Since many financial stocks have huge losses negative earnings, it’s tough to use some of the common valuation metrics like Price-to-Earnings. Lately, the crowd that loves to repeatedly proclaim that the worst of the credit crisis is behind us have spent more time excusing the absence of a trailing PE and focusing even more than they usually do on the forward projections of earnings.
Nevermind that last year their forward earnings estimates actually turned out to be this year’s huge losses. So, since we don’t have historical PE’s anymore and since the forward PE’s are questionable for anyone who isn’t an ignorant optimist, I’ve been thinking about a new valuation metric specifically for the financials. It’s called the Price-To-Capital Raised ratio.
After all, investors have embraced the idea that a financial company can announce huge writedowns and somehow that means proof that the kitchen sink has been thrown in(again.) And more importantly, if you announce $10 billion in losses and then simultaneously promise that you are going to raise $10 billion in new capital, that is being looked at as a double-whammy of bullishly ignorant optimism.
Never mind that the new capital raise may have conflicted with prior promises that the company didn’t need any more. Never mind that the new capital is highly dilutive to existing shareholders and being priced at ridiculously expensive preferred interest rates. In honor of all this nonsense, I am proposing the Price-To-Capital Raised Ratio - just take the market capitalization and divide it by the capital raised in the past year.
For example, Citi has a market cap of $121.5 billion and it has raised about $44 billion recently. That makes for a PCR ratio of 2.76. Interpretation is up to you. If you don’t mind dilution and you think the worst is behind us, then a really low PCR ratio would be ideal. If you are a long term holder of a stock, looking at a low PCR will be somewhat painful. It’s all based upon your perspective. And if you really want to get crazy, just do some projections of future capital raises so you can come up with a forward PCR.
Actually, I am just kidding about all of this. It’s all bullshit. But to me, so is the concept of believing that losses do not matter or that the worst is behind us or that needing to raise capital is actually a good thing.