In the Cramer blog post, “How to Survive the Banking Meltdown”, which bank ranked “Almost as Bad as the Worst”?
Almost as Bad as the Worst: National City (NCC), Washington Mutual (WM) and First Horizon (FHN)
FIRST HORIZON NATL CORP
FHN
7.23 1.34 +22.75%
NYSE
On Monday, Rebecca Darst said banks were rattled by the options action surrounding which stock(s)?
This seemed to get under way on Thursday, in any event, with Zions Bancorp (ZION - Annual Report), after an analyst suggested that Zions may face mortgage defaults in Arizona and Nevada.”Darst said the options action around Zion sent ripples through the whole sector.
In the models I follow, Zions gets high marks for potential return and free cash flow, but scores poorly for earnings momentum, earnings quality and price momentum.
In his Friday “Game Plan,” Cramer said banks may bottom soon. But he warned of possible “catches,” including:
The catch here, and there always is a catch, is that if HOV and TOL report poor numbers and the U.S. has lost more jobs, Cramer’s predicting next week would be horrible for the financials. American International Group (AIG - Annual Report), Washington Mutual (WM) Wachovia (WB - Annual Report) and Bank of America (BAC) could sink to multiyear lows.
None of the stocks fare especially well in the models I use. HOV doesn’t even make it past the screens, and Toll Brothers scores among the worst for earnings momentum and return potential.
Bank of America scores poorly for earnings quality, earnings momentum and price momentum. The same applies for Wachovia, which also ranks low for free cash flow. Washington Mutual, by contrast, has a high free cash flow ranking but is also among the worst ranked for return potential.
AIG is the only name on the list that is not a net negative in my models. Its poor scores for earnings momentum and price momentum are offset by high marks for earnings quality and free cash flow.
Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.
Small Cap Watch List (Track at Marketocracy) member First Regional Bancorp (FRGB) today reported strong net income for the second quarter ended June 30, 2007. Total assets, deposits and net loans all posted increases over the prior year, although net income for the first six months of 2007 was approximately 2.4% below last year’s record first half. Net income for the second quarter of 2007 was $8.6 million, equal to 66 cents per diluted share, compared with $9.6 million or 74 cents per diluted share in the corresponding quarter of 2006 and consensus estimates of $0.67.
Part of the shortfall in earnings was likely due to the company’s decision to take a higher loan loss reserve:
To keep pace with loan growth, First Regional added $300,000 to its loan loss reserve in the second quarter of 2007. This brought the balance of the reserve to $21.1 million at June 30, 2007, compared with nonperforming assets of just $13,000 as of the same date.
It may seem like a $21.1 million reserve against just $13,000 in nonperforming assets is overly conservative. But last year the company added $1.5 million to the reserve. If the company had simply taken the same amount as a reserve this year, net income would have been about 10% lower than reported. In terms of the total loan balance of $1.9 billion, the reserves are slightly more than 1%. We have seen from the Bear Stearns example how quickly loans can become worthless.
This is the second time I’ve noted that additions to the loan loss reserve were below the prior year levels. It could be as simple an issue as higher actual losses last year and improved credit performance this year. However, given the overall lending environment I would expect the opposite. It is something I will continue to keep an eye on.
With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.
Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:
I will continue to track both lists on StockPickr.
I am proud to host this edition of the Festival of Stocks. Since you are here for some stock picks, let’s get to them!
Rock Your Stock rang in first with Callaway (ELY) is Hot. He says the stock is on a tear and has the fundamentals to back it up.
Rick Casterline at Once More Unto the Breach figures he can sleep when he dies. No way is he going to do it during day 3 of the Berkshire Hathaway Annual Meeting.
Average Joe at Investment Jungle weighs in with a review of Small Cap Watch List (Track at Marketocracy) member First Regional Bancorp (FRGB). Joe and I have frequently been on the same investment page.
Project Stocks submitted Beat the Market With Only 15 Minutes of Work Each Year. The idea is to buy each year’s top performing fund and hold it for a year. Seems simplistic, but it actually has some support from recent academic research.
Neural Market Trends wonders about the effect of financial asteroids on market trends.
Fiscal Times tells us the stocks Business Week ranks as most innovative tend to perform better.
Big Cajun Man has found a real lu-lu.
TJP at Investor Trip explains what he missed when he first got Sirius (SIRI).
Trader’s Narrative is calling a bubble… in China.
Self Investors outlines a successful day trade in Force Protection (FRPT).
Silicon Valley Blogger offers 5 tips for evaluating your portfolio.
George at Fat Pitch Financials presents his five favorite ways to hack into the web’s resources for investors. I downloaded the Excel add-in and am looking forward to trying it out.
Sox First outlines what went wrong with the planned private equity takeover of Qantas.
And what the heck? I’ll toot my own horn by presenting my take on United Industrial Corp. (UIC).
Our Watch Lists continue to fare well, although a certain regional bank weighed heavily on the Small Cap Watch List (Track at Marketocracy) this week. As a result, that watch list lost 38 basis points while the Russell 2000 and S&P Small Cap averaged 1.23% gains. Still, the Small Cap Watch List (Track at Marketocracy) maintains its overall lead since inception on January 31.
The Mid Cap Watch List (Track at Marketocracy) gained 2.78%, compared with 1.39% for the S&P Midcap.
The Large Cap Watch List (Track at Marketocracy), at 2.11%, was just a hair behind the S&P 500’s performance for the week.
Finally, our legacy watch list (unchanged other than corporate actions) from June 2006 gained 1.67% and our heavily hedged personal portfolio eked out a 33 basis point gain.
Overall, quite satisfying.
Small Cap Watch List (Track at Marketocracy) member First Regional Bank reported earnings, saying:
First Regional Bancorp today reported record first quarter financial results for the three months ended March 31, 2007. Continuing to generate positive results, the company posted increases in net income, as well as total assets, total deposits, net loans and total capital.Net income for the first three months of 2007 was $8,991,000, equal to 69 cents per diluted share, an increase of 6% from $8,484,000, or 65 cents per diluted share in the corresponding quarter of 2006. Results have been adjusted to reflect the 3-for-1 stock split effected in August, 2006.
The lone analyst estimate called for $0.72 in earnings per share, but the stock actually regained some its losses for the day in after-hours trading. Concerns over bad debt appeared to have been alleviated, as the company said:
Reflecting the quality of the loan portfolio, no increases in reserves for loan losses were required during the quarter. The reserve for loan losses totaled $20.7 million at March 31, 2007, and nonperforming loans amounted to just $63,000 on that date.
The lack of a loan loss provision is a mixed bag, however. On the one hand it indicates lower earnings quality since last year’s earnings were impacted by a $2.3 million reserve. In fact, earnings were down on a cash basis compared to the same quarter last year. On the other hand, though, the existing provision was higher as a percentage of gross loans and was many multiples of the current underperforming loan portfolio. These measures suggest that it was at least somewhat appropriate to maintain the reserve as is rather than adding to it.
Investors should continue to monitor the reserves as well as the actual bad debt expenses to be certain which side of the story will ultimately prevail.
With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Small Cap Watch List (Track at Marketocracy).
Frankly, we were surprised at the amount of turnover in our screens. Only 9 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Still, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.
So without further ado, the names on the chopping block from the previous list are:
Silgan Holdings (SLGN - Annual Report); Steel Dynamics (STLD - Annual Report); NVR (NVR - Annual report); Middleby (MIDD); Vector Group (VCG); Sanderson Farms (SAFM); Downey Financial (DSL); Waddell & Reed (WDR); Wilshire Bancorp (WIBC); Harrington West (HWFG); Gamco Investors (GBL); Apria Healthcare (AHG); Papa John’s (PZZA); Cato Corporation (CTR); Meredith Corporation (MDP); CSG Systems (CSGS); Energy East (EAS); Dynamics Research (DRCO); Ingram Micro (IM); and Dade Behring (DADE).
The new watch list will be:
We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)
For your viewing pleasure, the Small Cap Watch List (Track at Marketocracy) (to be measured against the S&P 600) follows.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.
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