On August 23rd, 2011 I wrote an article on defense or attack as a long term strategy, on the big four USA banks - Bank of America (NYSE:BAC), Citibank (NYSE:C), JP Morgan Chase (NYSE:JPM), and Wells Fargo Corporation (NYSE:WFC). My end prognosis was that for the little value offered for funds invested in the banks, you may as well be invested in the banks:
"The more aggressive investor though is likely to attack with a long-term position in achieving significant capital growth over a 2-3 year time frame. During this time, dividend income should match, if not eventually outperform the banks' current paltry interest rates. After all, if you're going to have your money in the bank, why not be well and truly inside the banks?"
Since that time, there has been extreme volatility and downward pressure on financial stocks, notably the banks (BAC being a key example). That aside, the performance of the big four has been notable, ranked as follows:
- WFC +30.6%
- C +21.0%
- JPM +12.8%
- BAC +13.3%
On 30th August, 2011 I focused on PNC Financial Group (NYSE:PNC) as being a better value banking stock with less risk and more growth potential than the big four banks. Over the same period, the stock has increased by 33%, placing its gains ahead of the highest of the big four, WFC.
But frequently we must reassess our long positions and heed the warning that 'historical results are no guarantee of future performance', so where then is the value in banking stocks for the next 12 months? As I explained previously, I see value in Citibank on a longer term basis, and feeling the need for a big financial in my Sun Tzu Portfolio, I included the stock alongside PNC. As I see it:
"The rose among the thorns as far as the big financial banks, with less exposure to the big issues facing US banks, and a CEO who seems to understand the challenges (both real and protest driven) the stock is currently trading at $29.31 with EPS of 3.19 and P/E of 8.70. It will continue to face the current immediate issues causing pressure on banking stocks, but even so, it will be well positioned for capital growth and dividend growth as markets recover."
I believe this has been confirmed with the stocks strong growth of 21%, its return to payment of dividends ($0.01 - small but a step back in the right direction), and EPS forecast for the next 12 months of 7.8%. Management has also shown it is serious about getting back down to serious business, and has announced cuts of 30% to executive bonuses, Goldman Sachs also raised the stock to a BUY from NEUTRAL and Wells Fargo upgraded its outlook to OUTPERFORM (source: Markets Current, Seeking Alpha).
Citibank Performance - 12 months
The other potential value is in the old Wall Street blue blood of Morgan Stanley (NYSE:MS). In the same period (23rd August to 01st February) the stock has gained 23%, is paying dividends, cutting costs where possible, and is set to take the lead underwriting role in the IPO for Facebook. No doubt the last point may have something to do with forecast EPS growth of 68% over the next 12 months. But... I have been reading 'Blue Blood and Mutiny: The Fight for the Soul of Morgan Stanley', and deep down it has me thinking if values and loyalty still resonate within this banking bastion? Are they about to push forward in a bid to rebuild the company's foundations, and place it in a position of strength as it strives to emerge from the current global financial pressures?
Morgan Stanley - 12 months
I remain convinced that PNC is a value based buy for investors seeking more pricing stability, potential longer term growth, underpinned by steady dividend payments. For more aggressive investors, I see value in retaining C within my Sun Tzu portfolio, but would appreciate reader's thoughts (with reasoning on this dilemma) on whether MS would be a better stock to replace it with, given a long term position (3 - 5 years).
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MS over the next 72 hours.