Overview
Bank stocks have been whipsawed over the last year. After being beaten down to 52 week lows last year due to the eurozone debt debacle, they saw a tremendous resurgence in 2012. The positive outcome regarding the Fed's stress tests marked a high point for the banks. The financial sector led the way higher for the markets throughout the first quarter. The second quarter has been another story. The banks covered in this article have dropped more than 24% over the last quarter. I believe four of the banks have bottomed and present an excellent buying opportunity. I will present the positive macro catalysts for U.S. banks in general, and then perform a review of each bank's fundamental and technical status.
Macro Catalyst for U.S. Banks
I believe there are several macro reasons that will drive a turnaround in the banking sector. The major reason is the eurozone is not going to fall apart. The eurozone is taking the proper actions to calm its tumultuous financial markets. Recently, bond yields of certain eurozone sovereigns have rocketed higher driving U.S. banks lower in sympathy with their European counterparts. Even so, that fact of the matter is the U.S. banks have worked diligently over the last two years to reduce their exposure to Europe's continuing issues. In fact, many U.S. banks stand to gain significant market share on a global scale. As the European banks inevitably retract global credit lines to meet new requirements and focus capital and liquidity on the stabilization of Europe. An incredible opportunity presents itself for U.S. banks to step in and fill this void.
U.S. banks are well ahead of their European peers with regard to capital requirements. Many have already taken losses yet still have excess capital and reserves. The sector is flush with liquidity. U.S. banks have improving fundamentals and EPS growth projections. U.S. banks are trading at low price-to-earnings multiples even when taking into account lower earnings expectations and are trading at approximately three to five multiples below normal. Finally, the U.S. housing market is showing signs of life. All these signs of improvement bode well for U.S. banks.
Company Specific Reviews
In the following sections, we will take a closer look at these bank stocks to determine if value exists. We will perform a review of the current fundamental and technical state of each company. The following table depicts summary statistics and Monday's performance for the stocks.
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Bank of America Corporation (BAC)
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BAC is trading well below its consensus estimates and its 52 week high. The company is trading 31% below its 52 week high and 41% below the analysts' consensus mean target price of $10.93 for the company. BAC was trading Monday for $7.76, down nearly 2% for the day.
Fundamentally, BAC has several positives. The company has a forward PE of 7.68. BAC is trading for 1.75 times free cash flow and approximately one third of book value. EPS next year is expected to rise by 71%. Insider ownership is up 48% over the past six months.
I believe BAC presents a buying opportunity at this level. The stock has recently bounced off its low of just under seven dollars. The stock has recorded higher highs and higher lows in recent days. The stock may breech the 50 day sma in short order. This may be a good point to start a position.
Citigroup, Inc. (C)
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Citigroup is trading well below its consensus estimates and its 52 week high. The company is trading 36% below its 52 week high and 48% below the analysts' consensus mean target price of $40.64 for the company. Citigroup was trading Monday for $27.55, down nearly 3% for the day.
Fundamentally, Citigroup has several positives. The company has a forward PE of 5.95. Citigroup is trading for 1.68 times free cash flow and approximately half of book value. EPS next year is expected to rise by 12%. Insider ownership is up 30% over the past six months.
Citigroup's Vikram Pandit rang the opening bell to celebrate Citigroup's 200th year in business. Pandit said in an interview with CNBC Citi's earnings would be strong enough to generate sufficient capital U.S. and international bank regulators would likely require big banks to hold. Additionally, Pandit said U.S. consumers and the housing market are gaining strength. This may be a good point to start a position. The stock has recorded higher highs and higher lows in recent days.
The Goldman Sachs Group, Inc. (GS)
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Goldman is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and 36% below the analysts' consensus mean target price of $127.30 for the company. Goldman was trading Monday for $93.63, down slightly over 2% for the day.
Fundamentally, Goldman has several positives. The company has a forward PE of 7.22. Goldman is trading for 2.38 times free cash flow and approximately 65% of book value. EPS next year is expected to rise by 14%. Goldman currently pays a dividend with a nearly two percent yield.
The last time Goldman was at this level it went on a massive run from $90 to $127. The stock has been consolidating at this level for some time. I like the stock here.
JPMorgan Chase & Co. (JPM)
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JPMorgan is trading well below its consensus estimates and its 52 week high. The company is trading 25% below its 52 week high and 33% below the analysts' consensus mean target price of $45.97 for the company. JPMorgan was trading Monday for $34.62, down slightly over 1% for the day.
Fundamentally, JPMorgan has several positives. The company has a forward PE of 6.51. JPMorgan is trading for 1.30 times free cash flow and approximately a 30% discount to book value. EPS next year is expected to rise by 22%. JPMorgan currently pays a dividend with a 3.47% yield.
I believe Jaime Dimon's appearance in front of Congress marked the low for JPM. Dimon took control of the proceeding. Near the end it seemed as if the congressman were looking to Dimon for answers rather than the other way around. Oppenheimer reiterated their outperform rating for the stock on June 13th with a price target of $56. The stock has put in a bottom. I like the stock here.
Morgan Stanley (MS)
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MS is trading well below its consensus estimates and its 52 week high. The company is trading 43% below its 52 week high and 54% below the analysts' consensus mean target price of $21.32 for the company. MS was trading Monday for $13.82, down over 3% for the day.
Fundamentally, MS has several positives. The company has a forward PE of 6.14. MS is trading for 1.93 times free cash flow and approximately half its book value. EPS next year is expected to rise by 63%. MS currently pays a dividend with a 1.45% yield.
Unfortunately, this is the one to avoid. With the Facebook (FB) debacle still fresh, who knows what obstacles lay ahead for the company? I would avoid the stock until further progress is made in regards to the unwinding of the Facebook IPO mess. I realize other banks were involved in the IPO, nevertheless, Morgan Stanley was the leader and will face the brunt of the headwinds.
Conclusion
I believe the financial sector has significant upside potential as the issues of the eurozone get resolved and fade from the forefront of investors' minds. With the alarming retrenchment by banks across the globe, regulators are set to ease stringent new capital rules. The new regulations, known as Basel III, are set to start in 2013. This should help out the banks tremendously. The one stock to hold off on is Morgan Stanley. Too many unknowns lie ahead for the company. These are long-term investments. You can expect more volatility near-term for all equities, even so, I'm taking these bank stocks out of the penalty box.
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 at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.
