Deutsche Bank: A Contrarian Stock With a Contrarian Strategy

Deutsche Bank gets no investors love, so it's trying a contrarian strategy.

May 24, 2014 at 8:53AM

When it comes to big banks, Deutsche Bank (NYSE:DB) looks like the ultimate contrarian pick. Between a low valuation, capital concerns, and significant risk surrounding the eurozone economy, this German bank isn't able to catch a break from the market.

But at the same time as Deutsche Bank shares looks like a contrarian bet, the bank itself is taking a business strategy drastically different from current industry trends.

Bargain bin
Whether looked at from a book value or a price-to-forward-earnings perspective, Deutsche Bank looks to be one of the cheapest banks in the industry.At only 0.55 times book value, shares of the bank trade at levels below that of the two cheapest U.S.-based major banks, Citigroup (NYSE: C) and Bank of America (NYSE: BAC).

However, Deutsche Bank offers something Citigroup and Bank of America have yet to match.

With a 2.6% dividend yield, Deutsche Bank wins decisively on the dividend front when compared with Citigroup's 0.09% yield and Bank of America's would-have-been 1% dividend before B of A uncovered an accounting error that threatens the dividend.

Deutsche Bank's dividend isn't bulletproof, but then again, no bank dividend really is. If the European stress tests find the bank in need of more capital, the dividend may be suspended to preserve capital.

However, the bank's history of tapping shareholders for cash through rights issues makes it seem more likely that Deutsche Bank would run a rights issue than cut its dividend.

From a forward earnings perspective, Deutsche Bank also carries a low valuation. The bank trades at only 7.8 times FY2014 earnings and 6.0 times FY2015 earnings based on estimates from analysts reporting to Nasdaq.

A new strategy
In recent weeks, British bank Barclays (NYSE:BCS) announced a major restructuring that would create a bad bank and, more importantly to Deutsche Bank, slash Barclays' fixed-income business. Investors cheered the moves by Barclays as the British bank looks to streamline operations and move away from businesses that have been underperforming for banks on both sides of the Atlantic.

But where Barclays sees retreat as the best option, Deutsche Bank sees opportunity.

The Financial Times reports that Deutsche Bank is busy hiring workers being cut from Barclays as it seeks to build a fixed-income side that can truly rival the most powerful U.S.-based banks.

However, growing the fixed-income business isn't free, and with stress tests coming up, Deutsche Bank announced an 8 billion euro capital increase done through private investment and a rights offering.

Although large profits remain difficult to earn in the fixed income business, success here has upside for the German bank. If it can effectively compete with Wall Street's strongest institutions, it could take on a global presence even as other European banks seek to sell off assets to pass the upcoming stress tests.

Risks
Deutsche Bank would not be a true contrarian pick unless there were some risks, and these are certainly worth considering before making an investment.

The largest risk is poor performance in the upcoming stress tests. If regulators find a capital deficiency at Deutsche Bank, the bank may be forced to cut its dividend or tap shareholders for more cash through a rights issue.

The bank also faces the risks of a slow eurozone economy. Although the economy appears to be on the rebound, conditions can change quickly, and banks are often the hardest hit. New regulations could also restrain future profits, and lawsuits from governments or private individuals could also affect earnings over the next few years.

The venture into the fixed-income business is also not without risk. Fixed income has been hampered by weaker margins, and it may be some time before larger profits begin to flow.

A unique opportunity
As Barclays exits the fixed-income business, Deutsche Bank is seizing the opportunity to expand its business and is funding it by tapping shareholders for cash. With Deutsche Bank shares trading just above half of book value and the forward P/E ratio being in the mid-single digits, these shares are clearly in value territory.

Although not without risks, Deutsche Bank is a very interesting play on a bank with a low valuation as it seeks to grow its global presence.

As the bank completes its latest capital raise, I will strongly consider initiating a position in this unloved German bank.

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and it's poised to kill the hated traditional bricks-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under Wall Street's radar. To learn about about this company, click here to access our new special free report.

Alexander MacLennan has options on Bank of American and Citigroup. The Motley Fool recommends Bank of America and owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers