Protect Yourself from the Spanish Rally
This column originally appeared on Real Money at 9:30 a.m. EDT on June 11.
NEW YORK ( Real Money) -- It's the same old song again. A nation on the verge of a banking crisis gets billions of dollars injected into the banking system and the stock market rejoices.
The biggest surprise of the $125 billion Spanish bailout is that it is actually a surprise to begin with. I wouldn't buy too much into this rally. If you are someone that likes to invest on news like this, then the smart move would have to buy several weeks ago when pessimism was growing, knowing full well that at the end of day a bailout was coming.
Instead, if this rally has a few legs it may pose a worthwhile opportunity to buy some cheap insurance in the form of covered call options on positions you already own. You may also want to consider using the price advance to build up some extra cash to put back to work when prices indicate that valuations are attractive.While I agree that Spain needed capital and providing the $125 billion was the best, least-desirable solution, the long-term value creation comes from earnings growth over time. I would also look in areas where virtually no one wants to touch today and the winner today may be Spanish banks. Specifically, I am referring to Banco Santander (STD), the Madrid-based global banking giant. Although Spanish-based, Santander derives only 13% of its profits from the home country. Europe excluding the UK accounts for just 20% of profits. The bulk of profits, nearly 60%, comes from emerging markets. With loan loss provisions at a cyclical high in the first quarter of 2012, Santander still pulled in about $2 billion in profit in the first quarter of 2012. At the current share price of $6, Santander shares yield over 12% (depending on the USD/EURO exchange rate). So far there is no indication that the dividend is going away, although with such a high dividend yield the company does have an easy way to preserve capital and still payout an attractive yield. Many will be surprised to know that in a recent survey by Global Finance of the world's safest 50 banks, the nine top banks are all based in Europe.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV