A few good stocks in the financial sector
After many headline-grabbing daily fluctuations, the stock markets are back to where they started the year. Their daily volatility has scared many investors into low yielding products like variable annuities, which are often advertised as providing stable returns. Actually, they provide high fees for those who sell them.
MetLife (MET-$32), the largest U.S. life insurer and seller of variable annuities reported that sales of this product were up 22% in its latest quarter. That’s good for MetLife and for investors who take advantage of its fear-driven low valuation of only six times earnings. MetLife is trying to sell banking and mortgage-related operations that currently make it subject to Federal Reserve oversight that prevented its recent proposal to raise its dividend. Even so, it presently yields 2.2% with very strong earnings growth.
The financial crises of the last three years shredded and stranded many banks and other financial sector stocks. Despite irresponsible attempts to blame their failures on the federal government, their own greed was the main cause. In 1989, bankers successfully persuaded Congress to repeal the Glass-Steagall Act, enacted in 1933 to separate commercial banking from more lucrative (and riskier) investment banking. The repeal permitted expansion into mortgage-backed securities, collateralized debt obligations and other overly creative inventions.
The results are now familiar. Those who sought to control risks were swamped by the drive for short-term profits. Big bank balance sheets are still tainted by these toxins and I have recommended against buying apparent bargains like Bank of America. More sensibly managed institutions like U.S. Bank (USB-$25), are expanding, adding employees while B of A is laying off 40,000 workers. USB is a buy.
In Europe, the excesses of the last decade also battered the Euro Zone currency and its economies. The creation of this union was a remarkable political achievement but it has always struggled with an unbalanced two-tiered structure. There will continue to be strains in Europe that actually may be of relative benefit to American investors.
One of my recommendations, Aflac (AFL-$44), has a minor investment in Italian bonds and recent Euro jitters have caused predictable ripples in its stock price. Aflac continues to be a buy with almost a 3% yield, a 28-year record of consecutive dividend increases and rising earnings.
Regarding the Euro, I find it remarkable that Prime Minister Berlusconi, having survived a remarkable variety of criminal, diplomatic and sexual scandals to become the longest-serving Italian Prime Minister since Mussolini, is stepping down under pressure from economic matters. I suspect there is no truth to the rumor that he intends to become President of the National Restaurant Association.
All this volatility has sparked increased trading, boosting sales of CBOE (CBOE-$27), the marketplace of options, including options on volatility. Its third quarter earnings hit 50 cents a share, up 69 percent. It remains a strong buy and I am now also recommending its bigger cousin, NYSE Euronext (NYX-$27), which operates the New York Stock Exchange and other markets. It is trading at 10 times earnings and yields 4%. I expect an extra boost upon approval by European authorities of its pending merger with Deutsche Börse.
These stocks from the financial sector represent selected exceptions to its persisting problems. Broader gains are coming from technology, energy, manufacturing and the medical sectors. Among medical stocks, Merck (MRK-$35) announced that it has 19 drug candidates in late-stage critical trials. It also raised its dividend and now yields over 5%. Rising dividends and earnings are good medicine for investment worries.