Have Financial Services Stocks Become A Buy?

Have Financial Services Stocks Become A Buy?

Financial services firms are often blamed for causing the current economic problems facing the domestic economy. It has been such a bone of contention with people that even Oliver Stone made a movie about in Wall Street II. But there are several key points worth noting when looking at the viability of investing in these types securities.

The first thing worth considering is that the money that tax payers (aka the government) loaned these financial services firms is coming back to the government and with big gains attached to them. Although the government has had to pressure these financial services firms into repaying their bailout money through the threat of tighter regulation and government involvement, the end result is that the bailout, for the most part, has been repaid and with plenty of interest/gains attached to those amounts. From an investment standpoint, this proves that these firms have been able to generate enough cash to repay those loans continue to recapitalize under stricter lending provisions.

The second thing worth noting is that failures in the financial services arena, while rising, have reached something of a tipping point. Although the total number of failures in 2009 was 140 firms and 2010 is sure to exceed that number, the financial damage that these failure are causing are less than half of the amount it cost the FDIC last year and less than one third of the costs incurred in 2008. So, while more firms are actually failing, they are smaller firms. Many experts call this a turning point for financial services firms given the reduced costs associated with the failing firms.

It is also worth noting that the FDIC, which entered 2008 with a surplus of roughly $50 billion, ended up running a deficit in 2009 to the tune of $15 billion. Given the renewed faith in the financial system, the FDIC has been able to collect premiums from its members in such a way that has allowed them to reduce their deficit considerably in 2010, proving that the FDIC system not only works, but that it has helped to stabilize the failures of the weaker firms. Domestically, this is an accomplishment all on its own.

Given the strong cash generation abilities of the larger financial services firms and the reduced amount that the FDIC is spending on failures, it appears that the financial services arena has seen something of a turn-around. With improved regulation and stricter practices, these firms are quickly likely to become some of the most powerful firms in the world, yet again. And for investors with an appropriate risk tolerance, that means these firms might be at ideal prices today, well worth considering in terms of long-term capital appreciation.