TAKING STOCK: A soybean-frosted market goes best with a slice of grape pie

Dear Mr. Berko:

Like you, I think the Dow Jones is way too high and that current prices for many stocks are too high. But I have $26,000 I can afford to put at risk in the market. I don't want to buy commodities or options or invest in fancy computer trading strategies. I would like to buy some issues you think are very underpriced for the long haul. I don't need this money, and I don't want to lose it, but I don't want it to sit there in cash earning less than 1 percent. So I'm willing to risk it in hopes of a potentially good return.

MB in Aurora, Ill.

Dear MB:

Federal Reserve Chairman Ben Bernanke finally came clean in late March, commenting that there is not enough domestic spending to sustain an economic recovery and admitting that: "We lack a source of demand to keep the economy growing." Few comments could be closer to the truth or as publicly candid.

Almost all rehires are paid less for their new jobs than they earned prior to being laid off. While consumer income has fallen, lower mortgage payments and the assumption of significantly higher personal debt have allowed their purchasing power to remain strong.

Corporations are earning more money because they employ three people today to do the same work four employees did yesterday. Note the longer lines and stinky service at McDonald's and Walgreens. Try to find sales help at JCPenney or return an item at Best Buy. You'll fall asleep while "on hold" with Visa or American Express, or miss your flight waiting for a ticket agent on the phone with Delta.

And while prices haven't zoomed, consumers are being hurt by a clever barrage of new fees, charges, expenses, add-ons, usage costs, return charges, surcharges, surtaxes, new delivery charges and service costs, which were complimentary a year or so ago. Last year, the airlines made $2.7 billion in baggage fees. This works for a while, but at some point, all this mish-mash becomes counterproductive, and earnings growth begins to lose traction. Bernanke knows there's trouble in River City, which is why he's keeping interest rates low. However, Ben won't give us the straight skinny about the economy until after the election, because truth always defers to politics, no matter who runs the White House.

I think of the market like grape pie, radish cake and soybean frosting. It looks good, but it just doesn't taste right to me. However, there may be some very low priced regional bank stocks if you have three to five years' worth of patience. One issue that may be fruitful is Doral Financial (DRL-$1.54), home ported in San Juan. DRL, founded in 1972, has 29 branches in Puerto Rico and seven in Florida that could earn 18 cents this year and 49 cents in 2013. Its book value is $3.80, and DRL could be $8 a share in five years.

Another is Huntington Bancshares (HBAN-$6.23), a Columbus, Ohio, bank founded in 1866, with 652 branches in Ohio, Michigan, Pennsylvania, Virginia and Indiana. Its book value is $6.53, it pays a 16-cent dividend, and it expects to earn 56 cents in 2012 and 66 cents in 2013 and a possible dividend increase. By 2017, HBAN could trade in the mid-teens.

Synovus Financial (SNV-$2.10), founded in 1888 and home ported in Georgia, generates $1.1 billion in revenues from locations in Florida, Tennessee, Georgia and Alabama. SNV has a $2.55 book value and should earn 9 cents in 2012 and 18 cents in 2013, and by 2017, its share price could reach $8 to $10.

Flagstar Bancorp (FBC-98-cents) is a Troy, Mich., bank founded in 1987. FBC has 162 locations in Michigan, Indiana and Georgia, and with $303 million in revenues, it may earn a penny a share in 2012. In 2013, revenues should increase by 10 percent, and earnings could improve to 6 cents. The shares trading at 65 percent of its $1.55 book value are likely to grow four-fold in the next five years.

Finally, Popular Inc. (BPOP-$2.05), founded in 1917 and headquartered in San Juan, expects to produce revenues of $1.8 billion in 2012 from 200 branches in New York, New Jersey, Illinois, Texas and Florida. BPOP has a $3.97 book value that should earn 19 cents in 2012 and 29 cents in 2013. BPOP could trade at $10 in the next five years.

Don't try to cherry pick from this list. Rather, invest $5,000 in each issue, and use a discount broker such as Schwab or Vanguard and save more than $600 in commissions costs.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Wed, Apr 18, 2012