by Tom Klein

Created on: August 14, 2008   Last Updated: September 18, 2008

The Best High Risk Stocks to Buy Today

What sector of the stock market has been badly battered this year losing close to 30% of its value? It is a sector historically with low risk, but now is fraught with risk: bank stocks. Is now the time to invest in bank stocks? Bank stocks have spilled red ink this year with the triple-whammy of declining home prices (reducing the value of collateral for mortgages that the banks originate), the collapse of the securitized mortgage market (so banks could not sell the mortgages they originate), and the slowing economy (causing homeowners to fall behind in their mortgage and credit card payments). The epitome of the crises was the collapse of Indymac Bank, the 10th largest bank in the United States, which bank had to be taken over by federal regulators.

Have the clouds lifted and are the crises a thing of the past? Although there are a lot of bad loans still in the bank's portfolios mortgages that are either in or near default, credit card debt of people in bankruptcy, and loans to builders that may not be paid, the banks are nevertheless making money on new loans. The yield spread (the difference between short-term rates paid on deposits and long-term rates received on mortgages) is very favorable for the banks currently. Wells Fargo (ticker: WFC), although taking a large write-down on non-performing loans, last month announced a profitable quarter and increased its dividend. Even Citibank (ticker: C), which was threatened with insolvency before raising capital last year announced a quarter with a much diminished net loss and maintained its dividend. Both banks are paying in excess of a 5% dividend.

Here are the positives for bank stocks for the next three-to-five years: the worst news is already out and included in stock prices, the large bolus of adjustable rate mortgages has already moved through the adjustment cycle with just another six months of these large monthly volumes of adjustable rate mortgages getting reset, the steep yield curve contributing to profitable current operations, and the Federal Reserve Bank not taking steps to increase interest rates. These trends point to banks working their way out of the crisis back to profitability. As if that were not enough validation, Alan Greenspan recently said that housing prices would reach bottom by mid 2009, and that would provide stability for the housing market and financial institutions. Strong banks with good management will survive, their stock prices will increase, and dividend yields will shrink. Wells Fargo (WFC), Citibank (C), Bank of America (BAC), Regions Financial (RF), and Wachovia (WB) should survive the storm that hit the banking sector and provide favorable long-term returns. One can also invest in a collection of banks through exchange traded funds: some of the largest with the best liquidity are KBW Bank ETF (KBE), KBW Regional Banking ETF (KRE), and Vanguard Financials ETF (VFH).

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