Financials: A High-Risk, High-Reward Recovery Play

|
 |  Includes: BAC, BLK, GS, MS
by: Benjamin Goldman

On October 4, Ben Bernanke promised some intervention, which caused a down market to turn around and close the day up over 2 percent, followed by two more strong trading days on the 5th and 6th. A lot of the recent decline in the stock market has stemmed from uncertainty among investors, and if Bernanke and the federal government follow through, a lot of the declines in the recent market can be erased. For those investors trying to bet on this, I strongly suggest buying financial institutions, since they have high betas and their success is strongly dependant on the performance of the market. In this article, I list my three favorite large cap FIs that investors should consider if they want to bet on an economic turnaround.

Bank of America (NYSE:BAC)

Bank of America is at center stage when it comes to recent financial news, and now recent political news, with Occupy Wall Street becoming more visible. BofA is the largest of the American banks in terms of deposits and is the big bank with the most struggles, as it is the only big four bank that reported a loss in the last quarter. BAC increased by a whopping 8.84 percent on Thursday, October 06, as it has been common over the past few months for shares to have high one-day fluctuations. At a price of $6.28 at the close of Thursday’s trading, an investor can earn quite a high return if the stock moves anywhere near its 52-week high of $15.31. I believe that Bank of America is still too big to fail, and Warren Buffett’s investment in the bank is a good indicator that it will return to being a profitable company. However, I suggest not loading your portfolio with too many Bank of America shares because of its high volatility and PR issues. Its next earnings date is October 18, and with such a wide range of possible outcomes, Bank of America can be a good buy for the high-risk investor.

BlackRock Inc. (NYSE:BLK)

BlackRock is towards the safe end of financial institutions, since it generates its revenues from client business. Since I last wrote about BlackRock, its EPS estimates have dropped. Its 2011 estimate has gone from $12.74 to $12.34 and its 2012 estimate has gone from $14.58 to $13.73. Compared to other financial institutions, with earnings estimates that have been cut by as much as 45 percent, this isn’t that bad. BlackRock’s share price has stayed pretty constant over the past month, dropping by only 0.49 percent while the financial sector as a whole dropped by about 2.3 percent. BlackRock will continue to be a leader in asset management and will be able to gain substantial value as the market recovers. BlackRock reports its earnings on October 19.

Morgan Stanley (NYSE:MS)

Compared to its biggest competitor, Goldman Sachs (NYSE:GS), Morgan Stanley has been struggling. Its earnings are sluggish in comparison and shares have dropped by 33.21 percent over the last 3 months, compared to Goldman’s 26.85 percent drop. However, Morgan Stanley’s shares have started to outperform Goldman’s over the past couple of weeks, and it is very likely that MS and GS will return to having similar earnings, and investors long MS will experience huge returns.

Conclusion

I personally believe that now is not the time to bet on financial institutions. There is still a lot of uncertainty about the European debt crisis, and until that moves closer to being settled, I do not think that financial institution stocks can experience consistent gains. Those who start going long on financial institution stocks now hoping for a repeat of 2009 will be taking the biggest risk, but will also experience the largest financial gains if there is a real turnaround starting in the market.

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