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Thinking Beyond Today

By: Ted Allrich
Posted: 10/19/2011 1:15:00 AM

Most investors understand that stocks reflect activity anticipated 6 to 9 months from now.  That's why some stocks go up when they report losses.  It's because management announces new contracts or new cash flows that will create more profits in the future.  Or investors simply boost a stock's price because they think the worst is over and future revenues and profits will increase.  Banks are a good example of this, though they're still selling cheaply.  Still most of them are well off their lows as their numbers are improving in certain areas such as loan losses.

With that in mind, here are a few ideas to anticipate that are beginning to grab some investors' interest and enticing them to start buying.

- Home Building stocks.  These rallied for a while but then real facts took them back down.  Now the builders themselves are showing signs of optimism.  They're seeing more interest from buyers and anticipate low interest rates for some time will persuade home buyers to act.   Builder confidence in the market for newly built, single-family homes rose four points to 18 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October, which was released today (October 17). This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010.  Several stocks in the home building group include Beazer Homes (BZH), Pulte Homes (PHM), Centex (CTX), B.R. Horton (DHI), Lennar (LEN), KB Homes (KBH), and Hovnanian (HOV).  Another way to invest in a broad index is through the  iShares Dow Jones Home Construction Index (ITB).  Its holdings include the major home builders that are publicly traded.

- Banks.  Most of the larger banks reported earnings.  Some of them were very good because of one time events (Bank of America: BAC).  Others disappointed a little (Wells Fargo:WFC) because revenues were a little shy.  Others did well because international business picked up (Citigroup: C).  The thing to keep in mind is that not all banks are the same.  They may all say bank in their names, but they are each trying to carve a niche, usually a big niche, to help differentiate themselves.  If they don't, they simply compete with the next behemoth for commodity business, like single family, conforming mortgages.  There isn't much money in commodity businesses.  So they look for areas others don't do or can't do as well.  Bank of New York, Mellon (BK), for example, is mostly a custodial bank.  It focuses on wealth management and securities servicing.  You can't walk into a branch ask for the loan department.  They don't have one.

Banks have been beaten down.  Most are selling well below book value.  Earnings just out suggest there are areas of improvement, like business lending and refinancing for home mortgages.  But there is a concern over net interest margin (NIM) weakening as lower interest rates are pushing down the amount of interest received on most loans.  As NIM goes lower, so go the profits in most banks, if they do mostly lending.  Again, BK, as one bank with a specific niche, doesn't.  Another would be Goldman, Sachs (GS), more an investment bank than a normal bank, but still in the financial services group.  It's selling below book value (71% of book at this writing).  At one time, no one would have guessed that was possible.  But we're in a new world now.  Of course, it reported a loss this quarter for only the second time since going public.  So investors are wary.  Plus the new Volcker rule will prohibit it (and all banks) from using its capital for propietary trading so that source of income (or loss in a bad quarter) will go away.  Don't be surprised if Goldman decides to leave the banking fraternity and go back to being an investment bank only.

The point is that the banking sector has some values, if you know which ones have prospered in these tough times.  One is First Niagara (FNFG) (a stock written up this week in our Online Investor Income column:  It's expanding its footprint in New York and Connecticut, buying branches and still reporting solid profits.  And it pays a good dividend.

- Drugs
Most people think of drug stocks as defensive, or they used to.  Times have changed.  With generic drugs nipping at the heels of all prescription pills, most major drug manufacturers are having a tough time.  But not all.  One that isn't: Abbott (ABT).  Its best selling drug loooks like it will be protected for four or five years.  And it has almost $9 billion in cash to develop more drugs, pay dividends, and buy other companies.  Look deeper into the drug makers.  Most have plenty of cash to keep R&D healthy and make acquisitions.  Examples: Johnson & Johnson (JNJ) and Pfizer (PFE).  Some of these have been dormant for years.  But many pay decent dividends to assuage the pain of patience.

Don't think only of the now.  Now is basically over.  It's in the stock market. Think well beyond today.  Think about the possibilities if certain outcomes prevail.  Buying homebuilder stocks today requires that.  But these are the times that give investors opportunities to make large gains when markets turn.  Look in the sectors other investors have ignored or dumped.  That's where the bargains are.  And if you only buy a little of each and spread your risk, the rewards can be bountiful.

- Ted Allrich
October 18, 2011