Find a bull in a bear market

At the time like these, value investor could be seeing a lot of company comes undervalue particularly those in financial sector because not all banks have sub-prime exposure. There are banks that can snap back hard. These are banks that are down substantially for the year but that have recently shown improving fundamentals.

Here are some of the requirements that can help to filter it out;

1. Heavy short interest in these stocks so when good news is announced, they will get caught in a massive short squeeze or short cover.

2. Banks that are actually experiencing a decline in defaults or declining non-performing loans(NPLs)

3. Decreasing capital reserves in the company’s loan loss provisions portfolio because these bank believe the bulk of write-downs will be substantially lower in the future than in the past.

4. Trading at or below tangible book value.

5. Improving company credit and declining credit default swaps, or CDS, spreads.

Then there are bank stocks that are heading to zero. The FDIC has published that there are 90 or so banks on its watchlist for likely defaults to occur.

Here are some of the requirements to identify them;

1. Banks that are actually experiencing an increase in their defaults and loaded with toxic subprime, prime and Alt-A paper as well as increasing non-performing loans(NPLs).

2. Increased capital reserves requirements into the bank’s loan loss provisions portfolio because they will need to raise more capital, at extremely dilutive spreads to continue their current business.

3. Widening credit default swap spreads(CDS)

We should not forget about company earnings. Earnings are the most important factor driving share price appreciation. Earnings enable an investor to frame a company’s stock price within the context of actual financial production.

Market should expect stock prices to swing wildly, but this in itself carries little value. By creating investment strategies that rely upon actual and projected earnings, investors are aligning themselves with companies that have the fundamental strength required to produce long-term gains. Coupled these with above, we should be able to find some bulls in this bear market.