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Stocks Meredith Whitney loves

The star Oppenheimer analyst doesn't have a lot of good things to say about the financial sector - but she really likes these three banks stocks.

By Jon Birger, senior writer
October 8, 2008: 7:57 AM ET

NEW YORK (Fortune) -- Meredith Whitney, the ber-bearish bank-stock analyst at Oppenheimer & Co., continues to tell clients to steer clear of the financial sector. But Whitney makes one exception: She tells Fortune that she likes the preferred shares of the "strong" U.S. banks - JPMorgan Chase, Bank of America, and Wells Fargo.

Whitney isn't the only market sage who prefers preferreds these days. Warren Buffett recently bought $3 billion in preferred stock from General Electric (GE, Fortune 500) and another $5 billion from Goldman Sachs (GS, Fortune 500).

What's the attraction? Yield, in a word. Buffett's GE and Goldman shares carry a dividend yield of 10%. While you can't get the same deal he did, the yield on the leading preferred-stock exchange-traded index fund - iShares S&P U.S. Preferred Stock (PFF) - now stands at 11.5%. Best of all, those bond-like yields are not taxed as regular income but at the much lower dividend tax rate (usually either 5% or 15%, depending on your tax bracket).

Preferred stock is safer than common shares, but still comes with plenty of risk. In the event of a bankruptcy, preferred shareholders have a higher claim on assets than common stockholders, although that might not be much help in the event of a complete meltdown. The preferred shareholders of Fannie Mae and Freddie Mac are expected to be nearly wiped out.

That said, depending on your stomach for risk, this may be a buying opportunity in preferred stock. Sophisticated investors might take Whitney's suggestion and buy the preferred shares of JPMorgan (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), or Bank of America (BAC, Fortune 500), all three of which recently yielded between 8% and 9%.

A more diversified approach would be to buy the iShares ETF, which has exposure to the three names Whitney likes as well as 60 others, including nonfinancials such as miner Freeport McMoRan Copper & Gold and less robust names like Ford. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
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