Scoop up Bargains in Banking, Utilities

Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a  complete tally of stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

Credit Suisse
Moat: Wide  |  Risk: Average  |  Price/Fair Value Ratio*: 0.76  |  Three-Year Expected Annual Return*: 22.0%

What It Does:  Credit Suisse Group  is the world's second largest private bank and wealth manager in terms of client assets under management. It also has a bulge-bracket investment bank, an asset management arm, and is the second largest full-service retail bank in Switzerland.

What Gives It an Edge: Morningstar analyst Ganesh Rathnam believes that Credit Suisse warrants a wide economic moat. CS is the second largest private bank in the world and has $1.4 trillion in assets under management between its wealth management and asset management arms. The wealth management business is a very steady and profitable business, particularly the European model of relationship banking. Assets under management are extremely sticky as clients remain loyal to their bankers, creating a predictable stream of asset management fees. What's more, CS' realization rate on these assets is comfortably higher than that of  UBS (UBS), indicating that the firm is better at peddling custom in-house products to clients. CS dominates business and retail banking in Switzerland along with UBS, providing one-stop-shop comprehensive banking services for well-to-do individuals. On Wall Street, it ranks easily among the top 10 investment banks, on par with its U.S. rivals.

What the Risks Are: The bulk of Credit Suisse's profits come from its investment bank, making the firm's bottom line very volatile. During good times such as the past four years, the investment bank does tremendous business, boosting the bank's bottom line. On the flip side, during lean times, which are a certainty given the cyclical nature of the investment banking business, profits could be severely curtailed. Although Rathnam thinks this is a remote possibility, any detrimental change in Swiss private banking laws could negate advantages that Credit Suisse accrues from operating in that domicile.

What the Market Is Missing: The market seems to be baking in a severe downturn in Credit Suisse's investment banking business. Rathnam has already accounted for this possibility in his model, predicting a 15% decline in profits for 2008. Credit Suisse has drastically reduced its non-compensation expenses and by Rathnam's estimates, revenues would need to decline by more than 50% for the investment bank to post losses, an unlikely event.

Hawaiian Electric Industries
Moat: Narrow  |  Risk: Below Avg  |  Price/Fair Value Ratio*: 0.80  |  Three-Year Expected Annual Return*: 18.6%

What It Does:  Hawaiian Electric Industries (HE) is a utility holding company. The firm owns and operates three vertically integrated utilities that together supply electricity to 95% of Hawaii's residents. In addition to its principal electric utility business, the company engages in banking. Its American Savings Bank subsidiary is the third largest bank in Hawaii, operating 64 branch offices and a network of automated teller machines.

What Gives It an Edge: Hawaiian Electric is a two-segment business. The first--a vertically integrated electric utility--holds a natural monopoly in the state of Hawaii. This segment operates in a traditional regulatory environment, generating steady cash flows and an assured return on its investments. The firm also owns and operates American Savings Bank. Though not as efficient as its peers, ASB is the third largest bank in the state and operates a 64-branch network. The bank's extensive presence and established customer relationships should help protect its competitive position. Taken together, Morningstar analyst Ryan McLean thinks these attributes translate to a narrow economic moat.

What the Risks Are: McLean thinks that Hawaiian Electric rates below-average business risk, meaning that he'd invest in the shares with a smaller margin of safety. In addition to the utility's regulatory risks and the bank's exposure to interest rate risk, the company faces the broader threat of a protracted downturn in tourism, Hawaii's largest revenue source. While high demand growth has in fact hurt profitability recently by straining capacity, McLean thinks the long-term performance of Hawaiian Electric will be linked to the state's economy.

What the Market Is Missing: McLean believes the market is more focused on Hawaiian Electric's current operating struggles than its long-term prospects. The state's strong economic growth--and concurrent demand for electricity--has strained generating units and pushed up operating expenses. A tough interest rate environment, meanwhile, has hurt bank margins. While these challenges will persist in the near term, McLean thinks the firm's fortunes will turn as rate relief, new generation capacity, and an improved interest rate environment take effect.

Other New 5-Star Stocks
 Convergys 
 Nektar Therapeutics (NKTR)
 Sonic 
 Watson Pharmaceuticals 

* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, August 31, 2007.