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Three Financial Sector Stocks Worth a Second Look


The financials sector ETF is a good bet, but if you hedge and can handle a bit more risk, these individual financials stocks might be worth considering.

You might have seen my firm's blog post last week in which we added financials to our "sectors we like" list. The list is short and focused: financials, technology, and energy. Tech and energy were on our list for all of 2011, and financials is the new addition. You might remember that we removed consumer staples from the list.

Typically, in our sector rotation approach, we mostly use ETFs – and we like the SPDR Sector Select ETFs. So, to get financials exposure, you can use the ETF with the symbol (XLF). It will provide you with diversity across many large-cap financials.

But if you like to use individual stocks, let's revisit some of the stocks in this space that we have talked about before. And remember, when you use individual stocks in your portfolio, it is critical to hedge your investments. Individual companies carry a lot more risk than a diversified ETF.


We have talked about Bank of America (BAC) before and as full disclosure, both my clients and I have bullish positions in Bank of America. The run up to $8 has been nice – but we bought Bank of America with a two- to three-year horizon in mind. We believe this stock has more intrinsic value than the current stock price reflects. If you read us frequently, you'll remember our investment thesis was that it has three fantastic franchises: Merrill Lynch brokerage, Investment Bank, and Retail/Commercial bank.

Bank of America's stock has started to consolidate around the $8 price. The last 30 days it has really just been moving around that mark despite spending the second half of 2011 bouncing around like a piñata. I like this recent trend. The $8 looks like resistance, but we know that resistance often turns into support later. I think the buyers have started to come into this stock, and they have been consolidating up to the $8 price. I think many of these new owners are long-term holders. If the financial system can avoid any unforeseen shocks, then I like Bank of America to move up from $8 in 2012 and into 2013.


Having spent a decade in the online brokerage business, you know I am going to be partial to the e-brokers. What average investors don't know is that their online brokerage makes most of its money from the idle cash left in the client's account – not from the commissions the broker charges. The broker re-invests the cash at higher yields than he pays to the investor to maintain that cash position.

It has been a great money maker for the better part of a decade – until interest rate reductions crashed that party. Now, the brokers have had to pull back and perform layoffs and bunker down on costs. The stock prices all reflect it. Lately, there has been a little life in the stocks, but they are still underperforming the broader financial sector and the S&P 500.

When interest rates return to normal, expect these firms to obviously benefit from an improved interest rate spread. These firms are a great example of financial firms that are completely tied to interest rates for their earnings. You could even say they are a "levered" play on interest rates since 99.9% of every dollar of improvement from the spreads will go straight to the bottom line for these firms.

The two best publicly traded companies in this space are TD Ameritrade (AMTD) and Schwab (SCHW). Both have excellent management teams and both have built a very sticky client base. Both have also not even come close to recovering to their 2007 stock levels. Of course, because of interest rates, neither is near its 2007 earnings, either.

If you have a long-term view and expect interest rates to improve by 2013 and want to be ahead of the curve on the interest rate news, consider these two brokerage stocks. (Full disclosure: I spent a decade working at TD Ameritrade and am partial to its excellent management team, of course. I have clients with bullish positions in both Schwab and Ameritrade).

Editor's Note: For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies.
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Positions in BAC
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