These five banks top the S&P 500 in the banking sector for the largest turnarounds by percentage increase from 2011 to 2012. Bank of America (BAC) leads the way with a 2012 gain of 28.24% after an abysmal 2011 performance of -47.80%. Morgan Stanley (MS) and Goldman Sachs (GS) are next with 23.59% and 23.27% 2012 gains, respectively, after being down from 35 to 31% in 2011. Bringing up the rear, but still with good 2012 performances are Citigroup (C) and Sun Trust Banks, Inc. (STI) with 16% gains this year after mid 30% losses last year. Please review the table below for detailed performance statistics.
Company Current Performance Statistics (Click to enlarge)
Tables and Charts provided by Finviz.com.
I believe there are several macro reasons for the turnaround in the banking sector. First, one major reason is the eurozone has not fallen apart. The eurozone seems to be taking the proper actions to calm its tumultuous financial markets. Recently bond yields of the eurozone fringe sovereigns that were rocketing higher have sunk vastly lower with the back-door liquidity injections engineered by the ECB via the LTRO.
Secondly, U.S. banks are well ahead of their European peers with regard to capital requirements. Many have excess capital and excess reserves. The sector is flush with liquidity, capital and reserves. U.S. banks have improving fundamentals and EPS growth projections. U.S. bank earnings are up 40% this year and EPS growth rates are expected to come in at 20% next year. U.S. banks are trading at low price-to-earnings multiples even when taking into account lower earnings expectations and are trading at approximately five multiples below normal. The EU banks will inevitably have to retract certain credit lines to meet new requirements, creating an opening for U.S. banks to take market share.
Finally, the U.S. housing market, unemployment situation and economic indicators are all showing signs of life. Additionally, the government is preparing to introduce a plan to sell Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) foreclosures to investors, which may expedite the recovery of the U.S, housing market. All these signs of improvement bode well for the banks.
I believe the financial sector has continuing upside potential based on these geopolitical and macroeconomic catalysts. As the issues of the eurozone, U.S. and the world fade from the forefront of investors' minds and a renewed focus on fundamentals and company specific catalysts emerges, I expect these banks to continue their upward march. Nevertheless, in the market as in life, timing is everything. In the following section we will perform a review of each of these stocks fundamentals to ensure value still exists and then take a look at their technical state to determine if this is an ideal entry point. I will assign a buy, sell or hold rating for each stock.
Company Reviews
Bank of America
Fundamentals (Click to enlarge)
Analysis - Buy
Bank of America has a Price to Book ratio of .33, a forward Price to Earnings ratio of 6.37, Price to Sales ratio of 1.09 and a projected EPS growth rate of 51.35% for next year. Bank of America is 11% below its 52-week high. These fundamentals are strong. Bank of America is trading at a third of its book value. This fact coupled with decent EPS growth and reasonable price performance confirms that Bank of America is undervalued. With an RSI 69.16, it is on the brink of becoming overbought but not quite yet. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly or monthly basis depending on your time horizon to reduce risk and setting a 5% to 10% trailing stop loss order to minimize losses.
Morgan Stanley
Fundamentals (Click to enlarge)
Analysis - Hold
Morgan Stanley has a PEG ratio of 1.44, a forward Price to Earnings ratio of 7.97, Price to Book ratio of 0.60 and a projected EPS growth rate of 21.88% for next year. Morgan Stanley is 35% below its 52 week high. These fundamentals are strong. A PEG of less than 1 is extremely bullish. Morgan Stanley is trading at two thirds of its book value. This fact coupled with decent EPS growth and reasonable price performance confirms that MS is undervalued, although, with an RSI of 72.99, MS is technically overbought currently. I would wait for a pullback for a better entry point if I was looking to get in.
Goldman Sachs
Fundamentals (Click to enlarge)
Analysis - Sell
Goldman Sachs has a PEG ratio of 2.17, a forward Price to Earnings ratio of 8.32, Price to Book ratio of 0.85 and a projected EPS growth rate of 16.23% for next year. Goldman Sachs is 32% below its 52 week high. These fundamentals are mixed. A PEG of over 2 indicates the stock is rich and overvalued at current price levels. Additionally, with an RSI of 72.58, GS is technically overbought currently. I would wait for a pullback for a better entry point if I was looking to get in and take profits now if I owned it.
Citigroup
Fundamentals (Click to enlarge)
Analysis - Buy
Citigroup has a PEG ratio of 0.83, a forward Price to Earnings ratio of 6.51, Price to Book ratio of 0.50 and a projected EPS growth rate of 15.69% for next year. Citigroup is 35% below its 52 week high. These fundamentals are strong. A PEG of less than 1 is extremely bullish. Citigroup is trading at half of its book value. This fact coupled with decent EPS growth and reasonable price performance confirms that C is undervalued, additionally, with an RSI of 64.68 C is technically neither overbought nor oversold currently. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly or monthly basis depending on your time horizon to reduce risk and setting a 5% to 10% trailing stop loss order to minimize losses.
Sun Trust banks, Inc.
Fundamentals (Click to enlarge)
Analysis - Sell
Sun Trust has a PEG ratio of 2.14, a forward Price to Earnings ratio of 7.73, Price to Book ratio of 0.55 and a projected EPS growth rate of 51.14% for next year. Sun Trust is 36% below its 52 week high. These fundamentals are mixed. A PEG of over 2 indicates the stock is rich and overvalued at current price levels. Although, with an RSI of 60.65 STI is technically neither overbought nor oversold, I would wait for a pullback for a better entry point if I was looking to get in and take profits now if I owned it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC, C over the next 72 hours.
