RBS -- A Contrarian Buy

Published in Company Comment on 25 January 2010

Are Obama's plans an opportunity or a threat?

OK, I'm going to put my head on the block and call Royal Bank of Scotland (LSE: RBS) a contrarian buy. It's 35p as I write. This is dangerous stuff and a distinct departure for the value hunters amongst us who like to see earnings, assets and the like underpinning company valuations.

You certainly won't see any of that here for a while and while the taxpayers still own the vast majority of it, the Government has far too much of a say for comfort. Welcome to the world of contrarian investing. You see, there's not much you can say that's positive about RBS.

But if variety is truly the spice of life, the bank may provide some spice in the months and years to come. Its price took an Obama-led battering last week thanks to the so-called Volcker rule and is well off its 12-month high of 57.65p. 

At its current price, the old bank is valued at a fair bit less than its earnings per share for any of the recent years you care to pick -- bar the last couple of course.

Sentiment changes

Last week's US announcement that banks which take deposits won't be allowed to use their own money to take bets on markets, run hedge funds or make private equity investments sent shivers of fear through the British banking sector. Quite what will happen in Blighty is another matter. But we aren't far off a general election and a change of political hue looks a shoo-in.

Whether this will usher in a kinder environment for bankers is up for debate. Politicians must curry popular favour in today's world, hence the Volcker rule. However it all works itself out, I'd say these things have a habit of being over-done -- mainly in sentiment and, therefore, share prices.

A contrarian punt

The fact that there are now doubts about whether RBS will hit its target of selling its US trading business RBS Sempra Commodities, in which it has a 50 per cent stake for $2bn to JP Morgan Chase, simply lends weight to the contrarian viewpoint for me.

So for those of us who enjoy a bit of a contrarian punt as everyone tells you the bank will suffer greatly and the shares area clear sell, it's tempting. But it's also all about timing one's purchase. I think it's fair to say that the Foolish community generally advocates the "long-term buy and hold" approach to investing -- an approach I fundamentally agree with and live by. 

Whether RBS at 35p fits with such a strategy is a matter for each investor to decide for his/herself.

Gambling or investing?

Obama's plans have upset the game and who really knows where the chips will fall?

So why choose RBS as opposed to any of the other banks -- notably Barclays (LSE: BARC) whose shares took the biggest hammering last week? It's a fair point and depends on your investing horizons and which banking shares, if any, you already hold.

Last Summer, I thought RBS was the worst of a bad bunch and that there were better value banks elsewhere. I still believe this to be the case. I simply think that sentiment will change and RBS shares will rise as it does.

This may be more akin to gambling than investing; it depends on your viewpoint and investing timescale. Personally, I'll be buying a few for the metaphorical bottom drawer; one which I'll be happy to open again a decade from now to see what's happened.

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Terrapin1 25 Jan 2010 , 2:12pm

Sempra is a good business- not sure what else RBS has in the cupboard. they still seem to have about £6 billion worth of CDOs it is doubtful these have any value as the US housing market is such a disaster. I'd be a happy buyer of RBS at 30, and dithered in Dec 2009- but this is the cheapest bank stock and could be viewed simply as an undated option.

Dozey1 25 Jan 2010 , 6:15pm

I haven't found in this article any reason as to why RBS might be a good buy, other than that they might be a good buy.
Thanks a bunch.

RockderktheGreat 26 Jan 2010 , 8:21am

I'm a closet RBS buyer. Basically any bank in the 30s is a buy.

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