Is it Really a Bargain?
November 13, 2007Many of us eagerly seek out bargains when shopping for airfares or TV sets. Why should stocks be different? Perhaps the analysis is a bit more complicated, but that's where financial statistics might prove helpful. Or so we hope.
The financial press is often eager to help, publishing articles, as Fortune did earlier this year, suggesting that "sophisticated screens help us hook solid companies selling for much less than they're really worth." Financial stocks show up frequently in such surveys of "undervalued" stocks; but as banking and mortgage-related issues have been taking their lumps in recent weeks and months, investors are learning (or being reminded) that a "bargain" price based on careful analysis of company fundamentals and valuation characteristics is no insurance against large losses.
In the following table, Change reflects the price change between the price cited in the article's recommendation and the stock's closing price as of November 12, 2007.
Is It Really a Bargain?
Bank of America (BAC)
Price: $43.98
Change: -17.5%
"With a fat 4.2% yield, Bank of America is a favorite for income. But the financial services company has also been expanding so fast that it may soon be No. 1, surpassing Citigroup" ($53.32 on December 15, 2006).
Michael Sivy, "Why I'm Sticking with These Two Leaders," Money, February 2007.
Assured Guaranty (AGO)
Price: $19.80
Change: -23.8%
"The company hasn't covered one [security] below the triple-A level since 2003. . . . Shares trade at a 21% discount my $33 estimate of their private market value" ($26 on unspecified date).
John W. Rogers Jr., "Subprime Risks Overblown," Forbes, September 17, 2007.
Citigroup (C)
Price: $33.57
Change: -31.5%
"Investors are beginning to recognize that big banks are generating a ton of cash and returning a chunk of it toshareholders" ($49 on unspecified date).
Russell Pearlman, "Where to Invest Now," SmartMoney, July 2006.
MDC Holdings (MDC)
Price: $37.51
Change: -31.8%
"Our top pick is MDC Holdings, which owns only a two-year supply of building lots vs. eight for some of its rivals" ($55 on unspecified date).
John Eade, "In a Hot Market, Here's How to Play It Safe," Fortune, June 25, 2007.
Washington Mutual (WM)
Price: $20.77
Change: -41.6%
"The stock trades at just ten times 2007 expected earnings and yields 6.3 percent" ($35.58 on August 16, 2007).
Russell Pearlman, "Bargain Bets—Five Stocks That Could Double," SmartMoney, October 2007.
Radian (RDN)
Price: $11.15
Change: -53.5%
"The dean of value investing helps us find three stocks that are safe and cheap . . . [Whitman] figures the company has a book value of about $50 per share" ($24.00 on October 5, 2007).
Yuval Rosenberg, "Bargain Hunting with Marty Whitman," Fortune, October 29, 2007.
MGIC Investment (MTG)
Price: $21.30
Change: -65.1%
"The stock sells for a little more than book value. [Portfolio manager] Reinhart figures the shares could climb 56% to their $95 per share private market value" ($61.00 on January 25, 2007).
David Stires, "Five Bargain Stocks," Fortune, February 19, 2007.
"It is not so much where we stand,
as in what direction we are moving.”
– Oliver Wendell Holmes
as in what direction we are moving.”
– Oliver Wendell Holmes