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2 Banks to Look at Post-Cyprus

On the back of yesterday's losses, stocks are moderately higher this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.45%% and 0.53%, respectively, at 10:15 a.m. EDT.

Investors still have an eye on Cyprus. Although the Southern European island state has a bailout in hand, the full ramifications for the eurozone are not yet known, and the situation is fluid -- the Cypriot government announced only last night that banks, which were meant to reopen today, will remain shut until Thursday.

Crisis and opportunity
Yesterday, I encouraged investors clinging to asset allocation as the sole determinant of investment risk to throw out their risk framework and embrace a contrarian attitude. This morning, I'm going to give more examples of how to apply that attitude.

The Cypriot bailout has produced a vivid example of the risks associated with banks -- for customers, investors, and creditors. A protracted bank holiday, customers lining up around the block to withdraw money from ATMs, and a massive levy on large bank depositors -- these are unsettling thoughts even for U.S. investors, as they dredge up the fears we experienced at the worst of the financial crisis in the fourth quarter of 2008 and the first quarter of 2009.

Cyprus' bailout debacle is the latest event to reinforce investors' aversion to owning bank shares. Naturally, Southern European banks bear the greatest burden; just have a look at the performance of Spain's two largest banks, Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) and Banco Santander (NYSE: SAN  ) , since March 15 -- the Friday prior to the weekend during which Cyprus came up with its first failed bailout program:

SAN Chart

SAN data by YCharts.

Both shares have woefully underperformed both the MSCI EAFE Index and Spain's IBEX 35 Index. That may be warranted -- to an extent -- as the ultimate impact of Cyprus is not yet clear. However, keep in mind that excessively depressed valuations can mitigate a lot of risk. Both banks trade at a discount to their book values and a relatively modest premium to tangible book values (roughly one-fifth). On an earnings basis, they trade on less than 9.5 times the estimate for the next 12 months' earnings per share.

I'm not recommending that investors rush out and massively overweight their portfolios with these two banks. However, in a situation like this, these are precisely the type of stocks that contrarian, value-oriented stock-pickers should immediately gravitate to. Ultimately, you may decide they're not worth buying, but they're certainly worth a look.

With even large U.S. financials still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal or if finance stocks are a screaming buy today. The answer depends on the company, so to help you figure out whether JPMorgan is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!

Read/Post Comments (2) | Recommend This Article (4)

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  • Report this Comment On March 26, 2013, at 7:32 PM, robotclo wrote:

    Agreed. The downside is 100%, but the upside is 1000% or more for some of these banks. Solid odds for speculative money, if you have the patience to wait it out.

  • Report this Comment On March 27, 2013, at 9:36 AM, Teacherman1 wrote:

    San is a steal at today's price.

    BBVA needs to come down a little more because there is too much of a spread between them.

    Neither one is nationalized, and neither one is likely to be nationalized, but in this world, anything is possible, especially when the EU is involved.

    I am adding to my position in both today, but more SAN than BBVA.

    I found it interesting that on Cramer's site, The Street, they are still using the name of the bank in Chile that used to have the ticker symbol of SAN, though they did get the numbers correct.

    As I said before, there is a lot of confusion right now and the shorts are taking advantage of the downward momentum to drive them down even further, so I am taking advantage of this "overshoot" to lower my cost for a longer term hold.

    Do your own DD, but I think SAN is getting near it's short term bottom.

    JMO and worth exactly what I am charging for it.

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Related Tickers

9/30/2016 4:20 PM
^DJI $18308.15 Up +164.70 +0.91%
BBVA $5.96 Up +0.21 +3.64%
Banco Bilbao Vizca… CAPS Rating: ***
SAN $4.41 Up +0.14 +3.28%
Banco Santander Ce… CAPS Rating: ****