This week is the start of the earnings season. JP Morgan (JPM) is the key report I wish to focus on for the coming week. A letter from CEO Jamie Dimon to shareholders was released last week. The letter was very thorough and describes a great year for the company. It is a virtual lock that they will best analysts estimates on Friday.
With the assurance of positive news from JPM on Friday, I see Monday morning's sell off of 1% to 3% as a buying opportunity for the following banks; Bank of America Corporation (BAC), Citigroup, Inc. (C), Morgan Stanley (MS) and Wells Fargo & Company. See current performance below.
The banks have been on a tremendous run this year and are still in well-defined uptrends. As of late, most banks have pulled back from the top of the trading range trend channel which is a positive technically. Please review the following briefs on the banks in question.
Wells Fargo & Company
Wells Fargo trades at a premium to the other banks in this article. Wells is currently trading at 1.27 times book. Wells Fargo did not drop as hard last year and is only up 22% this year. That is a great return, but nothing compared to the 66% move by BAC. This stock may not provide the biggest bang for your buck regarding this short term trading idea. Wells has been the more stable of the banks over the last year and held up well. On the other hand, more of the good news is priced in to the stock so the upside potential may be less. Although, I would still include it in the basket of stocks as a hedge against the other more volatile banks.
Bank of America Corporation
Bank of America is up this year with a gain of 66%. The entire financial sector has been on fire since most passed the recent Federal Reserve stress tests. BAC has much more room to run due to the fact it is still trading at approximately half its book value. I don't think the rally is over for the banks. This stock has almost doubled in three months and was expecting a pullback below $9 prior to the next upward move. With BAC currently at $8.97 the stock has pulled back over 10% from its recent high of $10. I expect this trade to have the highest risk and the highest reward.
With a forward PE of 7.40 and a price to book ratio of .57, Citigroup looks vastly undervalued. Citi spiked along with other banks after the stress test results were announced. Since that time it has nearly touched $40 and is now trading down to the 50 day moving average of 34. This is the ideal time to start a position. Citigroup leads the pack regarding potential upside with a mean consensus estimated price target of 22 analysts of $43 and a current share price of $34, Citigroup has 26.4% upside potential.
With a forward PE of 7.93 and a price to book ratio of .57, Morgan Stanley looks vastly undervalued. Morgan Stanley spiked along with other banks after the stress test results were announced. Since that time it has nearly touched $22 and is now trading down to the 200 day moving average of 18 and the bottom of its upward trend channel. This is the ideal time to start a position. Morgan Stanley scored the Facebook (FB) IPO which is a definite short term positive catalyst for the stock.
This is a short term trading idea regarding the above bank stocks. Nonetheless, I feel all these banks have significant upside. I see this as a long-term buying opportunity as well. I believe the banks will recover from the lows of Monday and see 4% to 5% gains leading after JPM's announcement. I would suggest buying a basket of these banks stocks to reduce risk. The highest risk/reward play is BAC and the lowest is Wells Fargo based on price to book value ratios and performance year to date.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.