This article is part of our Rising Star Portfolios series.
As a writer for The Motley Fool, I throw a lot of ideas and analysis out there. The thing about investing is that good opportunities to buy good companies come along less often than we'd like. It's easy to get excited about a stock... it's hard to wait for the right time to buy it.
I keep myself accountable in two ways: (1) adding picks to my Motley Fool CAPS profile and (2) running a real-money banking-centric portfolio for The Motley Fool. My aim is to buy each of my picks in the latter in my personal portfolio (if not already owned), barring thesis-changing events or price swings before I'm allowed to buy per the Motley Fool trading guidelines.
Note that my CAPS profile has a lower barrier for entry than my real-money Motley Fool portfolio. Also, the picks I make in either one aren't meant to encompass a fully balanced portfolio. For example, my personal portfolio includes high allocations into buy-and-hold ETFs and mutual funds, some cash, and a house.
With those qualifications, let's check out the five stocks I've been writing about that I'm adding to my real-money portfolio. I've bought all but one (Microsoft (Nasdaq: MSFT ) ) previously.
The three bank stocks
I told you my portfolio is banking-centric, so it shouldn't shock you that three of the five are banks.
The short version of my thesis is that large U.S. banks are selling for deep discounts. These discounts make up for the uncertainty around their balance sheets (they're still minefields). Meanwhile, smaller U.S. banks are easier to figure out balance sheet-wise. They tend to stick to basic banking rather than loading up on exotic derivatives. There are a lot of these banks, and their business models are pretty similar, so I like to buy small banks that exhibit excellent metrics and pass some basic (but carefully chosen) sniff tests. I wait until their prices show weakness, and then I buy them. I'll surely miss a nuance here and there, but I hope to counter that with diversification among banks in different regions in the U.S.
So far, I've stayed away from European banks. I may dive in eventually, but it'll have to be at great prices relative to American banks. As an example, we see National Bank of Greece (NYSE: NBG ) , a traditionally strong bank that may get overwhelmed by its exposure to its country's debt and economy. It's trading for a price-to-tangible book value of 0.31. Meanwhile, Banco Santander faces a similar situation in Spain. Its country is stronger, and it has diversifying exposure to Latin America that has it trading for a higher price-to-tangible book value: 1.07. Both of those ratios are pretty darn low. It's arguable whether they're cheap on an absolute basis, but I don't think they're that cheap relative to the risk-reward opportunities in many U.S. banks, including these three:
Price-to-Tangible Book Value
|JPMorgan Chase (NYSE: JPM )
||A seemingly healthy, higher-quality bank that has Wall Street elements that obscure the balance sheet and could hide dangerous derivative exposure.
|Citigroup (NYSE: C )
||A lower-quality bank with an inscrutable balance sheet.
|Huntington Bancorp (Nasdaq: HBAN )
||A small bank that seems to be turning around.
Source: S&P Capital IQ.
Each of these three trades at a multiple lower than Santander, and Citigroup trades not much higher than National Bank of Greece. The U.S. has already gone through its scary financial crisis and shored up its banks. In addition, my working notion is that any exposure the U.S. banks have is less significant than the exposures of actual European banks. Derivatives can hide a lot, and none of these three is for the faint of heart, but I'm willing to take the chance at these historically low prices.
The two non-banks
As for Microsoft, I'm buying in based on the logic in this article, where I looked into the 30 Dow Jones (INDEX: ^DJI ) stocks for value. I may be able to get a slightly better price in the future, but I'll take this tech blue chip at current prices given its still-vibrant cash cows (Windows and Offfice) and its big cash stash.
The second non-bank is RadioShack (NYSE: RSH ) . It reported a rough quarter with profitability that rounded down to zero. Part of that is due to its discontinuation of T-Mobile products and services. It's losing T-Mobile, but it's gaining the Big Kahuna, Verizon Wireless.
So now The Shack carries Verizon, AT&T, and Sprint. I'll take that as a one-stop shop.
RadioShack has proven itself as a profitable operator in good times and bad, so I look at this poor quarter as a blip. And I'm especially heartened by RadioShack's decision to double its annual dividend payout to $0.50 a share -- that's in the neighborhood of a 4% yield. It also decided to authorize a $200 million share buyback that it expects to execute in the next 12 months. In fact, stockholders on record as of Nov. 25 get the whole $0.50 on Dec. 15. After that, the dividend will start being chunked up into quarterly installments (as opposed to annual payouts).
As I've said in the past, RadioShack isn't a company I'd love for the very long term. After all, it competes in a tough space that's moving more and more to the Web. That said, at a forward P/E ratio of 9, the market isn't giving RadioShack much credit for its past operational competence, its Verizon deal, or its solid balance sheet. And now that RadioShack is doubling down on dividends and cranking up buybacks, I'm even more confident we shareholders will get the last laugh on the market.
I'll be buying shares of JPMorgan, Citi, Huntington Bancorp, Microsoft, and RadioShack in my real-money portfolio tomorrow. I'd encourage you to continue your research on any of these that interest you.
The banking sector still holds a lot of danger and uncertainty, so focus on the latter two if investing in individual bank stocks would keep you up at night. For some more stocks that appear to be on the safer end of the spectrum, check out our new free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." I invite you to take a free copy. Simply click here.