Bottom-Fishing Financials Can Be a Winner

Bank stocks. The very words can make investors shudder with thoughts of writeoffs, billion-dollar losses and general turmoil. Some investors, full of hope and eternal optimism, have repeatedly called for a bottom in these stocks.

Richard Bove , a noted bank analyst, called for a bottom months ago, only to be proven wrong. A certain Great American Cheerleader and Champion of Free Market Capitalism started calling for a bottom before they even started to decline in price.

Since the announced bailout of Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take), bank stocks have bounced higher after steadily falling for over a year. Most of these stocks are down 50% or more and bottom-fishing is rampant.

This then raises the question. Have bank stock bottomed, and should you buy at these levels?

Oppenheim analyst Meredith Whitney still says no. This is important for one reason. She has been exactly tight throughout the entire credit crisis. She thinks there are more writedowns and losses to come, and the current crisis will run through next year, and maybe even into 2010.

For the major banks with heavy exposure to leveraged portfolios full of various rocket-science real-estate securities, I think she is right. For the medium to small banks, the bottom will come when the real-estate market stabilizes and credit markets can loosen up a bit. Prices do not have to go up. They just have to be stable enough to allow bankers to feel comfortable lending on real-estate collateral.

I do not see how that happens until the ever-growing list of foreclosed properties is cleared out, and I think that takes until sometime in 2009. Foreclosed sales focus on getting back as much of the loan as possible, not the best price possible. They will put downward pressure on home prices for several months more.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.