Buy Banks? When Pigs Fly
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Has Hell frozen over? Are there pigs in a V formation over New York City? Is it the impending Mayan apocalypse that caused famously bearish-on-banks analyst Meredith Whitney to change position on bank stocks, including Bank of America (NYSE: BAC), Discover Financial Services, and Citigroup (NYSE: C)? Apparently, all these and more must have happened, as Ms. Whitney now thinks there's at least 35% upside in Bank of America?!? And soon! Say whaaat?
If I hadn't heard it myself I wouldn't have believed these words coming out of her mouth on CNBC:"I think the underlying support is housing which has close to bottomed, so that is a great headwind relief for banks...They've come a long way." Ms. Whitney is looking forward to the Federal Reserve stress tests in March in anticipation of the big banks' passing with flying colors. She claims this catalyst will pave the way for raising dividends (even quadrupling them in Bank of America) and stock repurchases. Bank of America closed at a 52 week high of $11.36 on the announcement, as did Citigroup.
Say What? So What?
I agree the banks have come a long way, especially Bank of America, doubling from under $5.00 in 2011, but it hasn't recovered to the $18 per share level of 2010 or the pre-2009 glory days of $50. As for Citigroup, split adjusted it dropped from over $500 per share in 2007 (remember that's split adjusted) to below $25 a share.
Discover Financial Services operates in two segments, direct banking and payment services, and while they do offer consumer loans, Discover didn't have the mortgage exposure that the others did. Discover is up 67.89% over the last year. It has a P/E of 9.35 and a 1% yield, but it's not the really big story.
While Ms. Whitney famously called the bank crises, she seems to be quite late to the party on this Buy call. Widely respected analyst Dick Bove, formerly of Rochdale Securities, has been quite bullish on banks for some time, especially the banker/brokers like Bank of America, J.P. Morgan (NYSE: JPM), Citigroup, Morgan Stanley (NYSE: MS), and Goldman Sachs (NYSE: GS); he believes that investment banking opportunities will be extraordinary going forward. In an interview on CNBC after Whitney's on Dec. 18, he said he expects a record last quarter of 2012 for banks and calls for double digits in revenue growth for 2013. Bove expects Bank of America and others will pay out 30% of earnings in dividends.
Since the mid-October departure of Citigroup CEO Vikram Pandit, Bove has been calling Citigroup in particular "a screaming buy." Citigroup has a 16.67 P/E and 0.10% yield. Bank of America has a 30.70 P/E and only a 0.40% yield. Morgan Stanley, however, has a negative EPS of $0.46 and a 1.10% yield.
On current fundamentals alone the winner would actually be J.P. Morgan, with a 9.31 P/E and a 2.80% yield. Just a few weeks ago it could as easily have been Goldman Sachs with a 12.27 P/E and 1.70% yield, but it has surged from $105 to $127.18 since September. Analysts expect Goldman's growth rate to be 31.95% over the next five years but only 7.19% for J.P. Morgan.
What to Believe
Maybe you don't like Goldman Sachs and its "muppet" controversy or you think Jamie Dimon of J.P. Morgan should have done more about its multi-billion dollar trading losses earlier this year. These two are still better than Bank of America and Citigroup; and even Morgan Stanley is better than those two. There are ongoing concerns over mortgages that could still default, although Whitney believes all the write-downs (over $65 billion in the last five years) are now just "junk in the trunk" and baked into the stock. Whitney also thinks that Citigroup is unproven and the Fed will not support dividend raises but may go for share buybacks.
Do you go with Bove or Whitney? I think you have to lean toward Goldman and then J.P. Morgan. Bank of America has already run 117.21% over the last year. Did Whitney say buy before that run? While Citigroup is a Bove fave, Whitney may have a point about Citigroup dividends being somewhere over the rainbow. If you want something more speculative Morgan Stanley is plenty volatile, and analysts think it has a better growth rate than J.P. Morgan at 14.97% for the next five years. The forward P/E also comes down to 9.66.
Goldman is close to a 52-week high but far from its all time high in the $230s in 2007. However, if anyone can get back to its full glory, I think it's Goldman. Despite the blowback of a former employee exposing a "toxic culture" I never believed it was truly indicative of the Goldman ethic. They are still "the smartest guys on the Street" and the gold standard of investment banking.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Motley Fool newsletter services recommend Goldman Sachs Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!