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To Buy Or Not To Buy The Banks?


Despite what may look like bargain pricing, stocks facing selling pressure such as our financial friends may have just started to feel the pain and further declines may be in store.

By now, regardless of how active you are in the markets, I am sure you are being inundated with all sorts of noise surrounding the subprime issues and credit crunch facing Wall Street. Stocks have been volatile with the net result being a drop in prices and unless you have been sitting in all cash, you are feeling at least some of the repercussions first hand through your investment account or 401k.

The heated debate among market pundits seems to be surrounding the recent drop in financial stocks, most notably favorites such as Bank of America (BAC), Citigroup (C) or even investment banking powerhouse Goldman Sachs (GS). To buy or not to buy seems like the common question and makes sense considering the aforementioned stocks have all fallen 12%, 18%, and 19% respectively from recent highs.

As others are dumping such stocks and fear is wafting throughout, you may be tempted to flirt with the idea of entertaining those contrarian thoughts, swooping in to pick up some shares on the cheap. I mean, after all, isn't that what all great value investors do? While the thought process is constructive, consider taking a step back and curbing those feelings just a little longer. Despite what may look like bargain pricing, stocks facing selling pressure such as our financial friends may have just started to feel the pain and further declines may be in store.

While I don't fall into the camp of those anticipating a 1987-like crash, one could put things into perspective by studying past declines and understanding that Citigroup plunged over 50% from top to bottom in 1987 and 55% from top to bottom in 1990. Furthermore, during 1998 Citigroup fell over 60%, all of which makes the decline from 2006 highs of 18% look quite mild and hardly an attractive bargain.

The simple fact remains that at present we aren't quite sure just how deep the financial troubles run and until we understand more we must remain patient letting things play out.

While this may sound counterintuitive to the idea of stepping in while others are fearful, a glance at history will tell you that we are hardly at the point where fear has truly reached its max in the financial stocks.

Bottoms in stocks are not formed when everyone is debating on whether or not they are a buy. Think back a few short years when stocks like Toll Brothers (TOL) or Beazer Homes (BZH) started their decline and many paraded around telling all just how attractive these stocks were and the bargains that presented themselves.

Unfortunately, as the troubles continued to unfold, housing stocks had clearly just begun their decent and as we now know, still had a long way to go. While I am not attempting to equate the two businesses, all I am simply pointing out is the psychology that is present when a stock declines. Consider just how unpopular these home building stocks are now. Should you be looking to swoop in and pick up some bargains, this may just present the better opportunity over financials as it clearly is an area producing much more fear.

It may sound exciting and sexy to go against the trend, jumping in and attempting to pick up a few shares of a big bank or financial institution, but investors may save themselves much heartache and many sleepless nights by avoiding them altogether. When will you know it's time to step in? My guess is just at the time when everyone else in the world thinks it's a terrible idea, and from my vantage point, we are a long way from that.
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No positions in stocks mentioned.

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