Could all financial stocks need is a little understanding? When asked what the most misunderstood stocks were in their portfolios, members of the Ultimate Stock-Picker's panel at Morningstar's Investment Conference said financial stocks.

Robert Torray, manager of The Torray Fund TORYX, said huge financial companies that have seen their stock prices savaged by the credit crisis--such as Citigroup C, American Express AXP, and AIG AIG--could possibly double over the next five years. Their franchises still have considerable value that could not be recreated for where their shares are currently trading, which for some of the stocks is at or below book value, Torray said. "In my experience, big important franchises are not going to disappear," he said.

Charles Pohl, one of the mangers of Dodge & Cox Stock DODGX said most of the stocks in the fund's portfolio are misunderstood to an extent; otherwise they wouldn't be good values. But he said some of the analysis he sees on financial stocks looks misguided. The biggest mistake investors are making, he said, is assuming that if two companies have a certain amount of exposure to residential loans they will suffer the same losses in the current dire market for mortgages. Dodge & Cox holding Wachovia WB, for example, has been punished with the rest of the banks with mortgage exposure, and it has and will suffer losses, Pohl said. But the losses may be not as severe as the market expects because Wachovia maintained more conservative underwriting standards during the mortgage bubble, Pohl said.

The panelists, including Peter Langerman of Mutual Series, also pointed to commodity-linked industries and stocks as potential areas to avoid.

What do you think, are financial stocks misunderstood? 

Unfortunately the majority of investors, including "pros", do not know the exact workings of the companies they invest in. Stock market values are subjective and have a relation to intrinsic values only when bubbles burst, like now. How else could you justify for example a stock price for Ambac (ABK) of 90+ a few months ago and 1.60 today? And this was a AAA rated equity!!!!!! This is a sucker's game. Follow the serious executive-insider buying.

Financial institutions developed modeled products that went astray. And they do not know how to control the situation.  

<<Financial institutions developed modeled products that went astray. And they do not know how to control the situation.>>

dimitri, you are right on.    The managers of these financials are the ones who "misunderstood" the risks they were taking.

The bank stocks were "misunderstood" by investors 2 years ago, before the great Credit Crunch/housing declines.    When funds like D&C thought they were "cheap" based on earnings...  but the "earnings" were just vapor.

Since then, the financials portfolio of toxic-waste mortgages has declined, the financials' balance sheets have deteriorated,   and they have had to go hat in hand begging for more capital.

The financials are WELL UNDERSTOOD by investors now, at least those who have common sense. 

The shame of it all, is how are the average investors going to know what was happening to these stocks when the rating agencies had not a clue. Fitch, S&P, and Moodys had it all wrong, and even Morningstar, as good as they are suppose to be, never saw anything coming! All they did was keep lowering valuations untill the average investor lost his shirt! ABK,and CFC are perfect examples, and then you look at a bank like BAC which saw the same valuation taking down time and time again, so how do you know if these valuations are not going down again with such banks as WB, BAC, JPM, WFC. I am appauled how much money my portfolio has been hit because lack of follow up with these credit agencies that are suppose to know this type of business? If they don't know what is going on then how is the average investor supppose to know. One disgusted investor!!! Does anyone out there like the financials right now, and if so, for what reason? I hate to say it, but this time i think it is different? There are two many variables running against the tide, and i think oil is the main culpret? If we do not see a decline in oil prices soon, this country is heading right into a perfect storm, and i mean PERFECT. The damage will be like no other. It's scarry, but so true.

iyaofthetiger is absolutely correct-no one saw this coming and no one really knows where the bottom is.  Is it the one trillion alluded to by Bill Gross in his recent monthly pulblication?  If so, many- banks and investment banks won't be around for the next new deal.  I am a very seasoned investor and ex bond manager and CFO.  Believe me, I woulds not have been smart enough to miss some of this.  The auction rate securites mess is one example.  I survived  the Inverse yield and principal only IOs back in the 90s.  I thought they were bad.  This latest batch of Wall  Street AAA rated  securities is a disgrace and i am sorry for all of the money that the public at large will ultimately have to pay to replace these losses.  I still think many banks have yet to recognize reality in their real estate commercial loans and this will be the next shoe to fall in the banking industry. So, no to bank investments, except for trades.

The Dodge and Cox boys should reflect on the underwriting standards applied to the garbage WB strapped on in the Golden West transaction.

The Dodge and Cox boys should reflect on the underwriting standards applied to the garbage WB strapped on in the Golden West transaction.