At What Price Should You Buy The 'Too-Big-To-Fail' Banks?

Includes: BAC, C, GS, JPM, WFC
by: Parsimony Investment Research

Investors looking to add a speculative investment to their portfolio should consider buying the nation's largest banks on a pullback. Our thesis is simple: The government will continue to provide assistance to the "Too Big To Fail Banks."

When National City, Wachovia and Washington Mutual were absorbed by other banks during the financial crisis, the asset and deposit base of the largest money center banks grew. We think that breaking up these banks is a politically tenuous process and would take years and significant coordination. As such, we believe the easier solution is for the U.S. to simply keep these banks alive and we believe that the Federal Reserve will keep interest rates low until the banks can earn their way out of the current predicament.

Below are the 5 largest banks from the current list of the top 50 bank holding companies (by total assets).

  1. JP Morgan Chase (NYSE:JPM) - $2,265,792,000
  2. Bank of America (NYSE:BAC) - $2,136,577,907
  3. Citigroup (NYSE:C) - $1,873,878,000
  4. Wells Fargo (NYSE:WFC) - $1,313,867,000
  5. Goldman Sachs (NYSE:GS) - $923,718,000

While these banks may be forced to sell assets or raise additional equity, we do not think that the government will allow them to fail, which should put a floor under their stock prices.

Tactical Strategy

Due to the current market rally, which we believe will be short lived, investors should consider waiting for a pullback in these stocks to enter a new position. Patiently waiting for low-risk entry points is the key to long-term investing success.

Most of the stocks above are currently still in a long-term downtrend. As such, investors should be looking for near-term areas of support as potential entry points.

JPMorgan Chase has been struggling to break through the upper end of its recent range and we believe that the stock could potentially test the low-end of the range in the coming months. The stock got very strong support around the $28.00 level in October and December and we think that that level will likely hold again.
Buy Zone: $29.00-$31.00

Bank of America has also struggled to make a new high and the stock is getting some strong resistance at the 200-day moving average (~$8.00). We believe that BAC could also test the low end of its range on a significant pullback, which we think would be a great entry price.
Buy Zone: $5.00-$5.50

Are you starting to see a trend here? Citigroup has also failed to make a new high and is getting strong resistance from the 200-day moving average (~$32.50). We would be a buyer just above the low of the recent range.
Buy Zone: $25.00-$27.00

Wells Fargo has been the exception to the rule. WFC is the only big bank that is technically in an uptrend. The 50-day moving average crossed over the 200-day moving average last month. That said, the stock will likely test the 200-day moving average again on a pullback and we would be a buyer just below that level.
Buy Zone: $25.00-$26.00

More of the same with Goldman Sachs. The stock can't seem to make a new high and it is getting resistance at the 200-day moving average. We would be a buyer just above the low of the recent range.
Buy Zone: $90.00-$95.00

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

Additional disclosure: Waiting for the right price...