Covering Suntrust Banks: Coming Back for Seconds

| About: SunTrust Banks, (STI)

After a great summer blockbuster that’s amped up the audiences, news on a sequel is soon to follow. But everyone knows it won’t be as good. That's not the case with Suntrust Banks Inc. (NYSE:STI) -- we’ve taken a second helping, and with a bounce would be looking for a third installment.

The run-around in the stock market continued Thursday with another -4.5% day. Markets like this make us especially happy that we keep a hedge in place to take advantage of up days with longs and calls and at the same time take advantage of down days with shorts and puts.

The headlines want us to believe that we should blame Europe. I suppose that means that the downgrade of U.S. debt by Standard & Poor is but a memory now, soon to be forgotten. Or that the economic reports about unemployment, GDP, consumer sentiment, etc. are simply understood, leaving Europe as a great scapegoat candidate.

It doesn’t really matter who we blame, as it is much more important to realize our current state, which feels a bit like we’re “frozen here on the ladder of" our lives (Sir Elton John). It is more important than ever to have a balanced hedge in your investments and capture profits, so we don’t have to feel it’s “too late to save (ourselves) from falling.”

Today we are recommending taking profits on Suntrust again. Like many other banks, STI “took a chance and changed (their) way of life” and they are in jeopardy of “losing everything (on) the sun going down on (them).”

We recommended shorting STI originally on July 13, 2010 at $25.54 and covered with a profit on August 25, 2010, at $22.68. As I noted above, we recommended a second visit to the short side on STI Sept. 2, 2010 at $23.61 for the following reasons:

Suntrust Banks: SHORT STI at the open Sept. 2, 2010

Sun Trust Bank is rated a Strong Sell by Sabrient and is ranked #3 at the bottom of the VCU strategy. Earnings (or lack thereof) will be announced July 22, 2010, and 29 analysts project a range of -$.06 (on the best side) to -$.46 (on the worst side) with a consensus of -$.34. Price-to-Sales of 3.49 is significantly higher than the industry average of 2.88, and further convinces us that it is overvalued at this price. STI also has a fundamental score of 32.1, compared with the industry average of 53.8 and the S&P 500 score of 70.1, which is a measure of a company’s financial health, including its balance sheet, cash flow, revenue, and earnings quality.

Since that time STI has moved out of negative earnings to +$.33 in the most recent quarter, giving the company a trailing P/E of 22.09 but a forward P/E of 7.99, which is more in line with proper valuation metrics. The really good news for us is that the stock traded down to that proper valuation by reaching the current price of $17.89. Closing the short at these prices nets a 25.13% profit.

There are still many concerns going forward with STI, as with all regional banks, but the fundamental score for STI has improved from 32.1 in September 2010 to 47.4 on August 16, 2011. Recall that this is a measure of STI’s financial health, including its balance sheet, cash flow, etc. At that same time, the S&P 500 score has dropped to 60.6, which reduces the fundamental risk that associated our recommendation to short STI.

Recommendation: Buy to Cover STI at the market Friday, August 21, 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.