Which Financials Will Survive and Thrive?

As the 18th-century English poet Alexander Pope famously wrote, "Fools rush in where angels fear to tread." We've seen evidence of that observation over the past decade, with the dot-com and real estate bubbles being the most prominent.

But after financial stocks largely cratered following the debacles at Bear Stearns, Lehman Brothers, and AIG (NYSE: AIG  ) (and sadly, that's only a few of the examples), it appears that fools and angels are fearing the same ground. But should they?

Sorry, Alex
Put simply, when we look back on these times, the current situation with financials will be seen either as a tremendous contrarian-buying opportunity or just the beginning of a long depression in the financial sector.

Even the best minds aren't sure right now which it will be. Although Warren Buffett made a multibillion-dollar investment in Goldman Sachs (NYSE: GS  ) last week, he was quick to note that his confidence was in Goldman itself and the prospects of the Treasury's bailout plan, and not necessarily an endorsement of the entire financial sector.

As he said in his 2008 Berkshire Hathaway shareholder letter, "You only learn who has been swimming naked when the tide goes out -- and what we are witnessing at some of our largest financial institutions is an ugly sight."

Put some clothes on!
While some of our largest and oldest financials have been running for the bushes in shame, Buffett's purchase of Goldman forces us to ask: Are there any other properly covered financials out there?

The 115,000 members of Motley Fool CAPS think so. They rate their favorite and least-favorite stocks, and their collective wisdom has proved to be quite robust: Our data has shown that four-star and five-star-rated stocks outperform the market.

So what do our CAPS members like? Here are the financials that have earned four and five stars -- the highest ratings possible -- from our CAPS community.

Company

CAPS Rating (5 Max)

CAPS Rating 30 Days Ago

Umpqua Holdings

*****

****

Interactive Brokers

****

****

optionsXpress

*****

*****

TD AMERITRADE (Nasdaq: AMTD  )

****

****

Brookfield Asset Management (NYSE: BAM  )

****

***

Source: Motley Fool CAPS data as of Sept. 26, 2008.

In addition, these stocks are all well below their 52-week highs, so they would be a good place to start looking for values in the financial sector.

Conversely, stocks with lowly one- or two-star ratings have underperformed the market and should be handled with extra care. Here are a few financials that are out of favor among the CAPS community.

Company

CAPS Rating (5 Max)

CAPS Rating 30 Days Ago

Citigroup (NYSE: C  )

**

**

The Bank of New York Mellon

**

**

SunTrust Banks (NYSE: STI  )

*

*

KeyCorp

*

*

PNC Financial (NYSE: PNC  )

*

*

These low ratings don't mean that Citigroup or SunTrust will necessarily turn out to be terrible investments, but you should consider their lack of support from the CAPS community as a sign that there might be even more danger ahead.

See, CAPS has been pretty astute in calling some of the worst financial collapses. As far back as April 2007, Fannie Mae, Freddie Mac, and IndyMac were all one-star stocks, and in March of this year, Fool co-founder David Gardner used CAPS data to warn investors to stay away from Lehman, which was a one-star stock at the time. Heeding the CAPS community's advice to at least avoid investing in these companies would have saved you from huge losses.

Don't catch falling knives
Knowing which stocks you should avoid is as valuable as knowing which stocks deserve further research. Remember Buffett's rules of investing:

  • Rule No. 1: Don't lose money.
  • Rule No. 2: Never forget Rule No. 1.

Instead of sorting through the trash for financials that have deserved their recent markdowns, you're much better off looking for financials that have had very little to do with the toxic subprime mortgages and structured investment vehicles that are causing so many problems today. They'll be the ones that will survive and thrive when the market turns around.

Using our CAPS ratings is an invaluable way to kick-start your research or force you to rethink your investing ideas because those ratings have proved to have predictive value.

And we're using it, too. At our new Motley Fool Pro investment service, set to debut next week, we're using proprietary CAPS data to help us create an every-market, real-money portfolio. Using $1 million of the Fool's money, we'll be going long and short equities, exchange-traded funds, and options -- all to create a well-rounded and robust portfolio.

To learn more about our strategy at Motley Fool Pro, just enter your email address below.

Todd Wenning wants to take a moment to salute the men and women of the U.S. Armed Forces. He owns no shares of any company mentioned. Brookfield Asset Management is a Motley Fool Global Gains pick. optionsXpress Holdings, Umpqua, and Berkshire Hathaway are Stock Advisor recommendations. Berkshire Hathaway is also an Inside Value pick. The Fool owns shares of Berkshire Hathaway, and its disclosure policy takes its cheesesteaks "wiz with."


Read/Post Comments (3) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 03, 2008, at 7:34 PM, enet12001 wrote:

    I was sent an article from "The Motley Fool" titled "The ONE shock proof investment that just goes up." And "Just look at these gains last year from water technology companies..." The stocks and there last year gains that were listed in this article were as follows:

    CCC -- stock up 283%

    HDRX -- stock up 325%

    PNR -- stock up 528%

    WWAT -- stock up 630%

    I personally went back and check out these stocks via Bloomberg.com and none of them were even close to showing these gains, in fact HDRX closed the year as a loss.

    So what gives with these gentlemen and there newsletter? Would anyone from "The Motley Fool" please explain this to me?

    Thank you!

  • Report this Comment On October 04, 2008, at 4:06 PM, tablerox wrote:

    I too would like an explanation.

  • Report this Comment On October 06, 2008, at 2:12 PM, RookieR wrote:

    I subscribe to the Stock Advisor for seveal few years. I seem to pick the losers that are suggested, HRP, USG, Dell to name a few. Intl flat lined for more than a year. After a slight rise I sold it. The stock pickers may be up overall but I am down and I can't afford to buy them all. I realize it is a buy and hold but these picks are down right bums.

    RookieR

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 741075, ~/Articles/ArticleHandler.aspx, 10/21/2014 9:57:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement