The major banks have pulled back off their highs by an average of 7% this week. Most are rallying from one to two percent at the time of this writing Wednesday. JPMorgan Chase (JPM) is leading the Dow higher.
I posit the banks are a long term buy based on the fundamentals. The 7% pullback is a gift and a buying opportunity. In the Following sections I will lay out my bull case.
The Recent Dip Is A Buying Opportunity
Five Major Banks Performance Statistics
All these banks are down for the week. Bank of America (BAC) is currently down the most at 8.73% with Morgan Stanley (MS) second at 7.73%, Citigroup, Inc. (C) at 7.21%, Goldman Sachs (GS) at 6.71% and JPMorgan at 3.74%.
The most obvious reason for the pullback was the Italian elections jerking the markets chain once more. Nevertheless, the market seems to have become immune to the plague of European bad news and has begun to bounce back. Instead of the flu, it's only the 24 hour bug. As you can see by the following chart the banks have already begun to bounce back. BAC has the most to make up. See chart below.
The Big Picture Is Solid
This is a classic buy the dip opportunity. The next chart really shows the big picture. The Financial Select Sector SPDR (XLF) chart tells the tale.
The banks are all in solid uptrends and the golden cross was recently achieved. What this tells me is to ignore the short-term noise and stick with the long-term story. The fact is these banks are still vastly undervalued, and they are technically sound and have long term prospects for growth.
Reasons For Pullback Weak
I posit the primary reason for the pullback was the Italian election results and the possibility of sequestration causing some to worry. It seems the boy may have cried wolf one to many times. Market participants seem to shrug off the news now when it used to cause major swings in the market.
Fundamentals Appear Solid
The banks are still solid buys right now. Although most of the banks are up significantly over the past 52 weeks, they are still trading vastly below their historical average price to book ratios. Moreover, earnings continue to increase. EPS is up significantly for the banks this year and expected to grow next year as well.
The Banks Provide Bang For Your Buck
The banks offer some of the best values on the market right now. They have some of the biggest discounts to book value amongst sectors, trade for some of the lowest price to free cash flow ratios and have positive 2013 EPS growth estimates.
Bank Valuation Table
BAC trades for 51% of book value while Citigroup trades for 66%, JPMorgan for 89%, Morgan Stanley 74% and Goldman Sachs at one times book.
Global Growth Good News For Banks
Currently, several indicators are flashing that global growth is for real and 2013 could be another great year for banking stocks. For instance, Alcoa (AA) stated on its recent earnings conference call that the outlook for Chinese growth is much improved. Furthermore, global growth bellwether Danaher Corp. (DHR) predicts higher than expected core revenue growth.
This is good news for banks as they are the source of funding for the growth. This is why you always hear you can't have a real bull market rally without the financials starting off the party. The uptick in the housing market and the steepening of the yield curve due to demand for long-term capital are strong buy indicators for the banks as well.
Upcoming Fed Stress Test Results
All the banks have fortress balance sheets. I posit this year's stress test will be a buying opportunity just like in 2012. News of the banks passing coupled with announcements of new dividend increases and stock buyback programs being approved should propel the bank stocks higher yet again.
The Bottom Line
I posit this is the calm before the storm. The pullback was healthy for these stocks. The banks still have considerable upside potential, strong fundamentals and catalysts for growth. They have fortress balance sheets and strong cash flows providing the opportunity for a share buyback program and/or a dividend increases to be implemented when they pass the stress tests. The banks are a solid buy at this level if the U.S. housing market continues to improve.
The banks seem poised for solid growth. Nevertheless, if you choose to start a position in any stock, I suggest layering in to reduce risk. Furthermore, always have a well-balanced diversified portfolio.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.