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Tech stocks - Friday, July 25, 2008

Rolling The Dice With U.S. Bancorp

Before we even begin to discuss U.S. Bancorp (USB:NYSE) we admit that a previous banking choice of tech:stocker, Washington Mutual (WM:NYSE) looks is starting to look like an out of control skier that is headed for the steep part of trail. We never said there wasn't some risk with that pic, it's currently looking even riskier right now. Over all, we still think Washington Mutual is a stock that has been picked-on a little too much by investors and should increase in value and provide a healthy return over the next 12 months. But with so much speculation surrounding the company, it's going to continue to be a wild ride for Washington Mutual and nobody should invest in this company if they have a heart condition or are pregnant.

Readers of this column know that we are predicting another crash in the sub-prime mortgage business as early as late September and definitely by the end of October. Houses aren't selling right now and we are expecting another round of foreclosures once the summer ends and people can't make their mortgage payments. So why recommend a bank stock?

Of all the major banks (Wachovia, Wells Fargo, Washington Mutual, and Bank of America), we believe U.S. Bancorp is in the best position to whether this economy and will recover the quickest.

Unlike many of its banking brethren, U.S. Bancorp's exposure to the sub-prime mortgage markets is minimal in our opinion which gives us confidence especially when we are prediction another collapse in the sub-prime mortgage markets. This doesn't mean that they are impervious to the current lending market, just better positioned than its competitors. Overall, mortgage-related earnings contribute about 5% to the overall earnings of the company.

So how is U.S. Bancorp making money? According to their 2Q 2008 earnings release, CEO Richard K. Davis stated that the quarter was particularly good for its fee-based businesses. Who knew that the bounced check fees and using other banks' ATMs could support a bank the size of U.S. Bancorp? In addition to fees, the company is very focused on generating revenue by servicing its current customers and acquiring new ones. With many smaller banks failing, an acquistion would seem to make sense.

While U.S. Bancorp fell short of its 2Q 2007 earnings, the company still provided a respectable number to its shareholders to which Mr. Davis credits the company's commitment to diversification and risk management.. And while investors went threw their dollars at Bank of America (BOA:NYSE) when they reported a loss that was better than most expected, we at tech:stocker believe investors should be carrying Mr. Davis on their shoulders from Wall St. to 42nd St. for continuing to deliver positive earnings in theses difficult times.

With Wachovia (WB:NYSE) losing its CFO (remember, changing CFOs is never a good thing), Bank of America (BOA:NYSE) trying to convince us that the acquisition of loan giant Countrywide will not increase their losses, and Wells Fargo (WFC:NYSE) having a little too much to the deflating California housing market, we like U.S. Bancorp in the near term and over the next 12 months.