12 September 2005

A couple of Cramer choices took big hits today. Are they buys now? First up, CBH

As you know, I bank at Commerce, and its stock resides on the WershovenistPig Stock Watch List. Cramer loves Commerce Bank. Although he recently sold some shares from his charitable trust, he then publicly regretted the move as Commerce's stock continued to rise. Until today...

From the Movers & Shakers section of Marketwatch.com:


Commerce Bancorp (CBH: news, chart, profile) shares fell 7% after the Cherry Hill, N.J., banking holding company revealed in a filing with the Securities and Exchange Commission that it expects to miss Wall Street's profit forecasts for both the third and fourth quarters. The company said it expects to post per-share earnings of 45 cents in both periods. At last check, analysts polled by Thomson First Call were looking for third-quarter earnings of 47 cents a share and a fourth-quarter profit of 48 cents a share.

Montpelier Re Holdings Ltd. (MRH: news, chart, profile) shares dropped 13.8% after the company said it estimates an impact of between $450 million and $675 million from Hurricane Katrina-related flood losses. "This is a significant net loss for us," said Anthony Taylor, the company's chairman, president and CEO, "but nevertheless it remains consistent with the nature of our business plan and our capitalization remains strong."

More details are in Matthew Goldstein's piece
at thestreet.com. Here are some choice excerpts:

The flattening yield curve is squashing profits at fast-growing Commerce Bancorp (CBH:NYSE) .
The New Jersey-based lender warned Monday that the narrowing spread between short-and long-term interest rates will reduce its profits in both the third and fourth quarters.
"The continued flattening of the yield curve over an extended period of time has had a greater negative impact on net interest income, net income and earnings per share than originally projected by management," the company said.
Ever since the Federal Reserve began raising interest rates a year ago, banks have been forced to deal with a flattening yield curve.
Normally, long-term rates rise when the Fed increase short-term rates. But that's not happening this time. And the narrowing spread between interest rates has made it more difficult for banks to make money off of their investments.
"I try to avoid financial institutions that have large securities portfolios,'' says Michael Stead, the manager for River Aire Investment, a hedge fund that mainly invests in financial stocks. "It's really an extent of how much of the assets are tied up in securities. And what is the average life of those securities.''
Stead doesn't own shares of Commerce and says he has shied away from the bank because its growth has been heavily tied to its investment strategy.
The flattening yield curve also has a negative impact on a bank's lending operation, because there's less of a spread between a bank's own borrowing costs and the interest rate it can charge borrowers. A small spread diminishes the profit opportunities for a bank.

However, Commerce's warning could be harbinger of more bad news to come.

CBH's IBD ratings earlier today were 90/72/D+/A/B+. That 72 Relative Price Strength rating is now a 52 after CBH closed at $30.75, down $3.01.

I've been reading and hearing mentions of the flattening yield curve. I think that may have been the major factor in Cramer selling shares in CBH. But then he convinced himself and his viewers that CBH was more like a retailer than a traditional bank. Well, the retail sector is no great shakes right now, but the banking sector is worse (note the D+ grade; that's for the sector).

I'm keeping CBH on the Stock Watch List because it is a great bank with growth potential. I just don't know how soon that potential will be realized. The banking sector is not where I want to be right now, so even with this significant drop, I would be cautious in purchasing CBH, or any bank, right now.

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