Buying bruised shares

MrExample

Hi,

I've been dabbling a bit in share trading lately -- just a bit, nothing I can't afford to lose. Anyway, a lot of shares seem to be tumbling at the moment, and my gut instinct is that from an investment perspective, this seems great -- buying low seems like a good strategy. Big banks are going to bounce back at some point, right?

But it occurred to me that I might be making a schoolboy error: the shares could be low simply because they ain't worth anything.

Considering that I am hoping to invest for 5-10 years (perhaps even longer) -- is it wise for me to be buying shares that are either severely bruised, or sliding?

Case in point: Bradford & Bingley. They seem like an otherwise profitable and stable business, and offer a modest dividend yield. The shares are some 20% down -- a likely bargain in the long-run, or am I foolishly ignoring a serious economic crisis?

[Deleted User]

Some of the larger UK bank shares definately look a bargain to me, especially If you're planning to invest for 5 to 10 years. My favourites would be Barclays, RBS and HBOS. I would avoid B&B for a while to see what happens next; we all saw what happened to NR! This is not intended as investment advice, simply my humble opinion; and NEVER invest more than you can handle losing!:money:

gazza975526570

RBS shares have ogne down by over 50% over the last year.

My opinion is that hilst there will be further volatile reactions over the medium/longer term there is money to be made in them

spalding

So long term wise who would be the best banks to invest in?

purch

buying low seems like a good strategy

Yes........but you won't know if you managed to buy Low for a few months after the transaction.

A major Bank, somewhere in Europe is going to get into severe financial problems over the next few months. How that situation is handled, and how the market reacts will determine whether or not the Banking sector is underpriced or not, currently.

Looking a historical data, and P/E ratios etc etc will not help as we are in a whole new ballgame at the moment

Yes, there are many Banks that will emerge relatively unscated, but the sector as a whole will be damaged, and may take a few years to sort itself out.

tradetime

Prices in the banking sector are historically low due to a great deal of uncertainty, markets hate uncertainty. Banks continue to write down $billions in sub-prime exposure and it is not all out there yet. You have no doubt heard of CDO's (Collateralized debt obligations) these are the complicated products fashioned by Wall street into which they were able to package all sorts of garbage such as sub-prime loans, along with some high quality stuff and gain very high, often AAA credit ratings, as we have seen with the sub-prime crisis, the sub-prime element can wreak a lot of havoc with these. I actually don't think even the banks are sure which ones are likely to go bad untill they do, so it tends to be a wait and see approach.

However more worryingly there is a growing consensus that sub-prime mortgage write downs are the tip of the iceberg, the contagion has already spread to credit card loans and car loans, but the piece of paper many are whispering about at the moment are known as CDS's (Credit Default Swaps), these are a kind of insurance product built on top of junk bonds. The market for CDS's is estimated to be over $400 trillion though it is thought that real exposure is somewhere between $27 and $90 trillion. An article here covers these and the risks. (I do hope this article is way OTT). However as I've said elsewhere I do expect a major US financial intitution to collapse this year, and given the inter linking of global financial activities it will have repercussions around the world. To wit i would expect some banking names will not exist this time next year.
Thus I would say investing in the financial sector right now is high risk investing, akin to playing Russian roulette.

MrExample

Thanks for the thoughts folks. I've decided to diversify a bit and invest in some safer sectors. Since the whole stock market is down, I suppose there are plenty of good buys. I went with a few banks too, but invested less there than I planned to originally.

rrwfotr

Hi guys how about BT at the mo?? They are going for £2.30 and earing per share / dividend increased to 15.1p not a bad return no matter what happens to the share over the short to long term??

spalding

rrwfotr wrote: »

Hi guys how about BT at the mo?? They are going for £2.30 and earing per share / dividend increased to 15.1p not a bad return no matter what happens to the share over the short to long term??

Funny you should mention them just pick some up myself looked good at that price

rrwfotr

spalding wrote: »

Funny you should mention them just pick some up myself looked good at that price

I know what you mean, I picked some up the other day, I'm not bothered really about the price as the price to div is very good, So as I'm looking at the long to mid term I don't really care as long as the div's good. Am I missing something with BT as a good income share??

Cozworth806

I have made a loss of about £500 on £3000 in the last month by buying banks, Barclays, RBS (still holding those) and B&B (great call that one!!)
The fundamentals look fine, if you believe that the ongoing problems won't get worse, and the CDO's and SIV's bad debts will not go onto the P&L account, which will mean that the years profits could be wiped out (ala B&B)

I would suggest looking at buying half now and if the price drops then average down if you dare. A 15% stop loss may be a good idea, but with the volatility the price can go down 40p and then bounce back in a matter of days. (Part of the reason I lost so much)

Which banks? RBS has a large product/company range, but the ABN takeover does cast a shadow over them. Barclays is possibly a safer bet, but maybe wait till their results on Tuesday. The reason for these two is because they have diverse income streams, so should not be as affected from a housing slowdown. Lloyds TSB is also a favoured one, but that is heavily focussed in the UK, so is more conservative, but also more prone to a UK slowdown. (pays money take your choice, so do your homework)
They are yielding 7.4% (BARC) 8.5% (LLOYDS) 8.9% (RBS) as at Friday close against projected dividends for year end. The New Star Financial Opportunities Fund is yielding 7.46% and may be a better way in investing in a range of banks etc.

As for BT, I also hold those but bought in at 266 and then averaged down. Now in at about 250p average. These should be fairly secure at these levels, but companies like Carphone warhouse and Sky with LLU exchanges are eating into their natural profit streams. They are countering this but expanding into consultancy etc.

None of this constitutes advice of a reconmendation