EDIT: We all make mistakes. A lot of people have gotten burned on their Bear Stearns holdings. While I merely recommended this stock as a short-term speculative buy, I do not want anyone to get the wrong idea and think that I am still recommending them. The “heat” surrounding the financials sector has died down, but I stay fast with my recommendations on LYG, SPG & AFL as the banking sector is the main bad spot here, but international banks are still out of the hot water. Best regards.

The Financials sector of the stock market is HOT HOT HOT! After the sub-prime mortgage crash all but wiped out stock value, investors seem to have found a bottom (or support for you technical guys) and values have begun to turn around. This is certainly one of the hottest areas to invest because of the oversold , undervalued companies that were normally safe refuge against volatility. Lets find some winners.


Banks - The Net Fool Picks Lloyds TSB (NYSE: LYG)

Lloyds TSB is one of the leading UK banks. As such, many investors first figured they would be hedged against the sub-prime crash in the United States. They weren’t. However, they are now insanely undervalued and should rebound strongly with the rest of the financial companies. LYG is trading cheap at just 7.7 times earnings, and show big upside with minimal downside. I contend that UK banks have much more value than United States banks.

Lloyds TSB was upgraded to a “strong buy” by Standard and Poor’s, improving investor confidence and raising bids on the trading floors. LYG recently raised its dividend because of their strong free cash flow to 7.90%, this virtually guarantees profit for 2008 in my books. Competition is fierce in the UK financial services business, but there are a lot of growth opportunities. Their 12-month target was raised to $57, which is virtually a double from their current share price. Their strong free cash flow should allow them to make strong moves to drive demand, and a beta at 0.78 is irresistible. Get LYG on your 2008 wish list.

Real Estate - The Net Fool Picks Simon Property Group (NYSE: SPG)
Simon Property Grp. is one of the strongest plays on the market I have seen to date. Everything seems to signal SELL for us as investors. A P/E ratio at 36? PEG ratio at 2.02? Insiders Selling? It seems like the perfect storm for this real estate investment trust (REIT), but Simon Property Group will come out a winner. They are one of the largest shopping center owners in the US, and is widely expected to prosper from further Fed rate cuts and strong relationships with retailers.

SPG has a diverse portfolio in both whom they do business with and where they invest in property. Further growth overseas as well as in the US could be a major catalyst into the future. I think they are undervalued despite hideous ratios. Standard and Poor’s analysts expect this valuation to turn more favorable due to positive operating performance and easing concerns on the housing market risk. Simon Property Grp. releases earnings on February 1st, and I forecast favorable growth. They have been growing above industry standards, and have gotten hit over the last three months. I call for a rebound. I call for SPG.

Insurance - The Net Fool Picks Aflac Inc. (NYSE: AFL)
Aflac is one of the safest places to find growth in 2008. Despite rocky surroundings, Aflac dropped only 2.8% year to date. I smell a victory here after a small sell-off to begin the year. Strength in Aflac should be demonstrated through their operations in Japan. They own a market-leading position, and made a recent partnership with Japan Post Network Co. to secure this into the future. Unfavorable movements in the dollar/yen exchange rate could hurt this, but I think AFL’s share repurchase plan and increasing dividend (now 1.3%) should offset this possible shortcoming.

Aflac is consistent. This is shown in their 100th-percentile “investability quotient” rating and a beta at a ridiculous 0.52. Technical analysis has yielded bullish signals since November, 2007. The fundamental outlook on the life and health insurance sub-industry is neutral, and I really doubt that will change. Aflac is a great buy if you want a consistent stock in an unreliable and often bearish market. If you can make a bid for them at under $58, you should be sitting pretty for the next twelve months. In volatile times, strong and steady is king.

Bottom line: I DO NOT endorse anything coming from non-life insurance for 2008. I just don’t see the growth. Companies like AIG (NYSE: AIG) might do well in the short run, but I simply do not think they will give us the 10%+ we are looking for. That in mind, my recommendations are in Life Insurance, Banks and General Financial. At the time of this post, I am long BSC (under $82), LYG (under $33), SPG (under $83) and AFL (under $58).

-The Net Fool

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