Caller: Question for you, I know in the past you’ve liked Hudson City Bancorp. Do you still?

Cramer: Yes, I do. Very conservative bank. People don’t want conservatism they want explosive earnings. They’re not going to get it from Ron Hermance. The yield is good, stock is good, I want to be in it. — CNBC’s Mad Money 10/6/2009

As Cramer alluded to in this quick quip, Hudson City Bancorp (HCBK) is known for being a very conservatively run bank.  It is old-school in this way; they did not get caught holding a lot of sub-prime debt when the credit crisis hit, nor do they make a lot of moves in other risky assets.  Instead, management has run their bank by the book lending money to credit worthy borrowers and taking the slow and steady path.  They did not need TARP money and they have not raised capital, unlike so many others in their industry.HCBK

One would think such management would be rewarded, having been through the worst recession since the Great Depression.  However, this conservative management style has not found favor in this market as investors are looking for aggressive behavior to take advantage of the recovery.  For that reason, HCBK has greatly underperformed the larger banks over the last seven months.  For example, since the market bottomed in March, Hudson City Bancorp has appreciated 46%.  That is not a bad seven month return, but it falls short of the S&P 500 benchmark return of 55%.  Even more telling, the Financial Sector iShares ETF (IYF) has more than doubled the return of Hudson City, gaining 116%.  Even that outstanding performance pales in comparison to the performance of some of the government-backed, so-called “Zombie banks” like Citi (C) +357% and Bank of America (BAC) +445%.

The relative performance of Hudson City Bancorp is pretty stunning, as they are in effect being punished for conservative management.  There are those that believe Bank of America and Citi are still undervalued because they are operating with the understanding that the government will prop them up no matter what problems may crop up.  Even though that is true, it seems out of whack that these stocks would have nearly ten times the return of a Hudson City.  It is clear that traditional conservative banking has fallen out of favor with the market, but we have to wonder how long that trend will last.

We have gone on record many times on this blog that this rally is still very vulnerable.  The market– lead by the riskiest stocks– has rallied despite our growing concern over the real economy.  Jobs are still being lost, mortgages and consumer credit continue to default, and yet the market continues higher.  We think that it is likely that the recovery will be slower than the market has priced in already, and in that case the conservative nature of Hudson City Bancorp will look much more attractive.

We are maintaining our Undervalued rating on Hudson City.  We are not high on financials in general, particularly after their huge gains recently have made so many look rather expensive.  Hudson City currently trades at a very attractive 1.33x book value per share, and our model suggests could trade in the low $20’s for the current fundamentals.  HCBK is different from many of the other banks and could be an opportunity for investors that want to have a hand in the financial sector, but want to moderate the risks to an extent.  Not to mention, the stock has a nice 4.5% yield for investors looking for income.

Cramer Stands Behind A Conservative Bank