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These Are the Cheapest Stocks in the WorldBy
Saturday, April 23, 2011
Before I tell you what the cheapest stocks in the world are, there's one caveat:
I'm not saying you should buy them.
Why?
I'm the publisher of The Palm Beach Letter. And I make sure we don't buy things just because they're cheap. (Things can stay cheap for a long time.) We believe in trends... and these stocks are still gliding lower. In fact, many of them have hit new multi-year lows in the last month.
But as I'll show you, the time is coming to buy these stocks. They're safe. They're NOT going bankrupt. They're profitable. They pay dividends as high as 5% a year...
And because they're so cheap, some of these stocks have upside potential of 100% or 200%... just to get back to some semblance of FAIR VALUE.
I'm talking about regional banks.
Regional banks are the "mom and pop" shops of the financial world. The people who run them take their wives to the Elk Club on Friday evenings. They drive pickup trucks and wear golf trousers. Instead of an armed guard, you're more likely to see a dog sleeping behind the counter.
I used to work at a regional bank in Colorado. The bank manager – Dick Rogers – couldn't see the point of opening and closing the vault every time a teller needed more cash. So we just left it open all day.
When it comes to business, regional banks keep things simple, too. Have you heard of the 3-6-3 rule? It's how regional bank operate:
Borrow money at 3%. Lend money at 6%. Get on the golf course by 3 p.m.
That's it. Regional banks don't trade securities, they don't make international loans, and they don't game the system with complicated transactions. They simply take deposits from local businesses and residents at low interest rates and lend it back out at higher interest rates.
This simple business model is easy and profitable. But over the last five years, these banks came unstuck.
The collapse in real estate is the reason. Real estate is the biggest and most important source of regional bank lending. Regional banks provide residential and commercial mortgages. And they lend to real estate developers. This makes sense. In small towns, real estate is the most valuable asset anyone owns. So that's where local banks earn their money.
This was especially the case between 2002 and 2006. Former Fed Chairman Alan Greenspan cut interest rates down to 1%. A 1% interest rate made the spread so much wider than normal. It became the 1-6-3 rule. And local banks got carried away with their lending.
As property prices have fallen, these local banks have had to write off millions in bad loans they made during the property and lending boom. When you're collecting the margins between one interest rate and another interest rate, you don't have room for loans to go bad. One bad loan can wipe out a whole year of earnings.
So many regional banks have gone bankrupt. The rest are still falling.
But here's the thing: More than 2,000 regional bank stocks trade on the stock market. These bank stocks are now so cheap, you can buy many of them at a 50% discount to book value. Book value is their liquidation value. It's the money you'd have left over if you paid back all your depositors, called in all your loans, and sold all your branches.
Now that real estate prices have stabilized, banks shouldn't have to write off any more bad loans. They've taken their medicine. They can focus on getting well again. And it shouldn't take long. When you ignore the loan losses, banks are actually making record profits from their 3-6-3 strategies. Plus, most of these regional banks have large cash positions and pay dividends as high as 5%.
But again, I wouldn't recommend you buy any bank stocks right now. Their prices are still falling. There's no need to argue with the market here.
Instead, start building a list of your favorite regional bank stocks.
To begin your research, open the Industry Browser in Yahoo Finance and click on the regional bank lists. You'll see lists of all the regional banks in America, with market caps, dividend yields, and book values.
Do your research, pick your favorites, and watch their stock prices. Whenever a stock on your list makes a new three-month high, buy it. And use a stop loss to shield yourself in case there's another downturn in the real estate market.
With the rise in the stock market and the lack of bargains anywhere else, I have to assume regional banks are the cheapest stocks on the planet. There's an opportunity here. Make sure you're ready for it...
Good investing,
Tom
Further Reading:
This week, the Palm Beach Letter's Mark Ford introduced a low-risk, tax-free 6% opportunity you can take advantage of by following two simple rules – and without taking on any stock market risk. He also shared the easiest way to earn a 17% yield, right in your own neighborhood.
Market NotesCHART OF THE WEEK: A MAJOR "BOOM/BUST" SECTOR IS BOOMING! The market just "confirmed" one of the most important trading ideas we've passed along in the last few months.
As regular DailyWealth readers know, stocks, commodities, and gold have become part of one giant "risk on, risk off" trade. All three assets are moving in similar "up and down" waves right now... and all sport similar gains since the 2009 market bottom. This makes it darn hard to find diversified trading ideas.
In a recent essay published by our sister "trading" website, Growth Stock Wire, I detailed one of the few places one can find stocks that tend to trade on their own merits and stories... the boom/bust biotech sector. Please read the essay if you haven't yet (and click here to visit the site and sign up to receive such trading ideas, for free, every day.)
Today's chart shows the "biotech idea" at work. Back in March, the S&A Grail Trader recommended Biogen (BIIB) as a way to play biotech. And on Thursday, positive drug results shot the stock up 20%. This is how it works when the biotech market is in "boom" mode.
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