He dropped $1 billion for a 10% stake…

Fast forward three months, and things aren’t looking so good for Lewis (or any BSC investor, for that matter). In the course of a weekend, the stock plummeted 92% to $6.32. Just a couple weeks earlier, the stock was trading for almost $90. It became a small cap overnight. What caused one of the most prestigious investment banks in the world to fold so quickly? The name of the game is liquidity, and unfortunately for Bear Stearns, they were seriously lacking in that department — so much so that they were on the verge of insolvency.

Could Bear Stearns Mean Opportunities for Investors?

We’re seeing an unheard of stock market these days — powerhouses like Bear Stearns can crumble to dust one day, while the S&P closes up 4.24% the next. Bear’s hit has certainly reverberated throughout the market, but — so far — it hasn’t taken anyone else down with it. The Bear Stearns bitedown offers more than just a “lesson learned” it offers the potential of some serious market plays for investors who are willing to put their money where their mouths are.

Who’s sitting pretty from all this? JP Morgan Chase for one — you’ve probably heard that with the help of a loan from the Fed, JPM is buying up Bear Stearns at $2; that’s a number people like Joe Lewis feel is pretty paltry. JPM investors won’t tell you that though…the market pushed their stock up 10% on the news of the deal.

For a company with an $80 per share book value, a $2 buyout is a bargain to say the least. That’s not just us talking — everyone from Reuters to Forbes is chiming in on what could be one of the most notorious buyouts ever. JP Morgan Chase spotted a deal in Bear and jumped at it.

But, JP Morgan Chase isn’t the only one making big-time moves. Despite the battering i-banks and other financial stocks have taken lately, we’re starting to see several exceed earnings expectations and get on the road to recovery. We saw it with Lehman Brothers and Goldman Sachs on March 18, and we’ll likely see more financials in relief this earnings season. So what’s an interested investor to do?

Making a Play without Getting Played

Maybe Joe Lewis was right after all — value’s the thing to look for in this market… The critical thing for companies like BSC was finding the bottom. (Hint: It wasn’t the $107 share price he bought at.) There are a few small-caps out there that might be worth looking at now that subprime has beaten down their balance sheets — Ocwen Financial (OCN: NYSE), Franklin Credit Management (FCMC: NASDAQ) and White River Capital (RVR: AMEX) are a couple of names out there if you’re looking for some high risk stocks. As with Bear Stearns, the question you have to ask is whether or not they’ve seen a bottom yet.

Joe Lewis made his billions by making big bets, but this was one bet he should have stepped away from. It goes without saying that there’s money to be made in this market’s financial beat down. The question is: Are you going to be the one to make it?

Sincerely,

Jonas Elmerraji
March 20, 2008

Seeing a Huge Opportunity in Bear Stearns was originally featured in the Penny Sleuth.