Seeking Alpha

Sam Subramanian's  Instablog

Sam Subramanian is editor and publisher of the highly acclaimed AlphaProfit Sector Investors’ Newsletter. The Newsletter has been ranked #1 several times by Hulbert Financial and has featured among MartketWatch’s top 10 investment newsletters. Sam is well known for his sector analysis... More
My business:
AlphaProfit Investments, LLC
My blog:
AlphaProfit MoneyMatters
  • Financials - Up 39%in Q2, Will They Continue Rewarding?  1 comment
    May 31, 2009 08:48 PM | about stocks: XLF, XLI, VGT, XLB, SPY, C, BAC, JPM, USB, AFL, DFG, RE

    The first half of 2009 has been tough on most momentum-based strategies. After declining 11.0% in the first quarter, the broad market turned around and staged a roaring rally. The S&P 500 is now up 15.7% for the second quarter.

    The divergence in performance between the first and second quarters is even more striking at a sector level.

    Sector Performance in 1Q2009 and 2Q2009-To-Date

    In general, sectors like financials and industrials down the most in Q1 have rallied impressively in Q2. For example, Financial Select SPDR (XLF) and Industrial Select SPDR (XLI) declined 28.7% and 19.9%, respectively in Q1 to rally 38.6% and 20.9% to date in 2Q. On the other hand, Vanguard Information Technology (VGT) that bucked the decimation in Q1 advancing 3.5% has lagged in Q2.

    One sector where momentum has continued from Q1 to Q2 is materials. After declining a modest 1.9% in Q1, Materials Select SPDR (XLB) has gained a respectable 22.2% in Q2. 
     
    The shift in popularity of sectors from Q1 to Q2 highlights the difficultly most momentum-based strategies face in delivering consistent out-performance. The probability of success improves when one looks beyond momentum and considers other factors in sector or security selection. Such factors include news quality, valuation, growth expectations, and the like.
     
    As one looks at Q2 performance, the financial sector stands out as a leader. The $64,000 question is, Will this leadership continue for the remainder of Q2 and into Q3?
     
    Considering news quality, financial institutions are benefiting from positives like a historically steep yield curve, low borrowing costs, shrinking credit spreads, and rising mortgage originations … all of which help profitability of banking operations. 
     
    As for negatives, uncertainty on capital adequacy of banks and valuation of distressed assets remain high. Exacerbating the already high levels of non-performing loans, the rate of mortgage foreclosures and loan delinquencies hardly show signs of abating.
     
    While one can make a case for bank stocks trading at attractive prices with respect to their longer-term earnings potential, they hardly appear bargains if one goes by analysts’ 1-year forward earnings forecasts. Citigroup (C) is expected to lose money over the next 4 quarters. Bank of America (BAC) is expected to earn just 14 cents a share and this translates to a forward P/E of over 81 for BAC’s shares. Shares of better-positioned banks like JP Morgan Chase (JPM) and US Bancorp (USB) trade at relatively high forward P/Es of over 21.
     
    Given moderately attractive fundamentals and unattractive valuations, the financial sector taken as a whole is unlikely to maintain its leadership in market returns going forward.
     
    Disclosure: I own less than a 100 shares of RE. I do not have Long or Short positions in any of the other stocks or ETFs discussed.
    Themes: Financials, Sectors, U. S. Market, Insurance, Momentum, Value, Valuation, Banks, Industrials, Materials, Information Technology Stocks: XLF, XLI, VGT, XLB, SPY, C, BAC, JPM, USB, AFL, DFG, RE
Back To Sam Subramanian's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

This post has 1 comment:

Full index of posts »
Latest Followers
Posts by Ticker

Latest Comments


Most Commented
  1. Financials - Up 39%in Q2, Will They Continue Rewarding? (1 Comment)
Posts by Themes
aggressive growth, Asset Management, Banks, Base Metals, biotech, Biotech, Broker-Dealers, Broker-Dealers , brokers, bullion, capital markets, China, Cleantech, Commodities, Commodity ETFs, Consumer, Czech, Earnings, Eastern Europe, Emerging Markets, Energy, Environment, ETF, ETFs, ETN, finance, Financial, Financials, futures, Gold, Gold Precious Metals, Group of Eight, hardware, health care, Healthcare, Housing Real Estate, Hungary, India, Industrial Metals, Industrials, Information Technology, Insurance, IPO, IPOs, Long, Long Ideas, Long ideas, long-term capital appreciation, long-term growth, M A,
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.