Is It Time To Sell These 4 Financial Stocks ?

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 |  Includes: BAC, C, GS, MS
by: Bachar Samawi

In an article we published on October 23, 2012 "4 financial stocks that could go even higher" as a follow-up to another article we published September 26, 2012 "4 financial stocks doomed to trade higher", we made the case why shares of Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) could trade substantially higher and recommended buying such shares. Since September 25, 2012, such shares have appreciated between 42% and 65%. Should investors continue to hold such financial shares, or is it time to sell for now and possibly look for a better buying opportunity?

Our optimism in 2012 was driven by other analysts' pessimist outlook for financial shares. Such analysts' pessimism was primarily driven by fear of slower GDP growth rate for 2013 than initially forecast, as triggered by comments by Federal Reserve Bank of Philadelphia President Charles Plosser who said on September 25, 2012, that it is unlikely that QE3 will boost economic growth. Although we agreed with Mr. Plosser's comment concerning QE3 impact on economic growth, as we had previously concluded in our article of September 14, 2012, "La fed aux folles", our outlook for financial shares was quite the opposite than other analysts' outlook.

At that time, we actually argued that such shares will ultimately benefit from asset purchases by the Fed, in addition to improved lending margins, seasonal factors, subdued inflation (caused by expectations for moderate GDP growth) and additional financial trading and transaction opportunities. When accompanied by reasonable P/E ratios, it was very clear to us that there was a unique opportunity to benefit from buying such financial shares in late September 2012. Meanwhile, today, the effects of many such factors have diminished, while seasonal factors will present downside risks during the month of October.

Citigroup, Inc.

As of October 2, 2013, Citigroup had a market capitalization of about $148.13 billion, with its dividend and split adjusted share price having increased by 48.23% from $32.86 on September 25, 2012 to $48.71 on October 2, 2013. Its current book value has increased slightly to $63.02 per share from $62.61 on September 25, 2012 while its price/book ratio has increased from 0.52 on September 25, 2012 to its current level of 0.77.

with earnings estimates of $4.84 per share for the year ending December 2013 and $5.52 per share for the year ending December 2014, Citigroup's resulting P/E ratios are 10.1 and 8.8 respectively. Although such P/E ratios seem moderate, they have expanded from last year's 12-month forward P/E ratio of 7.25.

From a seasonal factor perspective, during the past 10 years, during the month of October, Citigroup shares have dropped by an average of 7.11%, whereby in four such years Citigroup dropped anywhere between 7.5% and 39.3%:

Citigroup October Stock Price Change - 2003 to 2012
Year October 1 price November 1 price Change
2012 $37.36 $34.55 -7.52%
2011 $31.52 $27.43 -12.98%
2010 $41.59 $41.88 +0.70%
2009 $40.79 $40.99 +0.49%
2008 $135.8 $82.48 -39.26%
2007 $389.88 $313.91 -19.49%
2006 $447.88 $447.16 -0.16%
2005 $392.44 $420.25 +7.09%
2004 $369.76 $372.92 +0.85%
2003 $381.54 $378.56

-0.78%

Click to enlarge

Prices are dividend and split adjusted - Data Source: Yahoo Finance

Given Citigroup's share price appreciation of over 48% since September 25, 2012, the expansion of its P/E and book/price ratios, the diminishing effect of past bullish factors such as QE3, the potential for an exit from quantitative easing, in addition to potential seasonal headwinds, whereby shares have dropped by an average of 7.11% during the month of October during the past 10 years, we would recommend booking profit at these levels by selling Citigroup shares and looking for a better buying opportunity.

Bank of America

As of October 2, 2013, Bank of America had a market capitalization of about $151.05 billion, with its dividend and split adjusted share price having increased by 57.98% from $8.90 on September 25, 2012 to $14.06 on October 2, 2013. Its current book value has increased slightly to $20.18 per share from $20.16 on September 25, 2012 while its price/book ratio has increased from 0.44 on September 25, 2012 to its current level of 0.70.

with earnings estimates of $0.90 per share for the year ending December 2013 and $1.36 per share for the year ending December 2014, Bank of America's resulting P/E ratios are 15.62 and 10.34 respectively. Although Bank of America's P/E ratio for the year ending December 2013 seems high, its forward P/E ratio for 2014 has only expanded slightly from last year's 12-month forward P/E ratio of 9.81.

From a seasonal factor perspective, during the past 10 years, during the month of October, Bank of America shares have dropped by an average of 3.72%, whereby in four such years Bank of America shares dropped anywhere between 4.3% and 32.8%:

Bank of America October Stock Price Change - 2003 to 2012
Year October 1 price November 1 price Change
2012 $9.29 $9.83 +5.81%
2011 $6.77 $5.40 -20.24%
2010 $11.30 $10.81 -4.34%
2009 $14.35 $15.61 +8.78%
2008 $23.17 $15.58 -32.76%
2007 $43.14 $41.22 -4.45%
2006 $46.01 $46.48 +1.02%
2005 $35.80 $37.96 +6.03%
2004 $35.19 $36.35 +3.30%
2003 $28.58 $28.47 -0.38%
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Prices are dividend and split adjusted - Data Source: Yahoo Finance

Given Bank of America's share price appreciation of almost 58% since September 25, 2012, the expansion of its book/price ratio, the same factors listed for Citigroup for diminishing QE3 effect, Fed tapering and seasonal headwinds, whereby shares have dropped by an average of 3.72% during the month of October during the past 10 years, we would also recommend booking profit at these levels by selling Bank of America shares.

Morgan Stanley

As of October 2, 2013, Morgan Stanley had a market capitalization of about $53.12 billion, with its dividend and split adjusted share price having increased by 64.86% from $16.45 on September 25, 2012 to $27.12 on October 2, 2013. Its current book value has increased slightly to $31.48 per share from $31.02 on September 25, 2012 while its price/book ratio has increased from 0.54 on September 25, 2012 to its current level of 0.86.

with earnings estimates of $1.99 per share for the year ending December 2013 and $2.59 per share for the year ending December 2014, Morgan Stanley's resulting P/E ratios are 13.63 and 10.47 respectively. Morgan Stanley's forward P/E ratio has expanded from 8.51 last year to its current level of 10.47.

From a seasonal factor perspective, during the past 10 years, during the month of October, Morgan Stanley shares have dropped by an average of 5.69%, whereby in four such years Morgan Stanley dropped anywhere between 2.95% and 21.61%:

Morgan Stanley October Stock Price Change -2003 to 2012
Year October 1 price November 1 price Change
2012 $17.27 $16.76 -2.95%
2011 $17.31 $16.18 -16.18%
2010 $24.19 $23.79 -1.65%
2009 $31.01 $30.49 -1.68%
2008 $16.53 $13.96 -15.55%
2007 $61.68 $48.35 -21.61%
2006 $57.35 57.15 -0.35%
2005 $40.15 $41.35 +2.99%
2004 $36.96 $36.71 -0.68%
2003 $38.96 $39.25 +0.74%
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Prices are dividend and split adjusted - Data Source: Yahoo Finance

Given Morgan Stanley's share price appreciation of almost 65% since September 25, 2012, the expansion of its P/E and book/price ratios, the same factors listed for Citigroup for diminishing QE3 effect and Fed tapering, in addition to potential seasonal headwinds, whereby shares have dropped by an average of 5.69% during the month of October during the past 10 years (depreciating in 8 out of the last 10 Octobers), we would also recommend booking profit at these levels by selling Morgan Stanley shares. From a longer term perspective, we still find Morgan Stanley shares attractive, although we would await a better buying opportunity, or otherwise re-enter at a seasonally favorable period possibly towards mid-November.

The Goldman Sachs Group, Inc.

As of October 2, 2013, Goldman Sachs had a market capitalization of about $74.34 billion, with its dividend and split adjusted share price having increased by 41.77% from $117.34 on September 25, 2012 to $158.67 on October 2, 2013. Its current book value has increased by over 10% to $151.21 per share from $137 on September 25, 2012 while its price/book ratio has increased from 0.83 on September 25, 2012 to its current level of 1.05.

with earnings estimates of $15.11 per share for the year ending December 2013 and $15.41 per share for the year ending December 2014, Goldman Sachs' resulting P/E ratios are 10.50 and 10.30 respectively. Goldman Sachs' forward P/E ratio has expanded from 9.09 last year to its current level of 10.30.

From a seasonal factor perspective, during the past 10 years, during the month of October, Goldman Sachs shares have dropped by an average of 2.82%, whereby they have depreciated in 6 out of the last 10 years:

Goldman Sachs October Stock Price Change - 2003 to 2012
Year October 1 price November 1 price Change
2012 $120.68 $116.64 -2.82%
2011 $106.30 $93.38 -12.15%
2010 $154.81 $150.35 -2.88%
2009 $161.97 $161.83 -0.09%
2008 $87.15 $74.42 -14.61
2007 $231.59 $211.71 -8.58%
2006 $176.12 $180.77 +2.64%
2005 $116.30 $118.68 +2.05%
2004 $89.71 $95.53 +6.49%
2003 $84.73 $86.70 +2.33%
Click to enlarge

Prices are dividend and split adjusted - Data Source: Yahoo Finance

Once again, given Goldman Sachs' share price appreciation of about 42% since September 25, 2012, the expansion of its P/E and book/price ratios, the same factors listed for Citigroup for diminishing QE3 effect and Fed tapering, in addition to potential seasonal headwinds, whereby shares have dropped by an average of 2.82% during the month of October during the past 10 years (depreciating in 6 out of the last 10 Octobers), we would also recommend booking profit at these levels by selling Goldman Sachs shares. As in the case for Morgan Stanley, we also still see longer term value in Goldman Sachs shares, but we would prefer to possibly secure a better buying opportunity or possibly to re-evaluate towards mid-November.

Conclusion

Given the substantial appreciation that we have witnessed since September 25, 2012 in the share price of Morgan Stanley, Goldman Sachs, Citigroup and Bank of America, with a fading of past bullish factors and the risk of future short term seasonal October headwinds, we recommend booking profits and selling such shares. In the case of Goldman Sachs and Morgan Stanley, we would look for a re-entry level either at lower price levels, or after re-evaluating the landscape around November 15, 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.