Searching For Value In Bank Stocks
October 13, 2009 by Tisa Silver
Filed under Finance
Financial sector stocks have risen dramatically in the past seven months. Is the run-up about hype or value?
Since March, the Financial Select Sector ETF (XLF) has risen from $6.99 to $15.21 per share. The rise represents a 117 percent increase.
Photo by The Consumerist, courtesy of flickr
Dramatic increases such as this one are typically followed by pockets of profit-taking.
A series of earnings reports will come out in the next few weeks. The results of which will confirm or discount the rally.
JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C) and Bank of America (BAC) will be reporting third quarter earnings in the coming days.
Even with the recent rise, the financial ETF is trading at about 17 times its earnings, which is far below the P/E ratios of some its largest component stocks including Bank of America (P/E = 30), JPMorgan Chase (P/E = 50), and Goldman Sachs (P/E = 42).
Looking at those figures, perhaps, some of the financials are due for a pull back. Other components with lower P/E ratios include Morgan Stanley (MS), American Express (AXP) and USBancorp (USB).
Coincidentally, Goldman Sachs was actually downgraded today. The news didn’t do much damage to the stock. Shares fell about 1.5 percent, and in after-hours trading they have recovered almost half of the day’s losses.
Using John Templeton’s principle of investing at points of maximum pessimism, February, March and April were the best times to invest in a broad basket of financials such as XLF. Now that the crisis has passed, the opportunities for future appreciation aren’t nearly as good. But there might be some opportunity in individual names, such as BAC, that are still embroiled in crisis and controversy.