The financial sector continues to get hammered as 4 major corporations reach 52 week lows. Citigroup (C), Bank of America (BAC), Morgan Stanley (MS), and SunTrust Banks (STI) all reached 52 week lows as a result of economic worries. The sector has now seen a YTD loss in excess of 9% despite strong earnings. If a long lasting recession is to take place there is no doubt the financial sector and money center banks will get hit the hardest.
The Emergency Economic Stabilization Act of 2008, commonly referred to as the bailout, remains fresh on investors' minds. It was a time where the government purchased distressed assets to aid in the recovery of our economy. The recession was a domino effect that included many countries all experiencing turmoil.
Looking back to the end of 2008 you can see why many believe we are headed towards another recession. I do not believe we have reached that point nor do I believe we will experience a market similar to 2008. Companies are turning record profits and have shown all the signs of growth. Yet with 2008 so fresh on our minds, investors jump at the first whisper of a recession.
It is a scary word for so many that lost so much during this time. In May of 2007 Citigroup traded at a price of $55 a share (before the 1:10 split) and on March of 2009 the stock was trading under $2 a share. In less than 2 years the stock price decreased to this level. If you had owned $10,000 worth of shares in May of 2007 your investment in Citigroup would have been less than $400 in March of 2009.
Therefore, I do not expect the market to forgive the financial sector over a short period of time. The growth has been slow for many of the largest banks traded in the market. The financial sector has seen loss greater in comparison to the S&P. The Money Center Banks Industry has seen a drop of nearly 12% in one month. This loss is significantly greater than the S&P or financial sector loss over the same period of time.
Several top banks within the industry tested 52 week lows and many others are trading very close to their year lows. Four stocks that reached 52 week lows include Citigroup, Bank of America, Morgan Stanley and SunTrust Banks. Each company witnessed a massive sell off during the recession in 2008, with investors losing a great portion of their investment.
The financial sector has dropped over 9% in one month. The four financial institutions listed above have dropped by more than 17% during the same period. This should illustrate the market's fear of repeating history with both financials and these four stocks.
I do not see history repeating itself with these companies. I believe the bailout was successful in establishing strength and removing toxic assets. However we may experience some bumps in the road. The financial sector may get worse before it gets better. Of the four financial stocks that have reached 52 week lows I like Citigroup as the company with the most upside.
Each company has posted solid financial reports and have strong upside. My choice, that Citigroup is the best investment at its current price could be debated. A strong case could be made for any of the following stocks who reached 52 week lows. With an economy such as this I use certain indicators to find undervalued stocks.
I want a stock that has a positive EPS because in economies such as this you want companies that are profitable. Next, I want quarter over quarter gains for income to show that the company is growing. I want a strong outlook that shows expected year over year growth. The company is usually familiar with how it will perform in various economic situations. Finally, I want a low price to earnings ratio which will indicate the stock is near the bottom and has plenty of room to grow. I look for these four indicators only when I buy stocks in markets that are experiencing a strong downtrend.
Bank of America is not trading with a price to earnings ratio because the company's EPS is negative 1.66. I believe Bank of America could slip lower during the next few months since the bank does not appear to be making progress in a timely manner. The stock has lost 31% this year as the result of ongoing mortgage related losses and doubts concerning revenue growth. These issues do not reassure me of the company's future and in this economy you must have solid financials to back the drop in price.
Morgan Stanley reported second quarter revenue of $9.3 billion up 17% year over year. The quarter posted a loss, the result of restructuring several areas within the company. The stock has lost 34% of its value during the last six months. Analysts expect the restructuring initiatives to reduce balance sheet risk, which will improve valuation over a period of time. For the short term it appears the stock may see more loss. It is trading with a price to earnings over 30 which is relatively high for the financial sector. The stock dropped to 52 week lows closing with a price of $19.70. I believe it is possible the stock falls to $15 before seeing any substantial uptrend. The company is taking the initiative to reorganize and balance the corporation in a way that will sustain long term growth.
SunTrust Banks is a mid size commercial banking organization that has seen solid growth. On July 22nd the company announced 2nd quarter results which include a rise in profit, as the result of fewer loan losses. The company posted a profit of $174 million or $0.33 a share. Growth is expected to continue from its current EPS of 0.80. Everything looks good about this stock, it has growth, a solid future, it is profitable, and it has decreased in value by nearly 26% year to date. The only problem is a price to earnings over 27. In this market I like to see a price to earnings under 19, when the market is experiencing a downtrend. If losses continue then it is very likely that SunTrust will reach this point. With a P/E of 19 the stock would be priced around $15.20 which would be its lowest point since July of 2009. I do not know that the stock will ever see $15.20 because the stock has solid fundamentals and great potential. At any price near $15 this stock should provide great returns for years to come.
CitiGroup has seen a year to date loss over 25% and just announced earnings that beat expectations. The company announced earnings with an EPS of $1.09 versus the consensus of $0.96. The company underperformed the earnings but was given a boost from the sale of subprime securities. Even with the securities sale Citigroup would have still outperformed expectations. The company showed strong results in emerging markets as they are positioning themselves for long term growth. The company has growth, profitability, outstanding potential, and one of the strongest capital positions within the industry. Yet investors are not sold on the idea of Citigroup's potential. There have been many investors who have lost a lot of money on their investments in Citigroup during the 2008 recession. The company trades with a low price to earnings ratio of only 10.58, which is far below the level of 19 that I want to see in a stock during a downtrend. Every indicator I look for in a stock during a downtrend has been found in Citigroup.
The financial sector is weak and trades below the average during a downtrend. We have already established that certain sectors within the market are more hesitant to grow because of investors past experiences. The financial sector is at the top of the list with this category. Many of the large corporations have exceeded financial expectations but have seen little in stock performance, yet are the first to fall when the market panics.
Regardless, if you like Citigroup, there may be another stock in the financial sector that has your attention. The sector will continue to fall if the market does not recover soon. Therefore all stocks within this sector can be bought a very low price compared to value. I believe the market has given investors the perfect opportunity to invest in this sector. I will wait a little longer before purchasing shares of Citigroup, or any other stock in the financial sector.
I believe Citigroup could trade with a price to earnings of 8.5 in the near future. An 8.5 P/E ratio would price the stock around $28.00 a share. If you consider this possibility and the skepticism that investors place in this stock then you have the potential to see an incredible return within a few years.
I do not believe it is farfetched to think that Citigroup could post an EPS of $5.00 within three years, assuming their growth is maintained. But I will use an EPS of $4.50 to show how important this future P/E could become. If Citigroup was to see consistent gains in net income and develop their emerging markets in a way that is expected then investors will regain confidence. Not only do I expect Citigroup to trade with a P/E over 20 I expect most other financial stocks to trade at this level, or higher. Almost all of the major financial institutions trade with a low P/E but consistent gains should change the trend. If Citi can trade with a P/E of 20 with an EPS of $4.50 the stock price would be around $90.00.
An EPS of $4.50 and a P/E ratio of 20 is not far-fetched for a company that has changed as much as Citi. This short lived downtrend in our markets should be used to purchase stocks at a cheap price. Many of the companies who are seeing loss are only decreasing because of market panic. There is no legitimate reason as it relates to company performance for most of the stocks to see this loss. If financials are improving and guidance is strong then it does not matter how low a stock sinks during the short term. Intelligent investors will take advantage of this opportunity in all sectors. I speak of the financial sector because I feel it is the worst performing amongst those with increased profit. Regardless, if you believe that Citigroup is a good investment there are other investments that are getting cheaper that offer value. I urge investors to trade against the trend and buy when the stocks are cheap so that you may reap the reward of large profits in the coming months or years.