Unrelenting pessimism over fallout from the mess in subprime mortgages has weighed heavily on stocks in recent months, as investors fear that turbulence in the credit market will result in a full-blown credit crunch.
Particularly hard hit has been the financial sector: Shares of the Financial Sector SPDR (XLF Quote - Cramer on XLF - Stock Picks), though they have recovered some ground recently, are down about 5% year to date, making it the worst-performing S&P 500 sector by far. But the focus on tidbits of negative news to the virtual exclusion of some very positive numbers for the sector as a whole may mean that investors have overreacted. Specifically, we see three factors that could make XLF a very attractive investment going forward: 1. Earnings estimates are rising, not falling. Although debt-related problems are a hit to earnings in some places, they are not the only factor affecting earnings for XLF. Strength in other areas, particularly in merger-and-acquisition activity (which brings tremendous fee income to Wall Street firms) has helped offset weakness in mortgage investments, while insurance firms have seen estimates rise as well. As a result, overall estimates for XLF have risen steadily since the start of this year, even though the subprime issue has been conspicuous for quite some time.|
Upward Trend in Earnings Estimates Estimates for XLF's full-year 2007 EPS; January=100 |
| Source: AltaVista Independent Research |
multiples, compared with 15.8 times for the S&P 500.
XLF also has a dividend yield of 2.8% which, if not something to write home about, still compares favorably with the paltry 1.8% yield on the S&P 500, and is close to the 3.0% yield of the Utilities Sector SPDR (XLU Quote - Cramer on XLU - Stock Picks).
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XLF is Cheap Price to earnings ratios on estimated 2007 EPS. |
| Source: AltaVista Independent Research |
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