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Analyzing Bank Stocks

Analyzing Bank Stocks

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Published by Doug Gerlach
Analyzing bank stocks presents a few additional challenges to investors than manafacturing or service companies. In this article from StockCentral.com, Amy Rauch-Neilson interviews Bob Adams who provides a framework for studying stocks in the banking industry.
Analyzing bank stocks presents a few additional challenges to investors than manafacturing or service companies. In this article from StockCentral.com, Amy Rauch-Neilson interviews Bob Adams who provides a framework for studying stocks in the banking industry.

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Published by: Doug Gerlach on Apr 02, 2009
Copyright:Attribution Non-commercial

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05/02/2013

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© Copyright 2009 StockCentral.com www.stockcentral.com
 
SPECIAL EDITION
 
26 March 2009
 
ANALYZING BANK STOCKS:
 WHAT YOUR CLUB NEEDS TO KNOW
BY: AMY RAUCH NEILSONuphoria. That was the stock market’s responseMonday, following the introduction of the Trea-sury’s plan to purge bank balance sheets of upto $1 trillion in bad assets that are limiting bank lending.The
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spiked nearly500 points in a single trading session. What market sec-tor led the march into this recession? Likely the samesector that will lead the recovery: Banking.In the meantime, though, the sector has piqued the in-terest of many an investor. So, if you’re a long-term,fundamental investor, here’s the question: Are therebargains to be had in bank stocks, or should your clubsteer clear? Before your club makes that call, there are afew things you should consider.
Mr. Bob Adams
, who is a vo-lunteer Director on the Board of 
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., a former Di-rector on the BetterInvestingnational
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DVISORY
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OARD
, and an As-sociate Director of the BetterIn-vesting
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, is no stranger to bank stocks. His first foray into thebanking sector was WashingtonMutual. “I needed a signature guarantee and I walkedinto my bank, and they said they couldn’t do it,” he re-calls. “They sent me over to a local branch of Washing-ton Mutual.“Washington Mutual did the signature guarantee, eventhough I didn’t have an account there. I spoke to themanager and she told me that they didn’t require an ac-count in order to provide a signature guarantee. I was soimpressed that I opened an account and bought stock inthe bank.”His interest piqued, Mr. Adams decided he wanted tolearn all he could about banking stocks. And he had justthe teacher in mind. “I have a friend, Bob Stewart, whoowned a small bank, so he really had the inside track onwhat to look for in a bank stock,” Bob says. “He usedto open an account at a small bank, with the idea thatsomeday, it would be bought out by a larger bank andhe’d be in on the ground floor to buy shares.”“It was like going to school,” Mr. Adams recalls. “I’dgo with him to the various banks and listen as he askedthe questions. Finally, one day, I said, ‘We should writethis down as a guide for investors who want to evaluatebank stocks.That’s exactly what they did, and the result is a spread-sheet for analyzing bank stocks that appears on Mr.Adams’s personal website: www.bob-adams.net. Thespreadsheet, which features built-in tips for locatinghard-to-find bank data, aids investors who want to ana-lyze a bank’s annual report data. His site also offers anexample of how this data can be used to analyze a bank.
NOT FOR THE FAINT OF HEART
valuating bank stocks is not for the faint of heart. “It’sdifficult to evaluate a bank stock,” Mr. Adams says. “Ido believe in the
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,but it doesn’t work as well for evaluating bank stocks. Banks are different enough that part of the information on the Guide is useful, but it’s not thewhole story.”For example, the
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ATIO
that ap-pears on the
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, while usefulfor other industries, is virtually meaningless in the eval-uation of a bank stock. “Banks borrow money and thenloan it right back out—so
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of theSSG really doesn’t apply,” Mr. Adams says.“The information you’re looking for in a bank stock isdifferent than what you’dlook for to evaluate a com-pany in a different sector,such as manufacturing,” Mr.Adams explains. “And, tomake your job even morechallenging, it can be verydifficult to locate the infor-mation that you need, be-cause not all banks report it.”

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