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Source; Prepared from FactSet data

The stock went down to $17, at which point I sold. I no longer had faith in the credibility of Westinghouses then management. Westing-house continued to underestimate or refuse to disclose the extent of their real estate problems. It made further write-offs in the next year or two, and the stock drifted under $10 by late 1992.1 should have known-on paper it was just too perfect a contrarian stock!

Price-to-Book-Value Strategies

5. Fleet Financial

Price-to-book value, even more than price-to-cash flow, is an excellent contrarian indicator when a company stumbles and earnings crater. A good example were the bank stocks in the financial crisis of 1990. As real estate free-fell, bank stocks plummeted. Savings and loans, even more dependent than banks on real estate loans, were decimated, and

Figure 8-8

Westinghouse Electric

Price-to-Dividend

6. KeyCorp

Price-to-dividend, as we have seen, also provides above-average retums. At its most effective it can be used with other contrarian methods to ferret out undervalued stocks, providing a combination of above-

the banking industry was severely shaken. In the first nine months of 1990, the Keefe Bruyettes Index of the 100 largest banks dropped an astonishing 50% .

But in crisis, as well see in detail in chapter 12, there is also major opportunity, particularly for the contrarian. Thus, when most bank analysts on the Street were exorcising bank shares out of the hands of investors, some of the banks showed remarkably strong fundamentals. Most traded at 60% or less of book value, including many that had already stepped up to the plate and taken all or the greater part of their anticipated real estate losses. Most sdll had more than adequate capital to meet the requirements of the regulators.

Take the case of Fleet Financial, a large regional bank holding company. The bank took enormous real estate losses in 1990. Eamings plummeted from $3.30 in 1989 to a loss of 51 cents a share the following year. The loss was accompanied by a decline in the stock from $25 to $9. Even after the loss, Fleet had a book value of $17.62 a share, or almost double its market price. A cheap stock even by Benjamin Grahams criteria, back in the depressed thirties.

Although the dividend rate was cut, it was not eliminated. The stock still paid 60% of the previous rate, indicating managements confidence in the future. The stock provided a well-above-average 7-8% yield-on the lower dividend. The dividend was raised in each succeeding year and now is 50% above the rate prior to the cut.

A word of caution: Buying companies that show losses is considerably rislder than simply buying contrarian stocks. The investor must be very sure of the companys financial strength, and should use only a small portion of his portfolio for this pu ose, while diversifying into a number of other issues to spread the risk.

To sum up, price-to-book value was an excellent criterion for banks who stepped up and took their medicine early. At the bottom of the banking crisis they traded at the lowest financial ratios since the 1930s. In the case of Fleet, the stock rose from as low as $9 in October of 1990 to over $24 by April of 1991, a gain of 160%. By late December of 1997 it had appreciated 700% to $73.

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12/90

12/91

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8 : Prepared from FactSet data

12/96

average income and first-rate appreciation. As noted, a higli yield, even if eamings are temporarily depressed, indicates managements confidence in the future. How management and the board of directors react to a serious problem is usually worth noting.

The drug stocks were an example of a group where a combination of high yield and low P/E resulted in investors scoring big. High yield also works well in tandem with price-to-book value. Most of the banks that took large losses on real estate in 1990 cut their dividends but did not eliminate them. The careful investor could thus see that this group of banks had confidence in the future. He or she could also observe that even after major charges, the capital was still well above the minimum required. Too, the regulators, having been bumt by the S&Ls, would bring strong pressure on banks to keep dividends conservative or omit them entirely, if they thought they saw problems in the loaii portfolios.

Figure 8-9

Fleet Financial