Is Bear Stearn the Last Big Story?
It’s official. Bear Stearns is being bought out by JP Morgan for $2 per share, or $236 million. The stock traded as high as $159 per share with a market capitalization of over $21 billion as recently as last spring. Their last quarterly earnings release indicated that the company had total shareholder equity of $11.8 billion.
The collapse is apparently the result of a concentration of subprime mortgages that the company held. This is alarming news, and it makes me wonder who’s next. Yes, Bear Stearns wrote down $1.9 billion in assets a quarter ago, but it is amazing to think the company could fail less than three months later. Their last earnings announcement contained the following statement:
“We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses,” said James E. Cayne, chairman and chief executive officer. “Our underlying fixed income franchise remains strong and we have taken steps to size the division to market conditions. We are taking appropriate measures to position Bear Stearns for renewed profitability in 2008 by focusing our resources on the businesses with growth potential in the current environment, while streamlining our operations in areas with lower expected activity levels. We are confident that these efforts will ensure Bear Stearns remains a strong and profitable competitor in the global marketplace in the years to come.” (emphasis mine)
How many investors are reading similar statements and maintaining some optimism for their investments in 2008? How many mutual funds have been exposed to this company and others like it?
Tomorrow should be interesting.
I believe that this year could present the opportunity to purchase solid companies with favorable long-term prospects at significant discounts to what they are really worth. I will, however, be avoiding the vast majority of financial stocks in the coming year.
