Breakout

Bank Stocks Are ‘Ridiculously Cheap’ Says Haverford’s Smith

While the Spanish bank bailout is making headlines today, and Moody's (MCO) is readying its latest round of bank downgrades, one money manager is keeping his focus here on the U.S. banks that his firm owns and the potential opportunity to add more exposure soon.

"They're extraordinarily cheap on today's earnings, and let alone what normalized earnings might be two or three years from now. They're ridiculously cheap," says Hank Smith, chief investment officer at Haverford Trust. "Also they're a play on an economy that is expanding, and we don't see a recession going forward."

Smith's general strategy right now is to trim exposure to take some gains when the financials rise, and buy shares on the cheap when they fall. But he still hasn't added to his JP Morgan (JPM) holdings.

"We still think it's [JP Morgan] the highest quality bank in the world despite their trading gaffe. We also own Wells Fargo (WFC), which is another one of the very high quality banks that has held up a little better than JP Morgan here."

JP Morgan shares have fallen 17% since announcing an estimated $2 Billion trading loss on May 10th due to a bad hedging strategy. The bank's CEO Jamie Dimon will have a chance to explain the losses before Congress this Wednesday.

Smith says there are two things going on here —Jamie Dimon's image being tainted, and a cloud of uncertainty over how much the losses will amount to.

"Is it two billion, is it four billion, is it five billion, or perhaps is it even less?" he questions. "I think there's enormous potential here if in fact at the end of the day, whether it's a quarter from now or year-end, we find out this trading loss is less than $2 Billion, than this has been a way oversold situation."

Further, Smith doesn't think adopting Basel III standards will challenge the banks. Last week the Fed voted in favor of putting the proposal out for public comment. The Basel agreement, put together by international regulators in wake of the financial crisis, would set a 7% ratio for top tier capital.

Smith points out that most banks passed the latest round of Fed stress testing "with flying colors," and that put the banks through much stricter conditions than Basel standards.

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