In investing, the crowd tends to follow the latest shiny object. A stunning out-of-context statistic or a sexy one-sentence story often trumps substance.
Today, I'm going to pick apart three such stocks and give you four overlooked stocks that are better. Let's get started!
Stock 1: The risky bank
The stock the crowd falls for: Synovus Financial
A lot of investors are attracted to Synovus because of the seemingly cheap numbers -- led by a stock price well under $5 and a price-to-book ratio of just 0.86. Add in a Tier 1 capital ratio of 13.1% and this initially looks like a good risk.
But dig deeper and it's not so pretty. A whopping 5.9% of its loans are in trouble (even Citigroup's only at 3.4%), and it's not sufficiently writing those loans down, which means that its losses could get even worse.
The stock that's better: BB&T
For a better regional mid-Atlantic bank, look to BB&T. It's pricier, but with that added price, you cut Synovus' bad loan percentage by more than half and get a bank that's actually turning a profit.
Stock 2: The American carmaker
The stock the crowd falls for: Tesla
Since going public this summer, Tesla's up 80%. But right now, Tesla is more idea (the promise of an electric car revolution) than reality (its $2.8 billion market cap is supported by just $99 million in sales). Tesla faces the challenges of extending its product line and growing into a more mainstream carmaker.
The stock that's better: Both Ford
Unlike Tesla's shiny promise of the future, many investors view Ford and GM through the rearview mirror. They both had some ugly years behind them, but Ford is well into its turnaround and GM is in much better share after its bankruptcy and subsequent IPO.
Behind its renewed focus on quality, Ford's pumped out enough profitability to support a P/E ratio under 10. All with no government help.
On the other hand, the investment thesis for GM is all about government help. Thanks to the government, GM has emerged with a relatively clean balance sheet, a better cost structure, and serious tax breaks. Given those advantages, GM can focus on its streamlined offerings and even competing with Tesla with its just-launched Chevy Volt.
At current prices, the old guard of Ford and GM offer a better risk-reward than Tesla. Don't let daydreams of the future and nightmares from the past cloud the present.
Stock 3: The risky bank -- global edition
The stock the crowd falls for: Banco Santander
Here's the pitch: A quality Spanish bank trades down because of overblown fears that Spain is going to be the next Greece or Ireland.
But here's the thing. It's not trading down all that much.
The stock that's better: PNC
Yes, even with a global view, I prefer a large but relatively obscure American bank. The case is just too compelling to ignore.
If you're intrigued by Banco Santander, PNC is a better choice. On the quality side, it has a similar percentage of bad loans, and on the price side, it's trading for similar multiples on tangible book value and earnings. So, basically, you're getting no discount for Santander over a comparable American bank despite the large unknowns in the Spanish economy.
I'm all for taking a shot on a risky foreign bank, but the price has to be right. For Banco Santander, it just isn't.
Even with a near-zero dividend yield (0.7%), I'd much rather buy PNC at today's prices. In fact, once the government allows the larger U.S.-based banks to boost their dividends (which may be soon), don't be surprised to see the market suddenly care about banks like PNC.
Rather than the three overrated stocks above (Synovus, Tesla, and Banco Santander), I've made the case for four stocks (BB&T, Ford, GM, and PNC) that I believe are better buys. If you've got room for one more, click here for our brand new free report, "The Motley Fool's Top Stock for 2011."
