Is It Time to Buy Bear Stearns?

Whenever a good company falls upon hard times that could very well just be temporary, it pays for value investors to take a look and see if Wall Street has overly punished the stock. After the hedge fund blowups at Bear Stearns (BSC) recently (they made some bad bets in the mortgage market), BSC stock has retreated more than 30 points from its highs, as the chart below shows.

Is the stock a bargain? Well, I compared it with the other big investment banking companies and I expected to see more of a discrepancy in the valuations than I found. The Big 5 (Bear along with Goldman, Lehman, Merrill, and Morgan) all trade right around 10 times forecasted earnings for 2007. As P/E multiples go, buyers of BSC aren’t getting any discount compared with the likes of Goldman Sachs (GS). That didn’t exactly get me excited about bottom fishing with Bear.

I also looked at a ratio called price-to-tangible book value. This measure is the same as price-to-book, but ignores intangible assets that can’t be easily and quickly valued. Book value is perhaps the most important valuation metric for banks given that the vast majority of their assets are liquid financial instruments and all banks pretty much do the same things business-wise, for the most part.

On this measure Bear Stearns trades at a discount of 1.6 times net tangible assets. This compares with 3.1 times for Goldman and between 2.2 and 2.4 times for the other three major players in the industry. As you can see, investors are paying up for Goldman’s superior track record and management. While Bear is cheaper, the stock would probably have to get down to 1.5 times book or less for me to really get excited about it as a contrarian play. That is not to say the discount won’t narrow as the sub-prime issues subside, but 1.6 times book isn’t a price that I feel like I absolutely need to jump at. It’s cheap, especially relative to the other brokers, but not ridiculously cheap by any means.

Full Disclosure: No positions in any of the companies mentioned at the time of writing

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5 Thoughts on “Is It Time to Buy Bear Stearns?

  1. Anonymous on July 5, 2007 at 7:52 PM said:

    I bought

    They have a great rep for making money, sounds like to me the sub-prime issues were somewhat isolated. will see.

    (I’m a big fan – keep up the good work Chad!!!!!)

  2. Alex Garcia on July 6, 2007 at 9:20 PM said:

    I like Countrywide Financial as a “sub-prime” target. CFC has a great diversified portfolio with less than 10% if its assets sub prime. As other companies fold, CFC will be able to increase market share and might be able to buy prime assets at discount prizes. Another kicker, its co-found is still steering the boat


  3. I agree with your analysis. It doesn’t seem to me that Bear is really trading at much of a discount. If anything, it was flying kind of high to begin with and the subprime issues might have acted as a catalyst to bring its stock back into a more sane range. I would probably wait around to see if there’s more downside. One stock financial stock that has gotten killed lately (full disclosure: I own shares of it) is Piper Jaffray and it doesn’t seem to have much to do with its fundamentals at all. If anything, it is now trading at a near 1 Price to book which seems to bode rather well at least as far as limiting further downside. Due to acquisitions and sales of divisions recently, it’s financials are kind of funky so I’m not entirely sure what to make of it but I’m holding for now.

  4. Rubens on July 26, 2007 at 6:45 AM said:

    Great call for recommending not to buy Bear Stearns. I am hearing that Bear and Lehman have a lot of undisclosed exposure to mortgage especially sub-prime, well beyond the 2 Bear hedge funds that have been everyone’s focus so far.

  5. Chad Brand on July 26, 2007 at 6:51 AM said:

    Thanks, Rubens. The biggest thing for me with the brokers is that although the multiples are very low (9-10x), it could very well be peak earnings for the sector. So, it’s not as much of a bargain as it appears if that proves true. If housing gets worse, M&A dries up, and the market corrects, earnings will drop and multiples won’t rise to make up the difference. To me, I’d rather go elsewhere for now.

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