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On September 28, 2012, we published the article "4 Financial Stocks Doomed To Trade Higher", making the case for why Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), and Citigroup (C), could trade higher despite the possibility of a slowing economy. As a matter of a fact, we reasoned that any economic malaise will help maintain and boost a Federal Reserve policy which would further support financial stocks.

Since the publication of the article, the Dow Jones U.S. General Financial Index (DJUSFN) has increased by 2.6% from 291.21 on September 25, 2012 to 298.71 on October 19, 2012, while the Dow Jones Industrial Average (DJI) has actually dropped by 0.9%. Although all four financial stocks have traded higher, there is a good possibility for additional gains during the next three months.

DJUSFN 1-Month Chart- Source

As we look forward to the next three months, this period is typically a cyclically strong period for financial shares. Although this period may have been weak during the turbulent years of 2007, 2008 and 2009, it has actually proven to be quite strong for these shares during other years of the past decade (especially for Goldman Sachs and Morgan Stanley).

Naturally, past performance is not an indication for future performance. However, we believe there is a good possibility for these financial stocks to appreciate by an additional 7% to 15% or more during the next three months . The recent proactive stance by the U.S. Federal Reserve and the European Central Bank is likely to prevent a repeat of 2007-2009 events in the near future.

The Goldman Sachs Group, Inc.

Since September 25, 2012, Goldman Sachs shares have increased by 8.9% from 113.5 to 123.62. Goldman reported quarterly earnings of $2.85 per share for the quarter ending September 30 2012, substantially stronger than estimates of $2.12 per share.

During the past 10 years, Goldman Sachs appreciated on seven occasions between October 19 and January 19 of the following year, with average appreciation of 10.3%. Meanwhile, it depreciated on three occasions, during the turbulent financial years of 2007, 2008 and 2009, with average depreciation of -19.9%.

GoldmanSachs Stock Price Performance from October 19 to January 19

Year% change
2011+7.2%
2010+6.5%
2009-9.9%
2008-35.9%
2007-13.9%
2006+17.0%
2005+10.6%
2004+12.1%
2003+15.6%
2002+3.3%

Source: values calculated using data provided by Yahoo Finance

Goldman's expected earnings for 2013 currently stand at $12.83 per share, 34 cents higher than where such estimates stood on September 25, 2012. This yields a forward P/E ratio of 9.64. Although such forward P/E ratio has increased since September 25 where it stood at 9.09, we believe it is still very attractive given the Fed's continued accommodative stance. We also believe there is room for further revisions upward for next year's earnings estimates (which would cause the forward P/E ratio to be lower at the current stock price).

Morgan Stanley

Since September 25, 2012, Morgan Stanley shares have increased by 5.6% from 16.6 to 17.53. Morgan Stanley reported quarterly earnings of 28 cents per share for the quarter ending September 30 2012, stronger than estimates of 24 cents per share.

During the past 10 years, Morgan Stanley appreciated on seven occasions between October 19 and January 19 of the following year, with average appreciation of 11.9%. Meanwhile, it depreciated on three occasions, during 2007, 2008 and 2009, with average depreciation of -17.2%.

Morgan StanleyStock Price Performance from October 19 to January 19

Year% change
2011+10.2%
2010+9.5%
2009-5.7%
2008-19.0%
2007-26.8%
2006+7.3%
2005+12.2%
2004+15.5%
2003+15.2%
2002+13.5%

Source: values calculated using data provided by Yahoo Finance

Morgan Stanley's expected earnings for 2013 currently stand at $1.98 per share, 3 cents higher than where such estimates stood on September 25, 2012. This yields a forward P/E ratio of 8.85. Such forward P/E ratio has increased since September 25 where it stood at 8.51, but again, we believe it is still very attractive given the Fed's continued accommodative stance. We also believe there is room for further revisions upward for next year's earnings estimates. Morgan Stanley's valuation may prove to be even more enticing than Goldman Sachs, depending on its fixed income trading performance during next quarter.

Bank of America

Since September 25, 2012, Bank of America shares have increased by 5.7% from 8.93 to 9.44. Bank of America reported quarterly earnings of 0 cents per share for the quarter ending September 30 2012, substantially stronger than estimates of a loss of 7 cents per share.

During the past 10 years, Bank of America appreciated on six occasions between October 19 and January 19 of the following year, with average appreciation of 7.7%. Meanwhile, it depreciated on four occasions, during 2003, 2007, 2008 and 2009, with average depreciation of -24.7%, driven by the substantial drop of -68.4% in 2008. Although from a cyclical perspective Bank of America has not performed as well as Morgan Stanley or Goldman Sachs from October 19 to January 19 of following years (during the past decade), a resurgent real estate market should actually bode well for BAC during the next three months.

Bank of AmericaStock Price Performance from October 19 to January 19

Year% change
2011+9.0%
2010+21.9%
2009-4.8%
2008-68.4%
2007-23.3%
2006+1.7%
2005+7.5%
2004+2.4%
2003-2.3%
2002+4.1%

Bank of America's expected earnings for 2013 currently stand at 94 cents per share, 3 cents higher than where such estimates stood on September 25, 2012. This yields a forward P/E ratio of 10.04. Although such forward P/E ratio has increased since September 25 where it stood at 9.81, it is still very attractive given recent strength in the housing market, and expectations for current Fed policy to further support the housing sector. Again, this should lead to further revisions upward for next year's earnings estimates.

Citigroup, Inc.

Since September 25, 2012, Citigroup shares have increased by 13.1% from 32.86 to 37.16. Citigroup reported quarterly earnings of $1.06 per share for the quarter ending September 30 2012, stronger than estimates of 96 cents per share.

During the past 10 years, Citigroup appreciated on six occasions between October 19 and January 19 of the following year, with average appreciation of 9.2%. Meanwhile, it depreciated on four occasions: during 2011 (although it was almost unchanged), 2007, 2008 and 2009, with average depreciation of -35%. As in the case for Bank of America, Citigroup has not performed as well as Morgan Stanley or Goldman Sachs from October 19 to January 19 of the following year during the past decade. However, a resurgent real estate market should also give a boost to Citigroup, although it may be somewhat mitigated in case of weakness in international markets where Citigroup has substantial presence in emerging markets.

CitigroupStock Price Performance from October 19 to January 19

Year% change
2011-0.2%
2010+17.2%
2009-22.0%
2008-76.2%
2007-41.5%
2006+10.4%
2005+7.8%
2004+11.2%
2003+3.1%
2002+5.7%

Citigroup's expected earnings for 2013 currently stand at $4.63 cents per share, 10 cents higher than where such estimates stood on September 25, 2012. This yields a forward P/E ratio of 8.03. Such forward P/E ratio has increased since September 25 where it stood at 7.25, however it is still very attractive given recent restructuring efforts at Citigroup, with the announced resignation of Vikram Pandit. This, coupled with a revival of the real estate market and an accommodative Fed policy, there is a high possibility for further revisions upward to next year's earnings estimates for Citigroup.

Despite solid recent appreciation in the stocks of Goldman Sachs, Morgan Stanley, Bank of America and Citigroup, there is still room for further appreciation during the next three months given reasonable forward P/E ratios. Current policy by the U.S. Federal Reserve, as well as the European Central Bank will likely prevent a repeat of the bearish events of 2007, 2008 and 2009. Investors who share our view could potentially see appreciation in the price of these stocks anywhere between 7% and 15% or more between now and January.

Source: 4 Financial Stocks That Could Go Even Higher