No. of Recommendations: 0
I would like opinions on financial stocks.  There are several that by 
some measures seem attractive at the moment, but some of these 
companies have problems or face some sort of uncertainty.  What will 
rising interest rates do to these companies?

Here are some that interest me:

DRL:

Year	EPS	Div
		
12/04	3.95	0.60
12/03	2.72	0.40
12/02	1.89	0.28
12/01	1.25	0.21
12/00	0.82	0.17
12/99	0.67	0.13
12/98	0.56	0.10
12/97	0.38	0.09
12/96	0.32	0.07
12/95	0.28	0.06

They have a problem with IO's at the moment and they are going to 
restate financials for the last 5 years reducing earnings net of tax by 
$435 million (approx $4 per share I think).

Personally I think they are oversold at the moment and am waiting for 
the price to stabilize before buying.

FNM and FRE.

What will interest rate changes do to these?  What if they are privatized.

FNM

Year	EPS	Div
		
12/04	7.62	2.08
12/03	7.72	1.68
12/02	4.53	1.32
12/01	5.89	1.20
12/00	4.26	1.12
12/99	3.73	1.08
12/98	3.26	0.96
12/97	2.84	0.84
12/96	2.51	0.76
12/95	1.97	0.68

FRE

Year	EPS	Div

12/04	3.78	1.20		
12/03	6.68	1.04
12/02	14.18	0.88
12/01	5.96	0.60
12/00	3.39	0.68
12/99	2.95	0.60
12/98	2.31	0.48
12/97	1.88	0.40
12/96	1.65	0.35
12/95	1.41	0.30


NYB

Year	EPS	Div
		
12/04	1.33	0.96
12/03	1.65	0.66
12/02	1.25	0.43
12/01	0.75	0.30
12/00	0.47	0.25
12/99	0.42	0.25
12/98	0.33	0.17
12/97	0.27	0.10
12/96	0.21	0.06
12/95	0.19	0.02


I like a quote from one of Warren Buffet's letters where he said to buy 
companies where the earnings per share continue to March steadily 
upwards decade after decade (perhaps in a bumpy fashion).  I know I 
have only looked at one decade, but I like the earnings growth of the 
above companies in addition to paying out a nice dividend.

StevnFool
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No. of Recommendations: 2

I have decided not to invest in any of the above mentioned stocks for two reasons:

1. I do not fully understand how these companies work and what affects their ability to earn money.

2. They all seem to be highly leveraged (i.e. Total Assets / Equity in the region of 10 or above). Perhaps this is typical of all financial institutions, but since I don't understand any better, it makes them more of a speculation to me rather than an investment.

StevnFool
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No. of Recommendations: 2
I'm with you StevnFool! I don't think there's any way for an outsider to truly understand what the risks are for fin companies, particularly when they use derivatives (and most/all do) - DRL is a case in point. Even WEB says there's no amount of reading anyone (even he himself) can do to understand what will happen to a firm's earnings/income/obligations if they hold a 'basket' of these instruments. In this year's AR, he called them "weapons of financial mass destruction".
Feaz
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No. of Recommendations: 1
Hi Guys,

There's also a sector argument - I think financial stocks are a larger
fraction of total market cap than is usual.

Well, there's still some unloved companies out there, even if most
stocks are pricey. I'm still expecting infrastructure build, as a
response to potential for economic slowdown. The state/provincial
governments may be the next borrower group to be used to deploy excess
credit/ money supply into the real economy, after consumer debt
(short term and via mortgages) has been maxed out.

Don't know. But, as well as reducing leverage in my finances (pretty
well completed, actually) I've been looking for businesses that it will
be safe to own a fraction of for long term even if stock prices are
terrible. Financial stocks do not meet either objective for me.
The ones I'm holding are BRK and FFH. Everything else is tangible,
making or doing something that has an existance in the physical world.

There are times to trust one's gut, I think.

Woodstove
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No. of Recommendations: 4
I've been looking for businesses that it will
be safe to own a fraction of for long term even if stock prices are
terrible. Financial stocks do not meet either objective for me.
The ones I'm holding are BRK and FFH. Everything else is tangible,
making or doing something that has an existance in the physical world.

There are times to trust one's gut, I think.

Woodstove 

I've actually just bought HDI (Harley Davidson) today for 46.60.

My logic for buying it is that I believe it has consistently returned a 
good return on equity for the past ten years (Warren Buffet logic) and 
I believe the current market opinion of the company is too pessimistic.

I have analysed this on a per share basis calculating the book value 
per share by adding earnings and subtracting dividends.  I calculate 
the return on equity as EPS/(my calculated book value per share for the 
previous year).

Since non current asset values are often meaningless leading to very 
questionable values for Book value per share, I totally ignore the 
official book value per share and pick my own starting value that
results in the most consistent return on equity over the 10 year 
period.  To demonstrate, the numbers for HDI are below.

Year	EPS	Div	BV/S	ROE
				
12/04	3.00	0.41	12.91	29%
12/03	2.50	0.20	10.31	31%
12/02	1.90	0.14	8.01	30%
12/01	1.43	0.09	6.24	29%
12/00	1.13	0.10	4.90	29%
12/99	0.87	0.09	3.87	28%
12/98	0.69	0.08	3.08	28%
12/97	0.57	0.07	2.47	29%
12/96	0.47	0.06	1.97	30%
12/95	0.37	0.05	1.55	30%
			1.23	

The BV/S values are my "psuedo" book values and the ROE is my 
calculated value based on these numbers.

This would suggest that HDI has consistently generated an ROE in the 
region of 30% for the last ten years.  WB likes > 15%.  The current 
price though even after the recent fall is still 3.6 times my 2004 year 
end calculation for BV/S.

My interpretation of this is:

1.  If HDI continues to perform in the future as it have done in the 
last ten years, one should be able to expect a long term total return 
before taxes on somewhere close to 30% per annum.

2.  HDI's own forecasts for future growth are lower than they have been 
in the past (10 - 15% per annum going forward over the medium term as 
opposed to 26% per annum over the last 10 years).  Depending on how 
much earnings they need to retain to fund this lower growth, it is 
likely that future ROE will not be maintained at 30%.  If they 
significantly increased the payout ratio and still maintained 10 - 15% 
growth, it is possible that they could still achieve an ROE of 30%.  On 
balance though, I expect their future to be less rosy than the past ten 
years.

3.  Since the current price is 3.6 times my calculated BV/S, there is 
plenty of scope for significantly reduced returns in the short term.

Still:

After a lot of searching, I have found this to be one of the more 
attractive stocks right now after:

1.  Ignoring financial stocks

2.  Looking for a solid, conservative balance sheet

and

3.  Looking for companies that have real intrinsic value.


I'll probably wait a while before my next purchase to:

1.  See if the market gets any more attractive

and

2.  To take time searching for my next stock.

I am generating a list of stocks that generally meet my requirements, 
but are too expensive at the moment.  I can keep an eye on these hoping 
for some short term bad news (like I hope is the case with HDI) to give 
me a buying opportunity.

StevnFool
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No. of Recommendations: 3
Hi Steven,

HDI looks like a very good business from the numbers you present. I've
never looked into them so have no comments about their financials, etc.
A documentary I saw on TV, about development of a new motorcycle model,
suggested a fair bit of depth to their design people and management,
and many of them showed pride in their products and their business.

Honda used to be more of a motorcycle firm. Also true of Suzuki maybe?
The potential for HDI is not necessarily limited by motorcycle buyers.
Especially with emphasis on fuel economy, and people looking for
vehicles which have efficient engines but still enough power to haul
the shopping.

One of the things I like to do, in the abstract anyway, is find a firm
which is in a good line of business, with reasonable future for demand,
and which has a management which has the right attitudes - emphasis on
being rational, profitable, sustainable, continuous improvement in the
business operations and re costs, and is honest towards shareholders.

Then trust the management to make good decisions about the details and
to safeguard my fractional interest in the retained earnings and other
benefits from being part-owner of that business. It is impossible to be
as up to date on the monthly financials and sales prospects, or other
opportunities which arise, as the people who are day to day managers.

One I recently bought into a bit more was Norbord (NBD on TSX - don't
know if they are also NYSE) who make oriented strand board. They seem
to have a good appreciation of how to balance cash generation with the
need to keep up on business opportunities. Right now may be a cyclic
peak, but I'm willing to trust those guys to do their best to maintain
the present dividend and deploy excess cash productively or return it.
The stock has dropped the past two days because it went ex-dividend
on a special dividend. Personally I would rather buy ex-dividend and
avoid paying income tax to retrieve my original investment capital.

I forgot to list my little GRY experiment in the financials I have in
the portfolio. A small thing anyway. Not unrelated to Norbord maybe.

I agree with you about the possible opportunity to buy cheaper later.
It seems to me that rather than waiting for a general discouragement,
it makes more sense to wait for sectoral discouragement. That was the
case 3 years ago with telecomms, and it may be getting that way with
forestry products companies. Though I have still to get serious about
Abitibi or Tembec. Those firms have the potential for big trouble,
though their managements are capable and committed to the business.
It is a time to be developing some familiarity with the candidates.
But until some firms go under, it will not be real industry distress.
And - back to trusting managements - the management of a competitor
with ample liquidity may be able to take advantage of an opportunity
better than an individual investor.

In the auto sector - getting back to HDI perhaps - I've arbitrarily
set a criterion of passenger car sales getting down to about 65 pct
of prior peak, before there is sufficient distress to produce plenty
of bargains. But there can be selected good firms that are being
underpriced, tarred with the same brush as the rest of their industry,
even now. I think I've found one of those, but it may sell for less
in future. A smallcap and I don't want to pump it, so no name here.
But that, for instance, may be the same argument as justifies HDI
even if consumer buying outlook is getting weak and most investors
are shying away from the related stocks.

Back in 1999-ish, I looked seriously into Winnebago, but never took
action. An error in retrospect. It was clear they were doing things
right and management could be trusted to run the business properly,
and the valuation vs price was advantageous. HDI (without any work
done personally looking into the details) may be a similar situation.

So... Good luck!

Woodstove
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