Portfolio Manager Perspectives

Jeff Benjamin

Amid bank carnage, vultures are a good bet, says Burnham's Schutz

Mar 30, 2010 @ 10:53 am

By Jeff Benjamin

The growing list of bank failures presents new opportunities in the financial sector, according to Anton Schutz, manager of the $160 million Burnham Financial Industries Fund Ticker:(BIRFX).

“There were about 140 banks shuttered in 2009 and I think we'll see even more than that closed down this year,” he said. “There are still 700 problem banks on the [Federal Deposit Insurance Corp.] list.”

As the manager of a fund that invests almost exclusively in financial institutions, Mr. Schutz is finding opportunities by seeking out those companies that are buying up the assets of the closed banks.

“Banks are buying the loans and deposits through the auction process, and that's a big part of the appeal right now,” he said.

Two examples of banks with strong balance sheets that have been able to bulk up through buying assets on the cheap at auction include New York Community Bancorp Inc. Ticker:(NYB) and Bank of the Ozarks Inc. Ticker:(OZRK).

Mr. Schutz, president of Mendon Capital Advisors Corp., manages the fund on a subadvisory basis for Burnham Asset Management Corp.

The fund, which received a 2010 Lipper award in the financial services category, gained 31% last year.

In terms of the long list of banks likely headed toward closure this year, Mr. Schutz said the market has already identified them and that many are trading at less than $1 per share.

In building the portfolio of between 50 and 70 stocks, he said, it's important to think in terms of “normalized earnings,” or earnings adjusted to not include irregular or one-time expenses. Many banks are instead now being valued on their ability to meet new cash reserve requirements.

For example, he singles out JPMorgan Chase & Co. Ticker:(JPM) as “arguably the best bank out there,” yet its stock is trading well below fair value, according to his analysis.

“The stock is trading at around $45 and the company is expected to earn $6 per share this year,” he said. “A company like this should have a P/E of around 12, and that puts the stock price at closer to $72,” he said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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