A Sale Does Not Mean Goodbye

By Roger Nusbaum | July 28, 2008 | 12:14 PM | 0 Comments

I have been underweight financial stocks for the last few years for two big reasons; first was their weight being 20% or larger of the S&P 500, which is more than normal, and because of the inverted yield curve that first occurred a couple of years ago.

Before I go on, a quick word about why yield curve inversions are bad for the sector. Simply stated banks borrow short and lend long. When the curve is normally sloped then capital is accessible for this and lending money is the most profitable. When the curve inverts or otherwise distorts it potentially impedes access to capital and makes lending less profitable. If lending is less profitable then the banks will be less profitable.

The sector has obviously had a nasty correction, far worse than the broad market and now financials are a shade under 15% of the market. Financials are not permanently broken, they are working their way through some sort of event driven process (you can try to quantify the event if you want to) that will take some period of time and then the sector will find the bottom, start to heal and then work higher.

Before all of this mess started I owned five different banks (one domestic and four foreign banks) at 3% each including Barclays PLC (NYSE: BCS). The case for Barclays was pretty simple in that it has a very large footprint, a successful investment division but the differentiator for me was and still is the ETF business. From 30,000 feet, ETFs are the real deal and Barclays, through its BGI division, is the big boy in the space. Throughout the crisis this part of the story has not changed and over time ETFs will account for more and more of BCS’ earnings and revenues.

All of that notwithstanding, I sold the stock last December a little under $42. Like most sales this one could have been better but it could have been much worse too. The reasons for the sale had to do with the unfolding of the mortgage mess and the visibility for an economic slowdown in Europe, and specifically the UK, being worse than in the US.

At some point, I don’t know when, I am quite certain I will buy the stock back. I have never stopped being favorably disposed to the name and when having more exposure to foreign banks and the UK makes better sense I’ll go back to it. My fondness did not blind me from the potential for more problems in the sector at large and this name seemed to be most vulnerable (that it either right or it is wrong, as I held on to BAC but the sale of BCS combined with a smaller, lucky purchase of an emerging market bank did reduce my net exposure to the sector).

The next time you hear someone on the teevee say “but the fundamentals are good so I would hold the name,” well you can sell and come back which is what this post is about. This is not a call for you to buy Barclays, Barclays is just an example that makes the point. If you use individual stocks you have names that could easily substitute in this article and make the same point.