For the first 5 plus months of 2011, the financial sector has been under performing the overall stock market. Through June 8, the S&P 500 is up 2.6 percent for the year and the financials is the worst performing sector tracked by S&P, down 7.7 percent. The financial sector has declined by over 10 percent since the first of April.
It appears investors are dumping banking shares due to the belief the banks are will eventually be forced to realize tremendous losses on their mortgage portfolios. Bank of America (NYSE: BAC), for example, is currently facing $13 billion in claims for fraudulently written home loans. The Obama administration has cut of HAMP payments to several large banks due to the terrible service being provided to existing mortgage customers.
The selling points for banking stocks are extremely low valuations for companies that many believe have turned the corner on profits and have the worst of the financial crisis behind them. This school of thought believes the banks have set aside enough loss reserves and profits will grow significantly from here.
The major money center banking stocks can be divided into two classes. The stocks where things still look pretty ugly and they have a ways, financially speaking and the stocks where the balance sheets and profits have already turned positive. One way to judge is whether the Feds have allow a bank to start paying more than a token dividend.
The Ugly Banks:
Bank of America (NYSE: BAC): The BofA share price is off 20 percent so far this year and hit a new 52 week low the first week in June. First quarter earnings per share came in 40 percent below the consensus estimate. If someone believes BAC management can start hitting the earnings estimates, the shares are trading at less than 10 times the 2011 protection with 2012 earnings forecast to increase by 70 percent.
Citigroup (NYSE: C): The Citi share price has also shed 20 percent of its value so far this year. Citigroup recently underwent a 10 for 1 reverse stock split to bring the share price out of the low single digits. Earnings are projected to be better than $1.00 per share in the upcoming quarters and the stock trades at 9 times projected 2011 earnings.
The Handsome Banks
Wells Fargo & Company (NYSE: WFC) Wells Fargo was able to remain consistently profitable through the financial crisis. That said, the WFC share price has dropped 16 percent so far in 2011. The profit picture for Wells Fargo sees steady per share earnings growth in 2011 and 2012. The stock also trade at a 9 multiple of estimated 2011 earnings.
JP Morgan Chase & Company (NYSE: JPM) JP Morgan Chase has the best year-to-date stock performance of those discussed here, off just 3 percent. JPM has been able to consistently beat the quarterly earnings estimates and the stock is at just an 8.4 multiple of projected 2011 full year earnings.
If you think these bank stocks have fallen too far, the Uglies may offer more profit potential if sentiment concerning financial stocks turns around. The good looking banks may work as more conservative choices.
