Opportunities among financials

Donald Saltz

May 08, 1992|By Donald Saltz

Financial stocks might scare a lot of investors who immediately think about banks and their loan troubles. But the group also includes mutual funds, brokerage firms and insurance companies, and many of them have been good performers.

Recently, for example, directors of GEICO Corp. of Chevy Chase voted a 5-for-1 stock split after another strong year that elevated the share price to a record high of above 230.

USF&G Corp. reported a quarterly profit before allowing for preferred stock dividends, this coming after a very poor year in which the big insurance holding company lost $590 million. The share price, while still down many points from its level of a couple years ago, nevertheless has improved back to double digits.

Last week, T. Rowe Price Associates of Baltimore has large and record increases in revenues and earnings, up 28 and 32 percent, respectively. The firm is benefiting substantially from the stepped-up flow of public money into mutual funds, even though company costs are up because of heavier advertising and promotion.

The Alex. Brown investment banking and brokerage firm has record-high earnings as the public appetite for owning securities has been whetted by a strong stock market and a quest for better returns on investments.

Despite this earnings strength, Alex. Brown shares are selling for less than five times annual earnings and the share price is down by one-third from the 1991 high when earnings were much lower. T. Rowe Price's shares are also down sharply, from a high earlier this year of almost 50 to a current 36.

Public tastes for investments change, and the enthusiasm that was around for stocks such as T. Rowe Price and Alex. Brown has waned, but the values appear to have improved substantially.

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Investors who choose quality stocks and hold them for the long run -- that is, for a number of years -- avoid much of the stress and just plain concern that affects frequent traders.

One particular stock that has proven itself over decades is Washington Real Estate Investment Trust, an equity trust headquartered in Bethesda. The trust has little debt and lots of cash as well as the expertise to use it well. Over the years, the firm, known as Writ, has progressed well in both share price and dividend payout.

Recently, with the shares selling at more than 25, an institutional adviser as well as Barron's, a financial weekly, advised its clients that Writ's shares were overpriced. This caused an unusually sharp sell-off, with the price declining 1 5/8 in one day and more than 3 points from the level at which the shares had been trading.

Then Writ reported its first-quarter earnings, which were much stronger than results of recent prior quarters. Earnings jumped 19 percent and the all-important (for a real estate company) cash flow rose 16 percent. Writ reported a high average occupancy rate (94 percent) and a near elimination of its mortgage debt (reduced from more than $12 million to less than $2.3 million), resulting in net savings of $227,000 in interest costs for the remainder of this year.

Many of those who sold Writ shares based on the word that the stock was overpriced were whipsawed -- the sellers sold for less for no strong reason, only to see the share price rebound on the good earnings news.

What the sellers overlooked was Writ's accelerating growth rate and a secure dividend payout of about 5 percent with that dividend raised annually for a long number of years. When considering selling a quality holding, shareholders should always think of the long-range outlook as well as additional brokerage fees.

The moral is practically like that of Aesop's fable of The Hare and the Tortoise, simply that "slow and steady wins the race."

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