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Fool Roundtable: Biggest Post-Meltdown Opportunities

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It's been a year since the market stopped being polite and started getting real. In honor of the fall of Lehman, the emergence of TARP, et al., we've been looking back on the good and the bad of the past year. To continue our efforts, we asked a few of our analysts about which stocks look good against the backdrop of the chaos and what regulations we should be instituting posthaste.  

A year later, which stock(s) do you have a new appreciation for, post-meltdown?

Morgan Housel: JPMorgan Chase (NYSE: JPM  ) has been fun to watch over the past two years. As nearly all its peers either exploded or hung on by their fingernails, JPMorgan not only survived, but prospered. It's a contrarian indicator for investors, but the fact that shares are quickly approaching an all-time high says something about the quality of this company.

More importantly, it's thriving without the public loathing Goldman Sachs (NYSE: GS  ) has received. The reason is that JPMorgan makes money the ways banks are supposed to: It lends money to people who can pay them back. It does have significant investment banking and trading operations, but the core of its franchise is build on good, old-fashioned, sound lending.

I wholeheartedly think the megabank model is dangerous and needs reform, but if there's one bank that's proved its worth, it's JPMorgan.

Those wondering how the bank did it should read CEO Jamie Dimon's biography, The House of Dimon. He took several so-so banks and turned them into what's now undoubtedly the strongest big bank in the world. The guy deserves all the credit he gets.

Alyce Lomax: I have a renewed appreciation for cash-rich, debt-free stocks. Of course, I have always been a fan of companies with strong balance sheets. During the debt gluttony phase, I wondered why on earth some companies were borrowing to, say, do stock buybacks or pay dividends. In the sage words of economist Simon Johnson, "Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms."

Prudent investors should focus on strong companies with no debt and copious amounts of cash. Google (Nasdaq: GOOG  ) will always have to fear competition from upstarts and old-school rivals such as Microsoft (Nasdaq: MSFT  ) , but its $19.34 billion in cash (a whopping $61 per share!) gives it a major survivalist edge compared to an indebted company like Sirius XM Radio. Or how about debt-free retailer Buckle (NYSE: BKE  ) , instead of debt-laden Talbots? Investors can set up a diversified portfolio across industries, focusing on strong, cash-rich, debt-free stocks. 

Alex Dumortier: I'm going to break the rules by offering up cash as the asset I've found a new appreciation for during this crisis. Superior stock selection is a means to earning excess returns, but the effect of a bubble collapse is overwhelming -- none escape the downdraft, even high-quality names such as JPMorgan Chase or Cisco Systems (Nasdaq: CSCO  ) .

Moving into cash when equities are well overpriced enables you to sidestep capital losses and bite into tastier valuations when they (inevitably) show up. Investors shouldn't overlook the importance of asset allocation, particularly during periods of stock market overvaluation.

What financial regulation would you like to see implemented?

Morgan Housel: Two in particular.

My Foolish colleague Ilan Moscovitz and I have discussed that if we can't find the will to regulate something as absurd as naked credit default swaps -- with which derivatives investors can "insure" debt they don't even own -- then the odds of passing any meaningful financial reform are nil. Simple talk of reforming the credit default swap market has been met with fierce opposition. That worries us about the prospect of overhauling more sensitive areas of the industry.

Second, and many have discussed this, one reasonable way to overcome the problem of "too big to fail" is a tiered capital structure, where bigger banks are forced to hold proportionally more capital than smaller banks. Naturally, this would discourage banks from becoming big, since profits would diminish with size.

It isn't a perfect solution (Bear Stearns wasn't that big -- just really interconnected), but it's probably more politically feasible than simply breaking up the biggest banks.

Alyce Lomax: I'm not a huge fan of regulation on principle. I believe it often has unintended circumstances, can work woefully contrary to stated intentions (or inadequately gauge future risk), and often ends up causing distortions and perverse incentives in our economy. However, I think Chuck Schumer's Shareholder Bill of Rights Act sounds pretty reasonable.

Strong corporate governance principles are important. While corporations and their shareholders may be slowly waking up to that opinion, it hasn't been happening quickly enough. Giving shareholders a voice with principles like "say on pay" seems like a step in the right direction. So does a greater emphasis on managers' need to remember shareholders' ownership role -- and shareholders' need to remember their own responsibilities, too.

Alex Dumortier: In "One Year Later, The Big Risk We're Still Facing," I wrote that Tier One financial holding companies (i.e., financial institutions that are "too big to fail") should draw up so-called "living wills" that would specify how they would be broken up and wound down in the event of failure.

Regrettably, the administration's approach to financial regulatory reform -- as outlined by Treasury Secretary Tim Geithner yesterday in a House Financial Services Committee hearing -- appears to be mainly focused on minimizing the risk of failure through stricter capital requirements, rather than openly dealing with the possibility of failure. (Regulators should enact a stricter, counter-cyclical capital regime, but that alone is not sufficient.)

By contrast, U.K. regulators are leading the way on living wills, and there is an early sign that this measure would have the desired effect -- on Wednesday, credit rating agency Moody's (NYSE: MCO  ) said that putting in place living wills for large U.K. banks "could potentially result in rating downgrades where ratings currently incorporate a high degree of government support." Any ratings downgrade would likely push the banks' funding cost up, reflecting the market's perception that the government has withdrawn its implicit subsidy.

But enough about us. What do you think? Which companies have weathered the storm so well that you'd gladly hide under their umbrellas? And what's the first new regulation we should implement?

This roundtable article was compiled by Anand Chokkavelu, who owns shares of Microsoft and Sirius XM Radio. Google is a Motley Fool Rule Breakers pick. Moody's is a Motley Fool Stock Advisor recommendation. Moody's and Microsoft are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (36)

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 September 24, 2009, at 6:27 PM, landlines wrote:

    I'd like to see a regulation which prohibits any member of Congress from providing policy advice or direction of any kind to a financial institution.

    We can call it the "If Barney calls, Hang Up!" regulation.

    It is outrageous that the very people who are huffing about the need for new regulation are the very ones who coerced banks into providing loans to people who had no ability to repay. It's even MORE outrageous that these same people are still doing the same thing today. This must stop, or our financial institutions will not survive.

  • Report this Comment On September 24, 2009, at 6:32 PM, peters46 wrote:

    Without careful study, if I were to go for the gold, I would buy NFLX. Long term, the online competition will bew fierce. Short term, during recovery, they should do great. For buy-and-hold, I would pick NUAN. Almost all businesses use voice-mail, and talking cars, kitchen appliances, etc are becoming much more popular.

    Regulations? Forcing 'Say on pay' has gotten rid of the say on pay that has existed in all companies I ever invested in. It was real say on pay, not this forced "advisory" vote of say on pay. What more can they destroy or take out of stockholders hands? I would like them to limit executive pay, perks and bonuses to no more than thirty times lowest paid employee.

  • Report this Comment On September 24, 2009, at 8:42 PM, OldYeti wrote:

    Landlines I agree

    The number of tax cheats and other assorted criminals in currently in powerful positions is unprecedented. Given the the ethics of the day I am concerned that much regulation will be designed primarily to elicit campaign contributions.

  • Report this Comment On September 24, 2009, at 8:52 PM, plange01 wrote:

    lot of rumors about hedge fund controlled hertz the one time largest car rental company is now nearing bankrupcy.another in the now endless list of hedge fund

  • Report this Comment On September 24, 2009, at 10:28 PM, mountain8 wrote:

    Until we treat the people who are responsible for this mess like the fraudulent criminals they are, they have no incentive to improve.

  • Report this Comment On September 24, 2009, at 11:03 PM, HSHEnterprises wrote:

    "coerced banks into providing loans to people who had no ability to repay." A pretty narrow look at the financial crisis, landlines. It was all Barney's fault....

  • Report this Comment On September 25, 2009, at 1:03 AM, thomdd1959 wrote:

    The Federal Reserve Bank is Set Up as a Privately Owned Banking Cartel Controlled by a Small Elitist Group of Powerful International Bankers. This Same Cartel Owns Other Central Banking Systems Worldwide Including the IMF (International Monetary Fund) and World Bank.

    We Don’t Need To Just Audit “The Fed Scam”

    We Need To Cut Off Its Ugly Head Once And For All!

    The National Sovereignty of the Great U.S.A. must never, ever be compromised in any way!

    “We the People” still know Health-care reform is really about Power and Control!

    “Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed has cost this country enough money to pay the National debt several times over. These twelve private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions. Those bankers took money out of this country to finance Japan in a war against Russia. They created a reign of terror in Russia with our money in order to help that war along. They instigated the separate peace between Germany and Russia and thus drove a wedge between the Allies in the World War." --Congressman Louis T. McFadden, Chairman of House Banking Committee 1921 through 1931 (In a speech made before the House in 1934)

    “The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse.” --James Madison

    “Every government degenerates when trusted to the rulers of the people alone. The people themselves are its only safe depositories.” --Thomas Jefferson

    Our Freedoms, Our beloved Constitution, Our National Sovereignty, “We the People” and the fact that we are a Constitutional Republic is why the United States of America is and will continue to be the Greatest Nation in the World! Americans have Heart!

    “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” –Abraham Lincoln

  • Report this Comment On September 25, 2009, at 8:20 PM, 7351jay wrote:

    Until they arrest and try some of these corporate "leaders" that got us into this mess there will only be a repetition in another 5 to 10 years. There is no deterrent for these characters.

  • Report this Comment On October 02, 2009, at 9:51 PM, WallstreetMike wrote:

    I agree with landlines comment, "I'd like to see a regulation which prohibits any member of Congress from providing policy advice or direction of any kind to a financial institution". Washington knows how to spend money & that's about it. Until they start running the gov't like a business instead of just printing money anytime a problem comes up we are all in trouble cause eventually it has to get paid back & who do you think is going to foot the bill for that. Now on to some good news. Did anyone here jump on the IPO of A123 (AONE). Got in at $17 and some change and watching this one take off. I would advise you to get in now and hold it as it's going to be $50 - $75 within 18 months. I've been trying to find some companies either here in the US or abroad that produce Lithium as I think this is where the money is going to be for the next 5-10 years. Can anyone out there tell me who these companies are and what there ticker is? I did find one in Chili that I bought the other day (SQM), I'm still looking for more. Thanks.

  • Report this Comment On October 02, 2009, at 9:54 PM, WallstreetMike wrote:

    If you do know of these companies or have any good stock recommendations that I can do my due diligence on please don't hesitate to shoot me an e-mail,

  • Report this Comment On October 05, 2009, at 5:35 PM, Beanfarmer wrote:

    Alyce Lomax get very close to right with her comment: "I'm not a huge fan of regulation on principle. I believe it often has unintended circumstances, can work woefully contrary to stated intentions (or inadequately gauge future risk), and often ends up causing distortions and perverse incentives in our economy." Until you can get our idiot politicians (and their need to use the public's money to please their voting bloc) who do not understand economics to stay out of the business of the country we will have problems. They create problems, then fixes that make new problems.

    If you have ever watched the repair crew from the water department patch a water leak in a main line, you would understand our economic problems. Where I live, we can see as many as six patches on top of older patches. What should be happening is pulling all the old patches out and starting with a new pipe section.

    The same applies to the Congress. They should scrap much of the tax code, and many of the onerous laws that force commercial enterprises into unprofitable business enterprises. Start from scratch and build something that makes sense.

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