JP Morgan's (JPM) surprise announcement of a $2B trading loss could hurt financial shares over the coming weeks as investors wonder what other banks still have potential landmines in their business model and/or balance sheets and the increased likelihood of yet more stringent banking regulation. I would use any significant selloff through the end of the month to start to build positions in two financial firms that do not have significant trading businesses or exposure.
Wells Fargo (WFC)
4 reasons WFC provides long term value at under $33 a share:
- The company has A+ rated balance sheet, no real trading exposure and yields 2.7%.
- Consensus estimates for FY2012 and FY2013 have risen over the past two months. The company will benefit greatly as well if the housing market continues to slowly recover.
- The stock has a five year projected PEG of under 1 (.89) and sells at under 9 times forward earnings, a discount to its five year average (13.3).
- The median analysts' price target for the 30 analysts that cover the stock is $38.
State Street (STT)
4 reasons STT is undervalued at $43 a share:
- The stock has a forward PE of 9.5 times FY2013's earnings, a discount to its five year average (12.2).
- The company gets the majority of its revenue from recurring fee channels, sells for just 9% over book value and yields 2.2%.
- Earnings estimates for FY2012 and FY2013 have nudged up over the past three months. It earned $3.73 in FY2011, and analysts project $3.93 a share in FY2012 and then over $4.50 in FY2013.
- The 21 analysts that cover the stock have a median price target of $51 on STT. It also has an A+ rated balance sheet.