Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.


Bank Stocks: A Comeback Investment?

It’s been a remarkable turn of sentiment for banks since early last year, when we wrote “Everyone Hates the Banks” in our February 2016 edition of The Turnaround Letter. At the time, not only was the stock market selling off, but bank stocks were falling even faster. Investors were worried that a weakening economy would delay the Fed’s interest rate hikes and increase loan losses, particularly from the energy sector – both of which would crimp banks’ already tepid earnings outlook.

We certainly didn’t foresee the economic upturn that started in mid-2016 nor the November presidential election outcome. All we knew was that bank stocks had bargain-basement valuations, relatively solid balance sheets and attractive dividend yields, all within a much-improved banking system. These traits made the banks very interesting as investments.

Both the economic upturn and the election were very favorable to banks. After continued price volatility in the first half of 2016, the KBW Bank Index surged 18% in the months ahead of the election. Following the election, bank stocks surged another 32% to their peak on March 1, 2017, a total gain of over 55% from their early 2016 level.

Expectations for a healthier economy (more loan growth, lower defaults), rising interest rates (better spread on loans) and a more favorable economic and regulatory climate (more growth, lower costs) provided the fuel for the sharp change in investor sentiment and share prices. Our highlighted selection of bank stocks produced similarly strong gains, rising 56%, more than twice the gain in the S&P500 index:

With the strong gains, and a recent 8% decline from their March 1st peak, what do we think about bank stocks today?

Some of the expectations that fueled the rally (healthier economy, higher interest rates, more favorable regulatory climate) are transitioning into reality. This is boosting confidence in banks’ future earnings power. Consensus estimates for 2018 and 2019 earnings are considerably higher than they were a year ago. Also, the friendlier regulatory environment could allow banks, with their strong balance sheets, to return excess capital to shareholders in the form of repurchases and/or higher dividends.

These justify much of the higher bank stock prices. However, just as the bank valuations implied an overly pessimistic future in January 2016, they now largely factor in the more optimistic future.  Price/book ratios are now commonly in the 1.4x range, and price/earnings ratios are around 14x. Both of these metrics are on the high side of average. As valuations have moved up, risks have as well. Major disappointments in any of the drivers could push bank stock prices downward.

However, we continue to selectively like bank stocks, particularly our Recommended stocks. We think there is more upside potential, but we recognize that achieving the upside is largely dependent on continued increases in bank earnings and a steady macro environment. With their strong gains over the past year, bank stocks have proven the merits of focusing on buying low.

Disclosure Note:  Accounts managed by an affiliate of the Publisher own securities of some of the banks mentioned in this blog.

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Lessons from the 1st Turnaround Letter of 32 Years ago

In July, 1986, exactly 32 years ago, George Putnam sent the first Turnaround Letter to subscribers. Technology back then seems like the Stone Age, with hard copy research and primitive CompuServe dial-up service. Wall Street ignored turnaround stocks back then and continues to ignore them today. While technology has changed immensely in 32 years, The Turnaround Letter’s philosophy of selecting out-of-favor companies on the verge of turning around hasn’t changed. Our timeless process helped driven The Turnaround Letter’s independently-verified market-beating returns. Read More.

Comparing Stocks Vs. Bonds

While the common stock of a turnaround candidate usually has the greatest upside potential, other classes of securities, such as bonds or preferred stock, may offer attractive profit possibilities with less risk. Many turnaround companies have only one class of securities available to investors but where there are different classes to choose from, it can pay to do a little extra analysis of the various options.

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Turnaround Letter Stock Pick Named Top Performer of 2017


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What Last Year's Top Stock Pickers Are Buying in 2018


This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.


George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."