Arguments For Investing in Financial Services Stocks When Everyone Else Will Not
As the number of small lenders achieve recording-setting results in terms of their failure rate, it may seem uncharacteristic to invest in financial services firms. However, with some of the larger banks slowly returning to profitability, the contrarian approach of investing in firms that others are apprehensive about makes plenty of sense.
In fact, with the government announcing recently that it will sell its stake in Citigroup this year (at an arguably tremendous profit), the signs are clear that the financial services sector is actually on a healthy path to recovery amidst record-setting numbers of smaller, regional-sized bank failures.
Does that mean that investors who are keen on achieving great profits should be investing in the larger banks, like Citigroup, Goldman Sachs, Wells Fargo and so on? Not necessarily. Investors with the right appetite for risk and with enough of a long-term investment horizon might actually profit much more from some of those smaller, regional banks.
Something that all investors who are interested in financial services should remember is that there are several types of smaller banks. Some are heavily involved in real estate lending than others and depending on their geographic location, this could be an unfortunate business choice (in fact, of the four most-recent failures, three were located in Arizona and Florida, two of the hardest-hit states in terms of real estate prices and unemployment).
There are other financial services firms, however, that are properly capitalized and who have actually been achieving year-over-year profitability. In addition, they continue to offer and increase their dividends. Surprisingly, some of them are even located in higher risk areas, like California.
The reason why investors should benefit in the future has to do with how these lenders and financial services firms conduct their business. If they are more prudently underwriting their mortgages and remain viable in terms of their capital positions and show positive trends in profitability, then it is quite likely that they will continue to pay those dividends and reward shareholders with capital appreciation in their stock value.
As well, with consumer spending on the rise, many of these financial services firms are poised to experience long-term growth in the years to come as people return to work and start spending more and more on credit. While the underwriting process might become more difficult, defaults will also be reduced; financial services firms that are already reporting profits and showing solid fiscal strength will only benefit from the failures of so many of their peers.
The investor who is able to find the best and “right” financial services firms among the many not-so-good firms will clearly profit substantially. The trick, of course, is to find which ones are deserving of your investment dollars.