In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
If you live or work in Cincinnati, it's impossible to avoid Fifth Third Bancorp (NASDAQ: FITB). Branches and ATMs pop up around nearly every street corner, and, if you're downtown at lunch time, you'll see hundreds of employees from FITB's downtown headquarters flooding the sidewalks. (They're easy enough to pick out, since they're required to wear gold 5/3 insignia pins.) And please, don't get me started on the madness that is Fifth Third Day, which naturally falls on 5/3. Despite its impressive banking dominance over this Midwestern city, FITB -- to paraphrase Chris Farley -- just can't seem to get its share price on the right track.
What went wrong? At number 16 on our list of SPX laggards, FITB shed 76% of its value during the 10-year period ending June 30, 2008. If you're mentally steeling yourself for another subprime sob story, Fifth Third won't deliver. The stock has crumpled steadily since its April 2002 peak at $69.70, defiantly blazing a path lower even as the rest of the broad market enjoyed a stellar bull run.
In the late '90s and through the turn of the century, FITB grew at a pace that cancer cells would envy. From CNB Bancshares to Vanguard Financial to State Savings, the regional bank swallowed up its peers and rivals with a voracious appetite to rival Jabba the Hut's. A fine growth strategy -- if your bean-counters are all on the same page. When FITB took a $54-million charge against earnings after improperly accounting for some mortgage-backed security investments, it drew the attention of the SEC. In the meantime, the Federal Reserve Bank of Cleveland and the Ohio Department of Commerce imposed a moratorium on any further acquisitions.
The Wall Street Journal's "Fund Track" reported that some banks struggling to raise capital may sell their money management units. National City Corporation (NYSE: NCC) is selling its Allegiant Funds, Fifth Third Bancorp (NASDAQ: FITB) is considering selling its Fifth Third Asset Management, and KeyCorp (NYSE: KEY) will possibly sell its Victory Capital Management unit.
The Wall Street Journal also reported that Andrew Cuomo, the New York state Attorney General, is preparing to file civil securities-fraud charges against UBS AG (NYSE: UBS), possibly as early as this week. Sources said the lawsuit may include allegations of malfeasance by senior UBS executives.
WEB SITES:
Bloomberg reported that money manager John Paulson, the owner of Paulson & Co., is launching a hedge fund that will provide capital to financial firms which have been damaged by the housing crisis. Paulson, who wants to open the fund by December, used bets against the U.S. housing market to help him earn $3.7B in 2007.
After U.S. lawmakers reached a deal on legislation to alleviate the housing recession, the House of Representatives will today vote on a rescue plan for Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE). Representative Barney Frank said that the package, which increases the likelihood Treasury Secretary Henry Paulson will get the authority to inject capital into the two, is "fully acceptable," Bloomberg reported.
Oil trading losses forced SemGroup LP, which used to be America's 12th largest private company, to declare bankruptcy yesterday. Reuters noted that SemGroup LP's parent company is SemGroup Energy Partners LP (NASDAQ: SGLP).
TheStreet.com's Jim Cramer says our problems are so widespread, he sees lots more IndyMacs before we're out.
You don't need me to tell you it's awful out there. You don't need me to tell you that there's no quick fix for any of these things. But what might help you understand why it feels so bad this time is that I have never, in my career, seen so many companies go off track at the same time. This is one unbelievable moment, and it is made more horrible by the day as companies' stocks just get pummeled, causing people to then question the very viability of the companies involved.
First, obviously, are Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take). We don't know what will happen, but we do know that their futures are much darker than their pasts. Their best hope: a Democrat becomes president and shows the usual love to both. But as investments, they are pretty much perma-losers going forward. The losses are that heavy. Yes, it is true that two years from now they will be better, but will the government let them limp through to that? View them as calls on a Democratic win.
We all know that Citigroup (NYSE: C) (Cramer's Take), Wachovia (NYSE: WB) (Cramer's Take), Washington Mutual (NYSE: WM) (Cramer's Take) and National City (NYSE: NCC) (Cramer's Take) are in trouble. Bank of America (NYSE: BAC) (Cramer's Take) says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe. Any short-selling hedge fund could hire 30 actors and have them line up at a Washington Mutual or two and get a bank run going. Then we would have to hear about a "hasty" Treasury department plan to bail out WM. Hasty? How can these guys not see it coming?
MOST NOTEWORTHY: ExxonMobil, Susquehanna and BJ's Wholesale were today's noteworthy upgrades:
Bernstein upgraded shares of ExxonMobil (NYSE: XOM) to Outperform from Market Perform to reflect the company's best of industry returns and high credit rating, which they feel makes for a safe investment in the current environment.
Keefe Bruyette upgraded shares of Susquehanna (NASDAQ: SUSQ) to Market Perform from Underperform on valuation and believes the company is unlikely to have to raise capital.
JP Morgan raised BJ's Wholesale (NYSE: BJ) to Overweight from Neutral citing improvement in the company's ability to convert free trial customers to paid members and strong June sales, which could result in EPS upside for Q2-Q4.
OTHER UPGRADES:
J.M. Smucker (NYSE: SJM) was lifted to Buy from Hold at Deutsche Bank.
France Telecom (NYSE: FTE) was upgraded to Overweight from Neutral at HSBC.
MOST NOTEWORTHY: Scientific Games, COTT Corp and Houston Wire & Cable were today's noteworthy upgrades:
Morgan Stanley upgraded Scientific Games (NASDAQ: SGMS) to Overweight from Equal Weight as they believe investors are underestimating the company's opportunity in China and sees potential upside to estimates.
CIBC upgraded COTT Corp (NYSE: COT) to Sector Outperformer from Sector Performer citing the company's re-focus on Retail Brands and adding talent to the board.
William Blair raised Houston Wire & Cable (NASDAQ: HWCC) to Outperform from Market Perform on valuation and the company's continued large project growth.
OTHER UPGRADES:
Beazer Homes (NYSE: BZH) was raised to Neutral from Sell at UBS.
And you thought it was all over. Well, you weren't alone. Many bank executives thought the same thing, that we've seen the worst of the writedowns banks were taking as a result of the subprime mortgage collapse.
So when today Citigroup Inc. (NYSE: C), the bank responsible for 10% of the total writedowns due to the subprime and credit crisis, announced it "would suffer more "substantial" write-downs on debt investments in the second quarter," many were taken aback. Sure, the CFO said that sequentially, Citi would write down less than in the first quarter, but he also said the marks are "sizable" and gave the impression they will likely go into the next few quarters. Credit markets remain tight, he said.
Perhaps we've seen the worst, if I insist on being optimistic, but we surely haven't seen the last. Just in the past week we heard from Lehman (NYSE: LEH), AIG (NYSE: AIG), UBS (NYSE: UBS) and Fifth Third (NASDAQ: FITB). We heard of writedowns, asset sales and capital raises, none of which gave much confidence about financials and the credit markets, but there was the lingering hope we were seeing the last few hiccups (large as they were).
Still, people remained cautious and I didn't hear pounding the table to get into bank stocks, although no one could deny that some financials saw some recovery since mid-March. It was also somewhat puzzling that Citi managed to raise just over a month ago some $4.5 billion from its public offering. Meaning, there were buyers at $25 and change. The stock closed at $20.17 today after dipping to $19.41 earlier in the session.
OK, so I know we're supposed to be forward looking when investing, but there are some stocks in some sectors I simply wouldn't touch. Not all of them, of course. I'd much rather take my chances with Goldman (NYSE: GS).
Today was a mixed day in the news, despite the rally we saw in the equity markets. Some was related to a surge in the dollar causing a relatively small drop in oil prices after hints of the Saudis boosting production. The Labor Department reported that the inflation index, the Consumer Price Index, rose by +0.6% in May, just above the +0.5% economists were looking for. The core-CPI, an ex-food and ex-energy basis, showed only a gain of +0.2% that matched expectations. Too bad that no one can go without energy or food. Perhaps the more shocking number came out of the housing sector where there were reports that May's foreclosure rates were up 48% compared to last year's reading. Below are the unofficial closing bell levels for major index levels:]
Capstone Turbine Corporation (NASDAQ: CPST) was one the more active movers after its earnings, but the real boost came from the realization that its backlog was actually understated and even better than an already strong report. Shares were up in the final minutes today.
The level of bad loans at US banks is getting worse and not better. According to the FT, "Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, said it was likely loan-loss provisions and bank failures would rise in coming quarters as the fallout from market turmoil hits the real economy."
Three banks have failed this year and the FDIC says the number of "problem" banks sits at 90.
All of this may be tough on regulators who may have to bail banks out, but it could be tougher on shareholders who have stock in mid-sized and regional banks. NCC (NYSE:NCC) has already had to raise $7 billion. Its shares are down to $5.68 from a 52-week high of $35.83. Other banks in the same category, such as Fifth Third (NASDAQ:FITB) and KeyCorp (NYSE:KEY), have lost about half their price compared to 52-week highs.
The news from the FDIC shows that investing in financial firms remains tricky and dangerous. It is not for the faint of heart.
Douglas A. McIntyre is an editor at 247wallst.com.
The Wall Street Journal reported that a federal judge said that the government had "sufficient evidence" for a jury to conclude that a conspiracy to fraudulently boost the financials of American International Group Inc (NYSE: AIG) began with former CEO Maurice R. "Hank" Greenberg. That led to a transaction that artificially inflated AIG's loss reserves.
Citigroup Incorporated's (NYSE: C) Falcon Strategies fixed income hedge fund is down 75%, the Wall Street Journal reported, bad news for the three U.S. banks that invested in it to help increase returns on employee life insurance. One of the banks, Fifth Third Bancorp (NASDAQ: FITB), is suing Transamerica Life and Smith Barney, both of whom helped to arrange the investment, and some are now questioning whether Citigroup will be forced to give back some of the investments as they have with individual investors.
After it stopped offering some mortgages last month because it was swamped by volumes of new applications, the Financial Times reported that First Direct, a unit of HSBC Holdings Plc (NYSE: HBC), has resumed lending to new customers. The bank said it has continued to receive "significant interest" in its mortgages from existing customers.
OTHER PAPERS:
In an effort to raise capital from shareholders, the Telegraph reported that Barclays Plc (NYSE: BCS) is considering a takeover bid for a rival in the U.S. or UK. Sources believe Barclays may attempt to acquire an investment bank, a struggling bank or a deal in a fast-moving economy. Potential names mentioned include UBS AG (NYSE: UBS) and Lehman Brothers Holdings Inc (NYSE: LEH).
TheStreet.com's Jim Cramer says this lender gave money to anyone with a pulse, and the shareholders are left holding the bag.
For pure laughs, go read the National City (NYSE: NCC) (Cramer's Take) conference call yesterday, the one where they destroyed what was remaining of their common shareholder base with the partial takeunder by Corsair, an unknown private-equity fund that surfaced to inject $7 billion to save the bank.
But this Nat City takes the cake. They have to be the most stupid and least rigorous lender since the S&L crisis. They have $10 billion in home equity loans that have got to be among the worst ever issued. I swear, I bet that many of these are going to turn out to be out-and-out fraud by the borrowers. Miraculously, Nat City found an even more stupid soul, Merrill's (NYSE: MER) (Cramer's Take) Stan O'Neal, to sell its main originator of this junk to, something that brought O'Neal down and almost brought Merrill down. Some would say that the latter is still in question. I have no idea what would have happened to NCC if they hadn't sold it before the height of the fraud, the first quarter of 2007.
National Citylost $333 million, or 53 cents a share, in the quarter ending December 31, compared with a profit of $842 million, or $1.36 per share, in the year ago quarter, when the company sold its First Franklin mortgage business, which resulted in a gain of $1 per share. For the year, National City made $314 million, or 51 cents. Analysts surveyed by Thomson Financial had expected a loss of 26 cents in the most recent quarter and $1.03 for the year. Shares were up about 9% to $15.60 by early Tuesday afternoon.
Fifth Third's fourth-quarter earnings fell 42 percent from a year ago, largely due to a charge for future litigation and for acquisition-related costs. Earnings for the three months ending December 31 were $38 million, or 7 cents per share, compared with $66 million, or 12 cents, for the same period in 2006. Excluding the charges, the bank would have earned 49 cents for the quarter, compared with adjusted profit of 64 cents in the same period a year ago. For the year, earnings were $1.1 billion, or $2.03 per share, compared with $1.2 billion, or $2.13 per share in 2006. Analysts surveyed by Thomson Financial had expected a profit of 27 cents in the quarter and $2.21 for the year. Shares were up about 4% to $23.50 by early Tuesday afternoon.
National City (NYSE: NCC) volatility Elevated; NCC sells off on EPS & loan exposure. NCC reported 3rd quarter 2007 net income of $106 million, or 18 cents per diluted share. Goldman Sachs says "turning NCC around is going to take time. Mortgage contributions are likely to remain depressed, while credit will remain an issue." NCC has a current dividend yield of 7.34%. NCC November option implied volatility of 45 is above its 26-week average of 31 according to Track Data, suggesting larger price fluctuations.
Fifth Third Bancorp (NASDAQ: FITB) volatility Elevated as FITB near 10-year low. FITB, headquartered in Cincinnati, is recently down $0.99 to $28.99. Smith Barney says "while FITB was going through its regulatory issues, it tried to offset by taking on more rate risk. One of our concerns has been that it was also taking more credit risk." FITB November option implied volatility of 38 is above its 26-week average of 27 according to Track Data, suggesting larger price risks.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
MOST NOTEWORTHY: Palm (PALM), Fuel Tech (FTEK), Weyerhaeuser (WY), and John Wiley & Sons (JW.A) were today's noteworthy upgrades:
Palm Inc (NASDAQ: PALM) was upgraded to Outperform from Market Perform by Morgan Keegan, who expects PALM's recapitalization to bring more financial discipline, better growth from new products, and views the valuation as compelling.
FuelTech Inc (NASDAQ: FTEK) was upgraded to Buy from Accumulate at ThinkEquity, which believes the company technologies are well-positioned as the U.S. Clean Air Act takes effect.
Bank of America upgraded Weyerhaeuser Company (NYSE: WY) to Buy from Neutral, citing valuation and their prediction that the company's restructuring will create value for shareholders.
John Wiley & Sons Inc (NYSE: JW.A) was upgraded to Buy from Hold by Stifel Nicolaus & Co, which views the company as a consistent performer with emerging catalysts and reasonable valuation.
Citigroup upgraded US Steel Corporation (NYSE: X) to Buy from Hold and raised their target to $118 to reflect operating catalysts and their expectations for domestic steel markets to improve in Q4 and 2008.
Cooper Companies Inc (NYSE: COO) was also upgraded to Buy from Hold at Citigroup despite the lowered guidance as they believe the company's products are improving and earnings upside is possible.
WestLB upgraded Continental AG (OTC: CTTAY) to Buy from Hold after the tire marker announced plans to reorganize its company structure into six divisions following the purchase of Siemens AG's (NYSE: SI) VDO automotive unit.
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