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Bank Stocks a Buy or Sell? Cramer, Bove Differ

Monday, 21 Jul 2008 04:52 PM

To buy or to sell? That is the question facing investors who are interested in bank stocks now.

Jim Cramer, host of CNBC’s Mad Money, sees more losses ahead for the financial institutions. He urges investors to stay away from bank stocks.

But Richard Bove, the prominent banking analyst for Ladenburg Thalmann, sees things differently. He maintains that bank shares have been oversold and now represent a “once in a lifetime” buying opportunity.

As for Cramer, he points out that earnings and dividends drive the price of bank stocks. With millions of home loans in default, bank earnings are falling precipitously, and as a result, banks are cutting dividends, he notes.

Earlier this month, the government had to take over IndyMac, which tanked thanks to its heavy mortgage lending operation. That was the largest government bank takeover in more than 20 years, and the second largest financial institution to close in U.S. history, regulators said.

More banks are sure to follow, Cramer argues, possibly including some bigger names.

Cramer’s rule of thumb: stay away from bank stocks that fall under $5. At that level, the banks represent prime targets for government takeovers.

Any bank stock that drops so low has virtually seen its equity destroyed. That means there’s little chance of a turnaround, Cramer explains.

A bank that falls that far but still maintains some value will likely fall prey to a takeover from the strongest names left in the business, he maintains, such as Wells Fargo and JPMorgan Chase.

Cramer’s worst tier of banks: Downey, Corus, FirstFed Financial and BankUnited.

The next level includes National City, Washington Mutual and First Horizon.

Among the money-center banks, Cramer urges you to avoid Citigroup, Wachovia and Bank of America.

But Bove obviously thinks differently. He first labeled bank stocks a screaming buy in March, after the Bear Stearns bailout.

He acknowledges in an interview with Bloomberg that anyone who followed his advice then “would have lost a lot of money” by now.

But Bove remains steadfast. “I’m convinced my statement was true in March and is true now,” he says.

“We’re not looking for a 10 to15 percent gain in the price of bank stocks. We’re looking for financial stocks to do what they did in 1991-98, when they went up 600 to700 percent.”

And why does Bove see that potential for bank stocks now?

“It’s because they are being sold down on unrealistic fears about massive loan losses at depression-era levels,” he says.

“And that view stems from fears that banks won’t be able to recover their businesses.”

But the most recent earnings reports from Wells Fargo and others put a lie to those worries, Bove argues.

“Wells Fargo had phenomenal numbers,” he says. “There’s virtually no negative in the whole array. Wells Fargo is increasing market share because many of its competitors are not in the loan business any longer, and the California economy isn’t in recession.”

Bottom line: “This company is proving that you can over-earn whatever the problems are.”

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To buy or to sell? That is the question facing investors who are interested in bank stocks now.Jim Cramer, host of CNBC’s Mad Money, sees more losses ahead for the financial institutions. He urges investors to stay away from bank stocks.But Richard Bove, the prominent...
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2008-52-21
 

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