Which Bank Should You Buy?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The S&P 500 is hit very high marks as a result of the European Central Bank announcing that it would not let the Euro fail (read: their printing presses are ready to go!). A move like this is bold, as the ECB claims that it will not let the debt of countries that pass the application for assistance go into default.
Decisions like this move markets – the Dow passed its highest level since 2007 and the NASDAQ has not seen these levels since Y2K.
However, some traders may have missed the move because they already went into cash, preparing for a market correction. The market looks like it has a little more upside to it – despite the large moves coming on low volume – but soon enough a downturn will be necessary.
Here are four banking stocks to watch out for if the markets take a trip south and four metrics by which to evaluate them.
JPMorgan Chase (NYSE: JPM)
Price to Earnings: 9.15
Return on Equity: 9.55%
Quarterly Revenue Growth (YoY): -11.7%
JPMorgan is the staple of Wall Street. Jamie Dimon runs the firm as well as any other financial CEO, and the company is a safer bet than pure investment banks because of its Chase retail side.
The hard part for JPMorgan will be increasing its revenues from investment banking, including its sales and trading revenues as well as its underwriting and M&A advisory service revenues. Sales from these groups have fallen amidst stagnant markets.
In all, JPMorgan is my favorite Wall Street bank because it has the exposure to the investment banking side, where profits can move the stock price significantly, and it also has the security of billions of dollars in Chase deposits.
Goldman Sachs (NYSE: GS)
Price to Earnings: 17.45
Return on Equity: 5.00%
Quarterly Revenue Growth (YoY): -9.00%
The plus side of Goldman Sachs is that its stock is volatile. When the markets roar, Goldman is out in front leading the pack. Sour markets, however, cause this bank to crawl into a hole.
Goldman is known for having some of the best and brightest traders on the Street, but the bank is increasingly branching into alternative sources of profits. For example Goldman is retooling its private bank, which advises and lends to individuals worth $25 million or more. Goldman and JPMorgan are two of the best in the business, and Goldman hopes to boost its lending to this group from $50 billion to $100 billion.
Consider, for example, a 5% interest rate and a $100 billion loan portfolio. Goldman would earn an extra $2.5 billion for doubling its loan portfolio to $100 billion, a sizable figure for a firm whose revenues have been trimmed by slow markets.
The move would be positive for the stock, which has been hurt by the company’s weak returns on equity which fell below its cost of capital.
Citigroup (NYSE: C)
Price to Earnings: 9.46
Return on Equity: 5.92%
Quarterly Revenue Growth (YoY): -7.9%
Citigroup’s weaknesses include its non-existent dividend and its low return on equity, both of which point to a lower stock price. Also, expect to see a charge on its third quarter earnings statement.
Citigroup just closed its deal with Morgan Stanley for Morgan Stanley Smith Barney, the joint venture brokerage unit that the firms shared. Morgan Stanley is buying out Citigroup’s 49% stake at a reported $13.5 billion, $4 billion higher than its original estimate and some $9 billion lower than Citigroup’s estimate.
Morgan Stanley won this round, and Citigroup will have to take a charge this quarter because it carried the venture at a higher value on its books. Look for Citigroup to report flat earnings this quarter.
Wells Fargo (NYSE: WFC)
Price to Earnings: 11.78
Return on Equity: 11.87%
Quarterly Revenue Growth (YoY): 8.4%
Wells Fargo is a great company. CEO John Stumpf is a strong leader with a vision for treating customers fairly – and it shows. Wells Fargo’s revenues rose last quarter compared to drops across the board. Wells Fargo is not a direct competitor in all businesses to the other banks because their bread and butter is mortgage lending and servicing.
Also, a congressional move boosted Wells Fargo’s non-interest bearing deposits, giving the company a nice cash cushion. In all, I like the above-average return on equity and the firm’s revenue growth. Also, if the market dipped the percentage dividend payment would likely increase. Finally, the bank holds around 5% of its portfolio in European banks, giving it only minor exposure to the continent’s volatility.
Of the bunch, JPMorgan and Wells Fargo seem like the best firms. Both banks offer stability as well as increased profit potential. Of the firms mentioned, these two are the ones I would like to own if the market corrects.
Of course investors never know which companies look the best until their prices actually drop, but it is always good to write out a buy list.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.