If you are expecting Mr. Market to ring a bell and call a short-term bottom for you, get ready to miss the bulk of the move higher.

Right now, in certain financial stocks, there is a serious disconnect between a few select companies' books of business and current market valuations thereof. And because of this disconnect, we believe certain stocks may represent a generational buying opportunity. You could say this about Bank of America (BAC), JPMorgan (JPM), Fifth Third Bancorp (FITB), Wells Fargo (WFC) or a number of others.

One stock in particular that we like is First Horizon (FHN), which is currently trading for $7.25 a share, down about 85% for the year off the company’s high of $45. As of June 30, First Horizon had a stated tangible book value of $12.52, meaning it is trading for about 0.6 times book value.

First Horizon has been hit particularly hard in this credit crisis, due in part to its National Specialty Lending Segment, which was a huge problem for the company, representing about 39% of total loans, with about 77% of these loans being defined as nonperforming loans, or NPLs.

However, management was able to stem the problem by selling this segment off to MetLife (MET) as part of an effort to entirely wind down its national lending portfolio. Additionally, management raised $690 million in common equity, cut its quarterly cash dividend and reduced its balance sheet by $1.7 billion in the second quarter of 2008, with another $4 billion of further contraction expected by the end of the year.

Given FAS-114 accounting rules, the book value of problem loans have been written down to net realizable value. Here, loans are charged down to 85% of appraised value when they reach 180 days past due. First Horizon provides its investors with a decent margin of safety here. The appraised value on internal problem loans comes to around $537 million; on a precharged down balance, this comes to $425 million.

More important, First Horizons’ 30-to-59-day home equity delinquency rate peaked in mid-January at 0.68% (it is now 0.55%), its 60-to-89-day delinquency rate peaked in mid-March at 0.33% (it is now 0.27%), and its 90-plus-day home equity delinquency rate peaked in mid-April at 0.67% (it is now 0.46%). Consolidated net interest margin from deposit accounts has gone from 2.81% to 3.01% and could improve in the future -- additional Fed cuts will help this.

With improved reserves and loans and with the core businesses of regional banking and capital markets (that is, fixed-income) still strong, First Horizon seems attractive. No wonder Goldman Sachs put First Horizon on its American conviction buy list. Since June 5, insiders have bought back almost $1 million worth of stock.

Look for the stock to trade back into the $12-to-$13 range in the near future.

Know What You Own: First Horizon operates in the financial industry, and some of the other stocks in its field include Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS). These stocks were recently trading at, respectively, $20.51, up 15.5%; $128, up 6.1%; and $23, up 9.6%. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

Posted on Sept. 29, 2008

Posted on Sept. 30, 2008