Officially we are now in Bear markets.So in times like this,one may wonder if there is any stock worth investing in. Well, there are stocks which one can pick up now.

One has to look for defensive stocks in sectors like paper, food, consumer goods, utilities, chemicals,etc.Dividend paying stocks are an investors friend during economic downturns.In this post, lets review four “BEAR” stocks. These are 4 stocks which
look attractive at current levels and are good additions to a diversified portfolio.I have selected one stock for each letter in the word “BEAR”. They are:

1. B – BASF AG (Germany)
2. E – EONGY AG (Germany
3. A – ABB Ltd.(Switzerland)
4. R – RBC Financial Group (Canada)

A short summary of some key information for the above stocks are as follows:

1. BASF AG – BASFY
This German chemical giant is the world’s largest chemical company operating in most of the countries of the world.Founded in 1865, BASF continues to be a leader and innovator in chemical business.

Current Dividend Yield is 4.53%.Last year sales topped over 58.0 Euros and earnings per share was 30% higher than 2006 and net income was over 25% over 2006.Sales has been steadily increasing for the past 10 years.

On July 2,2008 the ADR stock was split in the ratio of 2:1.PE is just 10.49.

2.EON AG – EONGY
EON is the world’s largest investor owned utility (Electricity and Natural Gas) based in Germany.In 2007, sales were about 69.0 EUR.

The current yield is 3.17%.The stock has an S&P rating of 4 stars. EONGY’s PE is 13.80 which is similar to others in the utility industry.

3.ABB Ltd – ABB
ABB is an infrastructure play.It helps utilities like EON and other industrial customers to improve their operations.ABB is a major player in the emerging markets of China,Brazil,etc.

The dividend yield is just 0.71% but ABB is mostly a growth stock in a niche sector.There are 2.2B shares outstanding and the stock is now at $27+ down from a recent high of over $33.0. ABB can be picked up at current levels.

4.RBC Financial Group – RY
You may wonder why we added this financial company in our “BEAR” selections. The reason it is included here is because RY is the most profitable bank in Canada and is a long-term consistent performer.

RY has an yield of 4.61% and is largest of all Canadian banks. The 5 year earnings growth is over 15% and the profit margin is about 23%.The stock is a good buy at $44.51.

There are many ways to evaluate a bank stock. Bank stocks usually pay dividends. In fact many banks have high yields and usually are grouped together with other dividend paying stocks such as Utilities, REITs etc. In this post, lets look at one way to analyze banks. In later posts, we will discuss different methods to determine whether a stock is over-priced or cheap.

Banks publish many financial measures in their reports.Out those there are some factors which are very important to review before making an investment decision.

One way to analyze a bank is to review the following three factors:

1. Reserves for Loan Losses
2. Non Performing Loans
3. Capital Levels.

Definition of terms
1.Reserves for Loan Losses:
Banks expect some of the loans to go bad. To meet these loan losses by regulation they are required to maintain some reserves. This reserve amount allocation is based on the judgment of the bank’s management at the time the reserve is made. The reserve can rise (or) fall depending on the performance of the loan portfolio. usually this reserve amount will be between 0.9% to 5% of a bank’s total loans outstanding. The lesser thisratio the better the bank.

Another term to this factor is “Provision for Loan Losses” or “Provision for Credit Losses”.

2.NonPerforming Loans
This is basically the level of loans which are not performing anymore – meaning that interest income is not being collected by the bank and the repayment of principal is either rescheduled for payment later or may not be paid at all. A high level of this factor indicates that the bank’s loan portfolio is not good.This measure usually can go anywhere from 0.5% of total loans. If it exceeds 3% then the bank may be in serious trouble.

This can also be called as “Impaired Loans” or “Gross Impaired Loans”

3.Capital Levels
By law banks have to maintain some capital to continue operations. A bank cannot have assets of $1M and issue loans totalling $990M. Banks with higher capital levels are conservative and hence better than less capital holding ones. A bank with high capital levels can grow easily since it will more money to spend on acquisitions, expansion plans etc.

Nowadays banks call this ratio as the “Tier 1 Capital” ratio.Simply put, it shows the strength of a bank.

Explanation
1.Reserves for Loan Losses – Some Examples:
You can find this factor in the “income Statement” of banks. For eg. – Bank of Montreal (BMO) had the following ratios:

Year 2004 – (0.07)%
Year 2005 – 0.11%
Year 2006 – 0.09%

The figures show that it increased from 2004 to 2005 a lot. But decreased slightly by 0.02% in 2006 which is good. So here the ratios never went above 1% let alone the max. of 5% as defined in the definition part above.

Similarly for Bank for Novo Scotia (BNS) the ratios were as follows:

Year 2004 – 0.27%
Year 2005 – 0.14%
Year 2006 – 0.13%

Again here also the figures are below 1%.

Because BNS and BMO have held the ratios at decent levels over the past few years their stock is now doing ok when compared with many other stocks.

As a sample lets look at how one bank in the US went from bad to worse in the past few months. Macatawa Bank (MCBC) is a tiny bank in Holland,Michigan. It had the following numbers:

Year 2007: $875,000 (1.38%)
Year 2008: $2.7 Mil.(1.81%)

Year 2008 had a huge increase compared to 2006.So due to this and other factors, the MCBC stock has fallen from over $20 to < $8 today.No surprise there.

2.NonPerforming Loans – Some Examples:
For BMO, the nonperforming loans ratios were as follows:
Yr 2004: 0.71%
Yr 2005: 0.46%
Yr 2006: 0.35%

BNS had the following ratios:
Yr 2004: 0.49%
Yr 2005: 0.34%
Yr 2006: 0.24%

Both BNS and BMO have been improving their NPL ratio from 2004.They have kept it below the stated 0.5% except BMO in 2004.

3.Capital Level (Tier 1 Capital ratio) – Some Examples:
To repeat, if this ratio is higher the bank is better when compared with others.Usually factors near 10% are desirable.

For BMO the Tier 1 Capital ratios were:
Yr 2004: 9.84%
Yr 2005: 10.30%
Yr 2006: 10.22%

For BNS the Tier 1 Capital ratios were:
Yr 2004: 11.50%
Yr 2005: 11.10%
Yr 2006: 10.20%

Overall both the banks were well capitalized in the years specified.

Note: Data for 2007 and 2008 will be added in future updates to this article.

In Conclusion:

Since BNS and BMO had average to above average numbers for the three financial measures their stock have held pretty well as opposed to many US bank stocks which have been crushed hard like NCC, FITB, CNB, CBC in recent months.