Banks to Bank On
Even by today's standards of volatility, the week of Aug. 31 was a crazy one for bank stocks. Citigroup (C) and Bank of America (BAC) fell nearly 10% by midweek, only to rebound later. David Ellison, manager of FBR Small Cap Financial Fund (FBRSX) and FBR Large Cap Financial Fund (FBRFX), went 60% to cash before the financial crisis. Now he says over the next five years the banking sector "will go from ugly to O.K. to good to great." He suggests buying the 8 or 10 banks with the most in deposits since they'll be able to make loans and acquire other banking assets on the cheap. "There's going to be a premium placed on [banks with] those deposits," he says. Some top names in his large-cap fund: Bank of America, JPMorgan Chase (JPM), SunTrust Banks (STI), Wells Fargo (WFC), PNC Financial Services Group (PNC), and Comerica (CMA).
A Boost to Berkshire Hathaway?
Warren Buffett is up to his old dealmaking ways. On Sept. 2, Berkshire Hathaway (BRK) partnered with Leucadia National (LUK) to buy the mortgage business of Capmark Financial Group. But Berkshire's shares are flat in 2009, while the Standard & Poor's (MHP) 500-stock index is up 14.6%. Shares fell 51% before leveling in March.
Buffett loaded up on ConocoPhillips (COP) as oil peaked. In November his foray into derivatives soured. Berkshire lost its AAA credit rating when Fitch downgraded it in March. But now investments in General Electric (GE) and Goldman Sachs (GS), which yield 10% annually and can be converted to stock, look shrewd. Its insurance business still bests rivals, notes Jerome Heppelmann, manager of Old Mutual Focused Fund, who has 5% of the fund in the stock. At Geico the number of new policies grew by nearly 11%, at a time of industry contraction.
Del Monte Foods' Pet Profits
Shares of Del Monte Foods opened 10% higher on Sept. 3 on a report of record first-quarter profits. The food and pet-products company (not to be confused with Fresh Del Monte Produce) hiked its earnings estimate 15% for the rest of the fiscal year. "Pricing has finally...exceeded the years of commodity-cost inflation that pummeled [their] profit margins," according to Credit Suisse (CS) analyst Robert Moskow. Although sales growth is expected to stay positive, he thinks the stock, at 11.48, can rise only to 12. Morgan Stanley (MS) analyst Vincent Andrews says that over the past two years, Del Monte and rivals have benefited by up to 2% growth a year from people eating out less. He calls such growth "ultimately unsustainable." Profit margins will likely fall since Del Monte plans to up marketing spending 40% to 50%, making the stock, at 10% below its 2007 peak, a hard sell. But CreditSights likes its 2015 bonds, which trade at a small discount.