The housing market is in a rapid state of decline. Aggressive lenders are imploding because they overextended themselves by making risky loans to borrowers without the means to pay them back. The mortgage industry is in decline following a multiyear boom.
The combined weakness in all of these sectors is dragging down the entire economy and stock market with them. However, a few “antibank” stocks are about to heat up.
Overall, the current situation seems pretty familiar, right? Is it the Savings & Loan crisis or the subprime crisis? Tough to tell them apart; they’re both eerily similar.
The causes are the same, impact is the same, and the medium-term outcome is going to be the same… a recession and years of lack of confidence in the economy. Two conditions that do not bode well for the slowing bull market we’ve enjoyed for years.
And just like the S&L crisis, the more we learn about how deep subprime-related problems reach, the more it’s looking like it’s going to take years to get out of this mess. Two decades ago, it took years for banks and banking stocks to recover from the S&L crisis. Meanwhile, the antibanks flourished.
There’s always a good investment opportunity, even in the United States, regardless of how gloomy things look. All we have to do is look back to see what to do now.
Following the S&L crisis, it took U.S. economy about five years to fully recover. And just about the same amount of time for the stock market.
Some of the best-performing investments during that time were in, of all places, the financial services sector. Right now, bank stocks are falling apart. The plummeting share prices of widely held Citigroup, Bank of America, Washington Mutual and dozens of other banks have cost investors a lot of money.
The most aggressive and biggest risk-taking banks, which have been acting with a level of responsibility comparable to hedge funds or defunct Savings & Loan operations, are finally paying the price. And they’re taking the rest of the financial services sector down with them. The fallout has dragged down the S&P Financial Services Index by 20% in six weeks.
When an entire sector falls this fast, there has to be a few values that get dragged down with the rest of the crowd.
There are plenty of businesses that do well when the financial services sector is hurting. In fact, antibanks perform best when the financial markets are at their worst. Antibanks are the companies that do best when interest rates are moderate and stock market values for companies are low.
In 1985, just a couple years before the Savings & Loan crisis really started causing problems, Peter Peterson and Stephen Schwarzman, founded one of today’s top antibanks, Blackstone Group (BX:NYSE).
They started with a mere $400,000 in cash and a small office in New York City. Now, 22 years later, this antibank has amassed more than $91.8 billion in assets free and clear. When you account for additional capital infusions along the way, Blackstone has earned an average 23% annual return for the past 20 years.
Antibanking is good business… and it’s only going to get better. As the Fed keeps interest rates in a holding pattern to combat inflation yet help spur economic growth and the stock market falls, antibankers like Blackstone will seize the opportunity.
After all, in the private equity and takeover game, its about being able to borrow more money at lower costs and take over public companies with depressed, even distressed, values.
So, if we’re right and expect bank stocks to fall even further and want to take full advantage of the subprime crisis, we’ve got to look at the antibank stocks. Here are three of them:
1. Blackstone Group (BX:NYSE) – As one of the leading takeover artists in the world, falling stock prices are about to be a boon for Blackstone. And with China owning 10% of the company and sitting on well over a trillion in foreign exchange assets ready for investment, Blackstone’s not going to have much trouble raising money, either.
2. Berkshire Hathaway (BRK-A:NYSE) – The investment company headed by Warren Buffett has averaged returns of 22% over the past 20 years. This antibank’s value-minded investment strategy, long-term outlook and acquisition-mindedness are likely to keep that impressive average holding up strong. Although, the premium valuation on the shares do limit the potential upside.
3. American Capital Strategies (ACAS:NASSDAQ) – Although by far the smallest of the three, it has just as much upside as the others. A healthy balance sheet and a quickly growing revenue stream are going to pay off well for shareholders of this antibank.
All antibanks are created equal. The “Buffett Premium” is alive and well with shares of Berkshire Hathaway not giving an inch. But two other antibanks have been dragged down with the entire financial sector and offer a much better value.
Antibanks Offering Significant Value
When it comes to the subprime crisis, take a look past all the headlines, multibillion-dollar paper losses, eventual finger pointing, or when Congress will decide to step in and throw some money at the problem… and figure out who’s going to prosper.
It’s kind of tough to have so many losers without a few winners in the bunch. Those winners are going to be the antibanks.
Good investing,
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