5 bank stocks: Time to jump in?
Investors, tread carefully amid the gyrations in this sector.
By Michael Shulman
American banks are, as a system, the strongest among large industrialized nations. Please do not laugh; Italy may be even stronger, depending on whether you believe that nation will leave the euro.
U.S. bank stocks have run based on an incrementally improving economy and the guaranteed profit they are making due to the policies of the Federal Reserve.
And now the stocks have stalled as Wall Street temporarily panics on concerns the Fed is going to ease off on easing. The Fed will ease off on its liquidity programs. But the Street is thinking it will happen sooner rather than later. In reality it will end later rather than sooner, well beyond this year and probably beyond 2014. That being said, the Street's fears are now running the bank stocks to and fro. Here is what to do in light of relative strength and misguided fears: nothing. Let's look at five big bank stocks and how they're faring.
Bank of America (BAC)
It's my favorite bank and its stock has almost tripled in two years or so . . . on merit. In March the Fed gave Bank of America a thumbs up to buy back $5 billion in shares, an endorsement of the bank's soundness and capital structure.
The stock has run and hit a wall around $14. Earnings will not surprise anyone until 2014, and I see the stock stuck in a trading range for quite a while. Get in at $13, or if it clears $14 and stays there for a while. The stock is good for $22 in two or three years.
Goldman Sachs (GS)
It is the best investment bank in the world -- by far -- and Goldman stock has almost doubled in the past 12 months. That should tell you most of what you need to know about the stock.
Increasingly, investors want to see how current sudden movement in the Treasury market will impact GS earnings. I want to see the stock, currently in the 160s, punch through $172 before moving in. If it retraces to $150 and holds, that is a terrific buying opportunity. Longer term, GS will continue to be the best company in the sector.
Morgan Stanley (MS)
This bank stock crashed, has rebounded and has been hit by Fed fears and profit-taking. The stock's current level at $25 is very important as it may be more of a floor than a ceiling. Unlike BAC or GS I do not like the underlying performance of the business compared to others in the sector.
Morgan Stanley is just now trying to rebuild its mortgage business and it is well behind other investment banks in deals and trading activity. Even if the stock breaks out, BAC and GS are better choices.
Wells Fargo (WFC)
This stock has been overvalued compared to much of the sector due to Warren Buffett. He personally owns the stock and loves the company. And WFC has done quite well on the earnings front in part due to its climb to No.1 in the U.S. mortgage market.
With interest rates rising, the refinance boom is over and the stock has moved too far ahead of itself. Stay away for now.
For those of you who read me with some regularity, this is the bank I love to hate. This behemoth does many things well but does too many things with too small a capital base. Just ask the Fed if you do not believe me. I made my bones shorting big banks in the fall of 2007 when Citi was split-adjusted, selling for more than $440 a share. It is now around $53.
So, be shy around all bank stocks. The risk-reward profile is not in your favor. And if you have to invest -- I cannot imagine why this would be the case -- think BAC or GS when the time and the stocks are right.
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