Don’t throw out the baby with the bathwater.

The adage is useful in wide swathes of life. It’s certainly helped me more than once or twice in raising two children.

But as investing advice it’s often just plain wrong. The truth is that some of the time you would do well to throw out the baby with the bathwater.

Take Spanish bank stocks. No doubt about it, you would have been better off getting rid of them all in your portfolio back when the euro debt crisis hit. For example, Banco Santander (STD), my favorite Spanish bank stock even now sold in New York as an American Depositary Receipt (ADR) for $14.04 on January 15, 2010. You could have sold all Spanish bank stocks then when a new Greek government revealed that the Greek budget deficit for 2009 was 12.7% instead of 3.7%, thanks to some deceptive accounting. You could have sold at $10.42 on November 15. In November the European Union decided to bailout Ireland. On April 18, 2012, Banco Santander traded at $6.37.

Or take solar stocks. You would have been better off selling everything in that sector back in December 2011 when it became clear that all the cash-strapped governments of Europe—and the Germans too—were going to cut solar subsidies in 2012. First Solar (FSLR), for example sold for $47.99 a share on December 7, 2011 but closed on April 18 at $21.38.

Or shares of natural gas producers. You would have been better off selling off the entire sector sometime after natural gas prices peaked in the summer of 2009. Shares of Chesapeake Energy (CHK) traded at $27.27 on September 28, 2009. They closed at $18.11 on April 18, 2012.

By better off, I mean simply that in these instances an investor would have lost a lot less money by throwing out the baby with the bathwater and selling everything rather than either holding on in the belief that the carnage would soon be over or that some stocks in the sector would manage to escape the general blood-letting.

So why don’t we all and always get this call right? Why, for example, am I sitting on shares of Banco Santander and solar cell producer Yingli Green Energy (YGE), for example, in my Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ and Dividend Income http://jubakpicks.com/jubak-dividend-income-portfolio/portfolios, respectively?

Because sometimes it’s hard to correctly identify the bathwater. And because sometimes it’s hard to know exactly how deep the bathwater will get. And sometimes because we want to make sure that we’ll be able to find the baby again when we want to.

Let’s see if recent history can teach us anything about doing a better job—by which I mean more profitable—with those babies and that bathwater. I think I’ve found five baby-and-the-bathwater rules worth considering for the next market crisis. Or for the next stage in any of the ongoing ones. Read more

Update U.S. Bancorp (USB)

Now that’s what strong bank earnings look like.

This morning before the open in New York U.S. Bancorp (USB) reported earnings of 67 cents a share (or 70 cents a share including releases from loan-loss reserves.) Wall Street analysts had been projecting earnings of 64 cents a share. (U.S. Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Other banks have beaten estimates so far this quarter but none have shown quite the strength across all key metrics as U.S. Bancorp. Average loan growth came to 6.4% year-to-year as commercial loans rose by 17.3%. Residential mortgages rose 19% from the first quarter of 2011. Average deposits increased by $5 billion or 11% year-to-year.

Credit quality continued to improve with non-performing assets falling 6% from the fourth quarter of 2011. That was a slowdown in the rate of improvement since non-performing assets fell by 15% in the fourth quarter from the third, but that’s only logical since credit quality has already shown so much improvement. Net charge-offs came to $571 million for the quarter, a drop of 8% from the fourth quarter of 2011. U.S. Bancorp released $90 million from its loan loss reserves and in the company’s conference call management told analysts to expect that reserve releases will continue to show a slower pace in 2012.

The bank’s Tier 1 common equity ratio using the Basel III rules is now 8.4%, well above the 7% minimum. Return on equity climbed to 16%. The bank raised its quarterly dividend to 19.5 cents a share after the Federal Reserve’s stress test from a prior 12.5 cents.

The items that I’d been worried about going into the quarter turned out not to be a problem. Read more

Half a loaf from Wells Fargo (WFC) Friday morning. The bank reported first quarter earnings of 75 cents a share. That was 3 cents a share above Wall Street estimates and a 12% increase from the 67 cents a share that the company earned in the first quarter of 2011. (Earnings were bolstered by $400 million release from reserves against bad loans in the quarter.) Revenue climbed—a novelty in the banking industry lately—by 5% from the first quarter of 2011 to $21.64. Wall Street analysts were expecting $20.5 billion in revenue.

But the strength of the story this quarter really depends on what part of Wells Fargo you looked at.

The mortgage business went great guns in the first quarter with the bank originating  $129 billion in mortgages. That was an increase of 7.5% from the $120 billion originated in the fourth quarter and a 54% increase from the $84 billion originated in the first quarter of 2011. This is the kind of performance from the bank’s mortgage unit that investors who have bid up the shares 24% for 2012 through the April 12 close were expecting. Wells Fargo’s mortgage business should be taking advantage of a retreat in the mortgage market from competitors such as Bank of America (BAC)—and it is.

The bank’s lending business wasn’t anywhere near that strong a story. Read more

That didn’t take long.

Hours after the Federal Reserve announced on March 13 that US Bancorp (USB) was one of the 15 financial companies that had passed its annual stress test (for more on the stress test and winners and losers see my post http://jubakpicks.com/2012/03/13/four-financial-companies-actually-fail-the-federal-reserves-stress-test/ ) and could therefore go ahead with its plans to raise dividends and increase its share buyback program—the Minnesota-based bank did exactly that. The board of directors approved a 56% increase in dividends to a quarterly 19.5 cents a share (78 cents annual dividend) payable on April 16 to shareholders of record on March 30. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/  )

The board of directors also authorized a new stock buyback plan of up to 100 million shares through March 2013. (The bank has 1.91 billion shares outstanding before the buyback.)

The new annual dividend of 78 cents a share takes the yield on US Bancorp shares up to 2.48% from the current 1.61% at today’s price of $31.48 (as of 12:30 p.m. New York time).

I added this stock to my picks on March 26, 2010 in anticipation that the bank would work to restore its pre-Lehman payout level and that the bank was in a strong capital position that would allow it to pick up market share in its core businesses.

I think that thesis still has a way to run. I’d raise my target price on these shares, currently at $33, to $35 by October 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of US Bancorp as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Four financial companies actually fail the Federal Reserve’s stress test

The Fed speaks: Lots of surprises.

In contrast to the don’t disturb the waters statement from the Fed’s Open Market Committee earlier in the day on interest rates and the U.S. economy, the Fed’s 4:30 p.m. (New York time) announcement of the result of its annual stress test of 19 big U.S. financial institutions blew a couple of smoking holes in the banking sector.

Yes, 15 of the 19 financial companies tested passed. They’ll now be able to increase share buy backs and dividends. In fact, JPMorgan Chase (JPM) has already announced that it will increase its quarterly dividend to 30 cents a share from 25 cents a share. (Record date for that dividend is April 5.)

But four financial companies failed and won’t be allowed to increase their dividends or buyback plans. And from the market’s reaction in afterhours trading nobody was expecting those results. Read more