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Commentary > Sivy on Stocks
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Stocks for an ownership society
Financials will eventually benefit, but there's no simple link between policies and share prices.
November 4, 2004: 6:33 PM EST
By Michael Sivy, CNN/Money contributing columnist

NEW YORK (CNN/MONEY) - The buzzwords of the day are "ownership society," a catch-all term for various Republican policies that would restructure Social Security, pensions and health insurance, as well as encouraging saving and homeownership.

It's still too early to know what specific changes the newly re-elected Bush Administration will make. But the general direction is clear. Individuals will have more choice and more control over major life issues that affect their finances -- from retirement saving to health care. This doesn't come cost free: individuals will end up shouldering more risks.

Most of Bush's ownership society programs will involve creating investment accounts. There will likely be a broader suite of retirement accounts to supplement 401(k)s and IRAs. In addition, there will be more medical savings accounts as well as new plans that encourage long-term savings.

At the same time, other Bush policies would encourage entrepreneurship and help small businesses.

Hard as it is to derive investment strategies from such vague initiatives, they all have one thing in common: They stand to create new customers for banks, brokerages and mutual fund companies (perhaps that's why those firms contributed more than twice as much to the Bush campaign as they did to the Kerry campaign).

Even so, you can't just assume that every financial services stock is poised for big gains.

The companies that serve as stockbrokers, trustees for accounts, lenders to small businesses and underwriters of new securities will likely enjoy more business. In the past quarter, for instance, both the number and dollar value of initial public offerings was more than triple its level a year earlier.

Nonetheless, there are a host of other forces -- from the level of interest rates to ongoing litigation -- that affect the major financial services stocks. Moreover, not all of them are attractively priced.

The major banks -- Citigroup, Bank of America and J.P. Morgan Chase -- are all cheap, trading at less than 12 times estimated earnings for 2005. But they are the most exposed to the earnings erosion that would be caused by rising interest rates.

Merrill Lynch, also trading at less than 12 times next year's earnings, is a more direct play on a stock market revival and new opportunities for asset management.

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Both Merrill and some big banks are exposed, however, to ongoing litigation over various deals done on behalf of Enron. Analysts say that the actual risks for the companies are limited -- Lehman settled last month for $225 million.

But what happened recently to the insurance companies, including AIG, serves as a reminder that even minor ongoing legal exposure can suddenly turn much more serious.

Investors might feel tempted to focus instead on other types of financial services stocks, such as mutual fund management companies. Only trouble is, those stocks are not necessarily cheap. T. Rowe Price, for instance, is currently trading at more than 20 times estimated 2005 earnings and does not rank high among analysts.

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In addition, all financial services stocks face the risk that the stock market itself will perform badly over the next four years, perhaps because of an unexpected recession at some point (I'm not forecasting that, but it is a possibility).

The best strategy, in my view, is to include big banks and brokerages with P/Es below 15 in a diverse portfolio that includes plenty of conservative choices. My single stock pick for addition to such a balanced portfolio would be Merrill Lynch (Research).

Otherwise, I'd probably look for a well-rated financial services sector fund or an equity-income mutual fund that includes some of these top names and has an above-average holding of financial services, which currently constitute more than 20 percent of the S&P 500.


Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday..  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.