, but from levels that were no longer relevant.  The same can be said for those investors who had the misfortune of purchasing the financials in November.  However, with February’s decline and the subsequent level of support that has been established the question arises; is now finally the time to buy financials?

Apparently, it is.  At least according to Harry Lange, the manager of Fidelity’s Magellan Fund who had a story written up about him on Bloomberg.com this week.  The subject of the piece was his recent purchases in the financials and in such names as Bank of America (NYSE: BAC) and J.P. Morgan (NYSE: JPM).  This is the first piece in the financial press, to my knowledge, that has shown a large mutual fund manager beginning to purchase financials or at the very least acknowledge to be buying financials in bulk.  I wonder if this will mark the beginning of a new inflow of capital into the financial side of the market as mutual funds begin to chase the value that they perceive to be in financials.  If a shift in sentiment is occurring it is incredibly important that private investors begin to shift into financials as well so that they can catch the momentum that the large mutual funds will likely create once they begin to expand their holdings in the industry.   

While it is clear from the many “bottoms” in financials over the last year is that it is next to impossible to call a bottom, the news that a fund such as Lange’s Magellan is beginning to increase its exposure to the financials should be seen as encouraging news.  While their primary picks mentioned in the article are Bank of America and J.P. Morgan are both interesting given their relatively strong position among their peers.  I believe that better value exists in the regional banks and that this is where investors should focus their exposure to the sector.  I plan on discussing my favorite regional banks in the future but for the time being I would give the following guidelines to those looking to invest in this part of the industry:  Stick to the area east of the Rockies, west of the Mississippi and to the areas south of the Mason-Dixon line in the Southeast, with the exception of Florida.  If you find a bank east of the Hudson, it might be worth looking into as well.  Whatever you do, please pay no attention to the West Coast, Southwest or Ohio Valley banks as they are in considerable trouble. 

If you have the time, please take a look at this short article and contemplate increasing your exposure to banks prior to the rush of mutual funds that are likely seeking to do the same thing.  The regionally sound economies of the areas listed above, coupled with low interest rates should help the banks in these specific regions produce strong results in the last half of this year.

For Further Review:

Magellan Buying Financials