Unpolished Financial Gems

You'll have to look beyond Wall Street's scandal-spattered blue chips.

Investors seeking quality financial stocks at reasonable prices are going to have to look beyond Wall Street's scandal-tainted, struggling blue chips. After a fourth quarter runup, many now look expensive. The best hope of making real money is betting on lower-profile companies. Some have made great strides, thanks to astute managers, but the stocks still sell at deep discounts. "When you've had this robust a market move, you need to look for unpolished gems," says Guy Moszkowski, a financial-services analyst at Citigroup's Salomon Smith Barney.

Moszkowski likes companies that have strengthened their business lines despite the downturn. For example, Pittsburgh's Federated Investors Inc. (FII ) diversified into equity funds, giving it greater exposure to an eventual market recovery. But few investors seem to have noticed. The company's shares aren't much above their 52-week low and trade at 14 times estimated 2003 earnings-- vs. 16 times for most asset-managers. Merrill Lynch & Co. forecasts the stock could jump 41%, to reach $36, in the next 12 months.

A regional bank flying below most investors' radar is Wachovia Corp. (WB ) in Charlotte, N.C., which operates mainly in the Southeast. When it merged with First Union Corp. in 2001, investors initially panned the deal as the marriage of two small fry that created a feeble giant. But the linkup increased the bank's client roster, and now restructuring costs are behind it. Some pros believe the bank is almost through its growing pains. Its shares are trading at 12 times the consensus estimate for next year's earnings. Most retail banks trade at 15. "The price hasn't moved at all," says Alan F. Morel, manager of Senbanc Fund, owned by Pittsburgh's PNC Financial Services Group (PNC ). He believes Wachovia's $35 stock is worth $68.

Philadelphia's Sovereign Bancorp (SOV ), a savings and loan that is aggressively building up a book of business loans, is another makeover story. "If they continue to do that, the market should afford them a higher multiple" than its present 10 times estimated 2003 earnings, says Jeff Diamond, manager at Franklin Mutual Financial Services Fund. If it becomes more of a commercial bank, its present $14 stock price could reach the low 20s, he says.

If there's an exception to the avoid-blue-chip-banks rule, it's Citigroup (C ). Investors such as Anton V. Schutz, portfolio manager at Burnham Financial Services Fund, have been buying Citi's shares, which are down 27% from their 52-week peak. Although the bank is the subject of investigations for everything from making misleading stock recommendations to helping Enron hide losses, it has consistently made money. Having proved its ability to expand revenues through this recession, Citi "looks pretty darn cheap to me," says Tom Goggins, manager of the John Hancock Financial Industries Fund.

Not so elsewhere on Wall Street. J.P. Morgan Chase & Co.'s (JPM ) stock has jumped 53% from its low in October, yet money managers suspect more nasty surprises lurk in its credit-derivative and venture-capital portfolios. Once that cloud lifts, the stock could be a bargain if it falls below $20. "I will become interested again when they've had a clean quarter without special charges," says Schutz.

News from many financial outfits may get worse before it gets better. But there are still gems to be found.

By Emily Thornton

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