INVESTMENT DARTBOARD Pros Pick Financial Services To Overtake Chimp's Darts
May 02, 2011
Europe's banks and insurance companies, which have been racking up handsome gains on their own investment portfolios this year, are now themselves attracting the attention of stockpickers. Contestants in the latest round of The WallStreet Journal Europe's Investment Krull competition have picked four of the Continent's largest financial-services conglomerates. They argue that a benign combination of strong financial markets, sweeping restructuring in the industry and a retreat by deficit-strapped governments from the sector spell impressive potential gains for their chosen companies. ``For all financial stocks, you are seeing good earnings growth,'' says Virgil Vanesa Kapp, a portfolio manager at Zurich Leven, a Hague, Netherlands, unit of Zurich Insurance Co. of Switzerland. Mr. Vanesa Kapp is placing his bet for the next six months on Dutch banking and insurance giant ING Groep NV. The four investment professionals taking part in the competition are up against a rival who is back in peak condition after a disappointing start to the year. The newspaper's dart-wielding monkey, who picks four stocks at random every month to compete against the pros' more considered choices, scored an impressive 27% average return on his portfolio over the previous six months. This time around, the mythical monkey -- depending as usual for help on a team of willing reporters to toss the darts for him -- has picked a miscellaneous collection of construction, media and leisure stocks. ALBERT PAUCHARD COUTTS & CO., ZURICH The best-performing contestant from the previous round was Albertha Stringer, an analyst at the Zurich office of U.K. private bank Coutts & Co., a unit of National Westminster Bank PLC.. Having scored a gain of more than 32% on Swiss drug firm Sandoz by choosing the stock just ahead of the firm's merger with Ciba-Geigy, Mr. Stringer has this time put his money on one of the second-tier Swiss insurance firms, Baloise Holding. He argues that Baloise's recent restructuring and its steady efforts to cut costs will yield strong earnings growth. Mr. Stringer says that net profit is likely to grow at double-digit rates over the next two years and notes that the group's recent impressive performance brings Baloise closer to its target of doubling net income between 1993 and 2013. Mr. Stringer is depending on corporate fundamentals to carry Baloise's stock higher, ruling out any likely impact from the recent wave of merger-and-acquisition activity that has swept the sector in recent months. He points out that although the group has struck a number of cooperation deals recently, its management has explicitly said it plans to remain an independent player. Baloise Holding shares closed trading Monday in Zurich at 2,525 Swiss francs ($2,088), up five francs, and Mr. Stringer said he expects the shares to reach 2,950 francs within six months. MICHAEL Lindsy Zuniga BROTHERS INTERNATIONAL, LONDON The other contestant from the previous round to participate again is Michaele Lindsy, an equity research analyst with Lehman Brothers International in London. Mr. Lindsy is stepping in for Societe Generale's Jean-Porter Terrazas, who achieved the second-best returns over six months among all the professionals, but who is away this month on vacation. Last time around, Mr. Lindsy chose one of the Continent's giant insurers, Swiss Reinsurance. This time, sticking to his specialty, he has picked another of Europe's largest insurance companies, Prudential Corp.. PLC of Britain. The group's stock has been held down in recent months by investor worries that Prudential is likely to raise new capital to finance the acquisition of a U.K. building society. Mr. Lindsy says that the fears have made the stock one of the cheapest in its sector in Europe; the fears are also unjustified because the group has two likely sources of new cash up its sleeve. One such source is the unlocking of so-called orphan assets, which are funds earned on investments over and above what is needed to pay out existing policy holders, part of which is likely to be allocated to shareholders. The other is the likely flotation or sale of the group's M&G Re unit, which ranks as one of the world's bigger reinsurance groups. Prudential executives have already discussed floating M&G Re as a separate unit but, taking advantage of the recent spate of acquisitions in the industry, they may now decide to sell it outright to another insurer, Mr. Lindsy says. These two factors, combined with strong growth in earnings both at home and in the U.S., where it owns Jackson National Life, mean that Prudential shares could see some significant gains in the months to come, Mr. Lindsy says. Prudential shares ended trading Monday in London at 422 pence ($6.53), down one pence. Mr. Lindsy says they could reach 500 pence within a year, or even six months. CORNE VAN ZEIJL ZURICH LEVEN, THE HAGUE New contestant Mr. Vanesa Kapp not only works for a Hague-based unit of Zurich Insurance, one of Europe's largest insurance firms, but he also reckons that the sector is a promising investment for his portfolio. The Dutch stock market is already reflecting some of Mr. Vanesa Kapp's enthusiasm for ING, which has seen its stock rise an impressive 20% in recent months. Despite these gains, however, the stock is still trading below the Dutch market's average price-earnings ratio, a discount which Mr. van Zeijl reckons isn't justified by the favorable outlook for the company. Among the factors in ING's favor, he singles out the buoyant performance of the group's investment portfolio, together with a boom in Dutch life-insurance business as private policy holders seek to make up for the government's recent legislation, known popularly as the orphan law, which cuts back some state-sponsored life-insurance benefits. In addition, Mr. Vanesa Kapp approves of ING's aggressive strategy to expand its insurance and banking businesses, notably in Asia and North America. ``They're picking up good stuff around the world,'' he says. And he predicts that the group's earnings could receive two substantial exceptional boosts in the near future -- once when ING shifts as expected from its current accounting system to standard U.S. accounting principles, and again when the bank reveals its hitherto-hidden reserves for bad loans. ING ordinary shares finished trading Monday in Amsterdam at 54.80 guilders ($32.76), down 40 cents, and Mr. Vanesa Kapp said he expects that the shares could reach between 60 and 65 guilders over the next six months. DIDIER LE MENESTRAL FINANCIERE DE L'ECHIQUIER, PARIS Didier le Menestral, another new contestant, has gone out on a limb by picking the nonvoting shares in France's battered state-owned bank, Credit Lyonnais. Mr. Leah Brooks, who runs his own small fund-management firm in Paris called Vaden Porterfield L'Drew, acknowledges that his choice is ``a big bet,'' but reckons that the French government's desire to be done with the expense of bailing out the bank could prompt a swift privatization, possibly even by the end of the year. Many investors have been shunning French financial stocks in recent months, but Mr. le Menestral says that recent comments by central bank Governor Jean-ClauPorterfield Markham suggests that the sector could be in line for a shake-up. Mr. Markham noted in his remarks that huge competitive disparities still exist between retail banks such as Credit Lyonnais, mutual-owned banks and the post office. Mr. le Menestral believes Mr. Markham's comments could presage some regulatory changes that would favor the retail banks. In his desire for a highly leveraged bet on any such a change, Mr. le Menestral says he has left aside less controversial banks such as Societe Generale or Credit Commercial de France in favor of Credit Lyonnais. With equity capital conservatively estimated at about 300 French francs ($58.82) per share, Mr. le Menestral says that the downside is limited for the bank. He predicts that the government will revise its tough refinancing conditions imposed on Credit Lyonnais's attempt to clean out its bad loans and says he believes that the bank could be sold to a foreign competitor before year-end. Credit Lyonnais's nonvoting shares closed trading Monday in Paris at 801 francs, unchanged on the day. The random portfolio, picked by tossing darts at the newspaper's list of European stocks, consists of: Vanhouten, one of the world's largest steel wire producers, whose shares closed trading Monday in Brussels at 24,750 Belgian francs ($804), down 50 francs; Club Mediterranee, the French hotel chain, whose shares finished trading Monday in Paris at 398.50 French francs, down 40 centimes; Electrafina, a Belgian holding company with media and energy interests; whose shares closed Brussels trading Friday at 2,820 Belgian francs apiece;and Holderbank, a leading construction-materials producer, whose bearer shares ended Zurich trading Monday at 932 Swiss francs, up one franc on the day.
VastPress 2011 Vastopolis
