The Minnesota investor: Banks hit a rough patch

When the Federal Reserve cut interest rates a few weeks ago, the euphoria on Wall Street helped drive prices up to the highest level in years. The euphoria has faded and so have many of those market gains.

Even before the broad market tumbled, some of Minnesota's most prominent stocks had already seen a sharp drop in their share prices.

One of the worst-performing sectors this year -- both locally and nationally -- has been that of the financials, where the subprime mortgage mess has cut into earnings and raised fears of further losses.

TCF Financial (TCB) has had a particularly tough run lately. The stock is down about 25 percent the past month and recently traded at a four-year low of about $19 before making a modest rebound.

The drop was precipitated by poor earnings in the past two years. TCF's earnings per share dropped 5 percent in 2006. After a strong first quarter this year, earnings dropped about 6 percent each of the past two quarters. Fierce competition in the banking business as well as repercussions from the subprime mortgage crisis have contributed to the firm's softening earnings. But there is one silver lining: TCF stock now pays a dividend of nearly 5 percent, so new buyers stand to be paid well to wait for a rebound.

U.S. Bancorp (USB) has also had a tough year -- down about 9 percent the past six months -- but the stock has bounced back from a summer swoon and is up about 5 percent the past three months.

Third-quarter earnings were down about 2 percent because of higher loan losses resulting from the weakening mortgage and home-building market. For the year, earnings are flat after two strong years of growth. The stock also pays a dividend of about 5 percent.

Wells Fargo (WFC), which has been among the nation's leading mortgage lenders, has avoided some of the problems other lenders have faced because it maintained a higher-quality mortgage portfolio. The stock has remained fairly consistent this year, and was recently down only about 6 percent from its 52-week high. After a 10 percent rise in earnings last year, earnings have been up modestly each of three quarters this year. The stock pays a dividend yield of nearly 4 percent.

If you like dividends, it's hard to pass up these bank stocks. All three also have very modest price/earnings ratios of under 13, which makes them cheaper than most stocks. But with more fallout ahead from the subprime crisis, you may not want to bet the farm. It's going to be a tough environment for the banking business for at least another year or two.

Other ailing blue chips

Banks are not the only Minnesota stocks that have hit a rough patch. Three of the Twin Cities' most prominent companies -- 3M, Medtronic and Supervalu -- have also suffered double-digit market losses.

Medtronic (MDT) is a great company that just can't seem to get untracked. Its recent stock price of around $46 is lower than its price of seven years ago, and its 1 percent dividend yield doesn't give shareholders a lot to shout about either.

The stock dropped about 20 percent in mid-October when the company had to recall a defective defibrillator lead.

However, the company's revenue has continued to climb by about 10 percent per year and earnings growth has been strong the past two years.

Growing competition in its key product area--heart pacemakers and related products--has continued to keep Medtronic from posting the consistent gains that made it one of the best stocks in the country through the 1980s and 1990s.

Although its share price growth continues to disappoint, its price/earnings ratio of about 18 is modest compared with other medical technology stocks, which means the downside risk should be minimal if Medtronic can avoid further bad news.

3M (MMM) has also taken a tumble the past month after reaching an all-time high of $97 in October.

The stock dropped nearly 20 percent to about $81 due to a softening of its optical film business. The firm's optical films are used for liquid crystal display televisions, a market that may have hit a plateau.

In a recent report, 3M projected a "severe and rapid margin decline" in its optical film division that could cost the company about 20 cents a share in earnings.

But the sudden drop in share price and a modest P/E of 13.5 should minimize downside risk for 3M investors in the near term, particularly if sales in 3M's other product lines continue to grow. The stock pays a dividend yield of about 2.3 percent.

Supervalu (SVU) has seen about a 20 percent drop in its share price since June when many of its stores were forced to recall tons of ground beef that may have been contaminated with E. coli bacteria.

But sales and earnings continue to climb and the stock's P/E of about 16 is modest compared with other companies in the grocery store sector. Supervalu pays a dividend yield of nearly 2 percent.