NEW YORK (
fund manager Kevin Rendino, who oversees the money manager's
Basic Value Fund
, is underweight the financial sector, as he worries lawmakers will give the sector their full attention once they are finished with healthcare.
"At the end of the day the bark was bigger than the bite," Rendino says of legislative threats to the healthcare sector, and while he believes the same may ultimately be true of financial reforms, he still expects weakness in the stocks as investors worry about the issue.
Click here for an excerpt of
interview with Rendino>>>
Relatedly, Rendino expects dilutive capital raises, not only from
as they look to pay back the money they received from the U.S. Treasury's Troubled Asset Relief Program, but also from several regional lenders.
"A lot of the issues come from a lot of these smaller companies like a
Principal Financial Group
-- a lot of the regionals, which is a place we have not gone to -- we haven't gone
to because that's where the commercial real estate issues reside," Rendino says.
On the other hand, Rendino is confident
, one of his largest financial holdings, has enough capital to meet whatever new standards are put into place. He also believes JPMorgan, trading at around $41 Wednesday afternoon, will hit $60 over the next three years as the benefits of the Bear Stearns and Washington Mutual acquisitions made during the crisis cause the bank to consistently beat estimates.
"They stole both businesses with government backstops, especially Washington Mutual," Rendino says.
Rendino worries, however, that a resignation by JPMorgan boss Jamie Dimon would hit the stock hard. Many have speculated he will leave the bank to pursue a political career, perhaps as Treasury Secretary.
"If you told me tomorrow that he was leaving, the stock would be down 10 or 15 percent," Rendino says, though he believes Dimon's relative youth, desire to "get paid" for steering his bank through the crisis in good shape, and the fact that, in Rendino's view, Dimon "detests government," are working in favor of JPMorgan shareholders.
Rendino owns several insurance names for his fund, with
The Travelers Companies
as the largest holding. He argues Travelers is well-positioned to take market share and improve margins as
is effectively out of commission.
"With the stock at $50 and an earnings estimate of $5.66 I don't really even need a catalyst," Rendino says. "The catalyst always for me as a value investor is price and when you buy something at the right price, whether it's price to book, PE, yield, whatever, you kind of limit your downside and at some point -- as long as the business continues to accelerate and do well -- at some point someone's going to notice."
Rendino also began to dip his toe in the water on
a couple of months ago, but he isn't convinced he should dive in further, as he does not see GE returning anytime soon to the $2.20 per share earnings power it enjoyed at the peak of the last economic cycle. He argues GE's industrial businesses are "late cycle" and so will be slow to benefit from a recovery. He also has concerns the financial unit may need to raise more capital.
"I need to come with $1.75 in peak earnings to want to make GE a real position and I just can't do that right now," Rendino says.
Written by Dan Freed in New York