STOCKS & BONDS


Annoying Companies, Great Stocks

Consumers hate them. Investors love them. They’re companies that annoy us with high fees, rotten service and policies so abusive that you want to call the Better Business Bureau -- or a lawyer. And yet some of the very banks, airlines, insurers and other kinds of companies that you hate for their surly service and avaricious policies often turn out to be great investments. "It’s easy to vilify them,”" says Morningstar analyst Jim Sinegal. "But that’s probably why their stocks are so cheap and so attractive to investors."

SEE ALSO: Our 2013 Investing Forecasts

Airlines

Spirit Airlines (symbol SAVE) , the no-frills carrier based in Miramar, Fla., recently hit the headlines for hiking carry-on baggage fees as high as $100 for those who don't check in online. Spirit also charges for checked bags, drinks, snacks and booking a ticket over the phone through its reservation center. Legroom? Forget about it -- unless you're willing to pay extra, of course.

To say customers don't like this kind of treatment is an understatement. Negative reviews and complaints registered at ConsumerAffairs.com total more than 600. But, says Imperial Capital analyst Bob McAdoo, Spirit is one of the best firms for investors.

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Since going public in May 2011, the stock has soared 45% yet still sells for just 8 times estimated profits, which are expected to jump 30% in 2013. That's a bargain for a firm that analysts see delivering annual profit growth of nearly 20% over the next few years. Besides, McAdoo says, many passengers complain about Spirit because they don't really understand how it works. "If you are expecting traditional airline service, Spirit is annoying," he says. "It would be annoying if you went to McDonald's expecting to sit down in a restaurant with a knife and fork. Spirit offers a different product."

Banks

Complaints about banks are legion -- from allegations that they engaged in predatory-lending practices to charges that they impose a variety of "gotcha" fees on everything from credit cards to overdrafts. But lately, many analysts have taken a shine to the banking industry as the companies improve their balance sheets and benefit from a growing willingness of consumers and businesses to borrow.

Morningstar's Sinegal endorses industry giants Citigroup (symbol C)and Wells Fargo (symbol WFC), both of which trade at modest single-digit price-earnings ratios. He considers San Francisco–based Wells a high-quality bank, with a simple business model and a deposit base "that's the envy of the industry." Sinegal says the stock is worth $42, or 27% more than the current price of $33.

Citigroup is more of a turnaround. The New York City–based bank was drowning in bad debt at the height of the credit crisis, but the number of delinquent loans has been slowly diminishing. Citi recently ousted CEO Vikram Pandit and replaced him with Michael Corbat, a 30-year veteran who was in charge of reforming the loan portfolio. Sinegal thinks Citi may soon reinstate its dividend, which it eliminated in 2009, and values the stock at $46, 31% above its current price of $35.

UBS analyst Greg Ketron favors regional banks, especially U.S. Bancorp (symbol USB). He says the Minneapolis-based company gets nearly half of its revenues from fees for processing credit- and debit-card payments. It also has a substantial trust operation that generates a steady stream of fees. With declining interest rates squeezing bank profit margins, that fee income is particularly attractive, Ketron says. He thinks the stock, now $32, is worth $38.

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