Tahoe Market Pulse: Profiting from panicky sellers | SierraSun.com

Tahoe Market Pulse: Profiting from panicky sellers

There were two days in early February when bank preferred stocks fell, some as much as 10 percent. They recovered just as quickly. What happened and how can we benefit again?

First a background: Banking stocks have lagged, driven by concerns about economic growth (or lack thereof) and continued low interest rates. Add to that fears of higher losses on loans to energy companies.

That came to a head in early February when European banks, which are still working through bad debts from the financial crisis, looked more fragile under an even flatter yield curve. Their preferred stocks dropped by as much as 10 percent.

Preferred securities are closer to bonds than stocks, so investors must constantly evaluate credit quality. For U.S. banks, credit quality is high. Listening to some presidential candidates one would think that U.S. banks are free to do as they please.

In truth, since the 2008 financial crisis a lot of regulation, including Dodd Frank and its stress tests, has been imposed on banks. Lending standards are higher and balance sheets are stronger, diminishing the potential for future loan losses even if the economy deteriorates.

European banks are less secure as their economy is worse than ours and they face a flatter yield curve. That said, both U.S. and European banks still make money. They aren’t even close to suspending dividends or defaulting. The February panic was overdone.

Investors can benefit from these brief periods of panic. In gambling terms, it’s best to fade the pessimism. An example of a great entry point came with Barclays Bank 7.10% Preferred (BCS.A).

This security had been trading above its $25 par value and then it dropped to $22.50 in early February. Its yield rose to 8 percent. Barclays has been in business for 300 years, surely it could survive whatever was happening in February!

Cooler heads prevailed and two days later the preferred was back above par. Those who purchased into the panic received more than a year’s worth of dividends in the form of capital appreciation.

If you don’t follow the market throughout the trading day as I do, you can place good-till-canceled buy orders at panic level prices.

The orders won’t get filled unless the security falls to your price or lower. Because of very strong capital reserves and adequate earnings, I’m a buyer anytime U.S. bank preferred stocks (or even selected European preferreds) succumb to panicky sellers. It will happen again.

David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients may hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.

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