Bank Stock Risks Mount: Sell In May And Go Away

Includes: BAC, C, JPM, MS, XLF
by: Hawkinvest

For the past two years, investors who followed the old adage "sell in May and go away" were ahead of the game when markets fell sharply after May 2010 and 2011. The sell in May principle is based on the fact that many traders and investors are on summer vacation at that time, and historically the market returns during the months that follow May are typically weak.

With May just around the corner, and with the markets starting to look shaky, many investors are asking themselves the same question. With the economy and debt crisis in Europe deteriorating, a market correction appears more likely, especially after the rally it has enjoyed this year. In particular, European financial stocks could lead the global markets lower as many investors believe that bank stocks will need to be recapitalized in a number of countries. If European bank stocks and other financial stocks see renewed downside, chances are good that banks in the U.S. will also come under pressure.

In a recent CNBC article, famed bank analyst Richard Bove stated:

The European debt problems have arisen once again. The seasonal activity of the Federal Reserve is likely to cause the normal seasonal decline in stock prices. ...Thus, investors are likely to note continuous increases in bank earnings through the summer but no positive movement in bank stocks.

Richard Bove has been one of the most bullish analysts for the banking sector, so if he is turning less optimistic, investors should take note. Here is a closer look at a few leading bank stocks that have started to trend down, and could be headed even lower if the markets head South after May.

Bank of America (NYSE:BAC) shares have been in a major uptrend in 2012, but more recently the stock has been declining. Not long ago, a well-known bank analyst named Mike Mayo even put a "sell" rating on the stock. After a huge run from as little as $4.92 per share where it traded late last year, it's normal for the stock to give some back, but the question is whether a little will turn into a lot later this year. The company recently reported better-than-expected earnings of 31 cents per share (excluding one-time charges), or about 17 cents per share if you include the charges. This bank is still facing major challenges, not the least of which is a continued flow of foreclosures and litigation. Since earnings were released, the stock has been a weak performer, even on days when the markets are in rally mode. That is not a good sign and it could indicate that the stock will be heading lower in the coming weeks and months.

Here are some key points for Bank of America:

  • Current share price: $8.23
  • 52-week range: $4.92 to $12.71
  • Earnings estimates for 2012: 62 cent per share
  • Earnings estimates for 2013: $1.06 per share
  • Annual dividend: 4 cents per share, which yields 0.5%

Citigroup (NYSE:C) shares also participated in the market rally and announced a quarterly profit of about $2.9 billion (with accounting charges the earnings came to 95 cents per share). It also announced that capital was raised by selling assets, which further improves the balance sheet. Some investors find the stock to be an attractive way to benefit from growth in emerging market countries where Citigroup has exposure. Many investors also believe that it has less exposure to foreclosure losses relative to a company like Bank of America, which bought Countrywide Financial, a major mortgage lender. Citigroup shares recently peaked out around $38, and might find support at about $31 in a market sell off, which is close to the 200-day moving average.

Here are some key points for Citigroup:

  • Current share price: $33.27
  • 52-week range: $21.40 to $46
  • Earnings estimates for 2012: $4.23 per share
  • Earnings estimates for 2013: $4.71 per share
  • Annual dividend: 4 cents per share, which yields 0.1%

JPMorgan Chase (NYSE:JPM) shares might be the safest place for bank stock investors, as many believe it is best-positioned for growth and that it has relatively limited risk of mortgage losses. This bank is widely believed to have top-notch management, and these factors will probably limit the extent of any decline in a market correction. JPMorgan recently reported a strong profit for the first quarter of 2012, which was $5.38 billion, or $1.31 per share. This stock appears undervalued for long-term investors; however, most investors will agree these are not normal times where traditional valuation metrics might apply. Therefore, it might make sense to wait for pullbacks closer to around $36 per share, which is near the 200-day moving average for this stock.

Here are some key points for JPMorgan:

  • Current share price: $43.21
  • 52-week range: $27.85 to $46.49
  • Earnings estimates for 2012: $4.98 per share
  • Earnings estimates for 2013: $5.60 per share
  • Annual dividend: $1.20 per share, which yields 2.8%

Morgan Stanley (NYSE:MS) shares have also rallied in 2012, but many investors seem to have doubts. In a recent CNBC article, an analyst states:

If another financial crisis were to strike, like the one in 2008, Morgan Stanley will be the first to go -- that's the conventional wisdom on Wall Street. So says Charlie Bobrinskoy, vice-chairman of Ariel Investments in an interview on CNBC's Fast Money. 'That's why whenever there's trouble in Europe, Morgan seems to fall the most,' he says.

That's enough to keep me looking elsewhere for a bank stock to consider buying in a market correction, especially since the debt crisis in Europe could easily deteriorate in the coming months. However, the company is reporting good financial results with earnings of 71 cents compared with estimates of 44 cents. However, these results excluded a big accounting charge. The stock has not been acting strong in April, and it has broken below the 50-day moving average of $18.75 and looks like it could also break well below the 200-day moving average of $17.35. I think investor wariness and the weak price action makes this a stock to sell on any rallies. In a significant correction, this stock looks vulnerable and I believe investors should be cautious.

Here are some key points for Morgan Stanley:

  • Current share price: $17.15
  • 52-week range: $11.58 to $26.49
  • Earnings estimates for 2012: $1.49 per share
  • Earnings estimates for 2013: $2.46 per share
  • Annual dividend: 20 cents per share, which yields 1.2%

Financial Select Sector (NYSEARCA:XLF) is an ETF with diversified stock holdings in many large banks and financial stocks. This ETF holds stocks like JPMorgan, Bank of America, Citigroup, and others. It also holds other financial sector stocks such as insurance companies. Investors who believe the bank stocks are going lower might want to consider shorting this ETF.

Here are some key points for the XLF:

  • Current share price: $15.31
  • 52-week range: $10.95 to $16.46
  • Earnings estimates for 2011: n/a
  • Earnings estimates for 2012: n/a

Data is sourced from Yahoo Finance.

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

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.