Stocks highlighted in this article include: Goldman Sachs Group (GS), JPMorgan Chase (JPM) , Piper Jaffray (PJC), and Deutsche Bank (DB).
If you are anything like me you have spent more than a year avoiding anything with “bank”, “financial”, or “investments” in the company’s name. However, over the past week some of Wall Street’s giants have exceeded expectations and have a brighter outlook on the future.
Equity markets have been on a tear since early March, rising roughly 40% in just a few months. Prior to several key bank announcements the indices have leveled off as investors began to seek validation for the sharp rise and it looks like they have found it.
JPMorgan Chase (JPM) reported a 36% rise in net income as earnings per share of 28 cents easily beat the consensus of 4 cents. Goldman Sachs Group (GS) also topped forecasts. On July 14 the investment bank announced second-quarter results that included earnings per share of $4.93, well above the consensus of $3.52. Earnings were up 35 cents year-over-year.
So…Rush Back to Financials?
Not so fast. After you look deeper into the numbers you will see that these record revenues stem from a favorable trading environment, which is not always the case. Not to mention the life line thrown to banks by the government in an effort to prevent an, arguably, inevitable financial collapse.
Also, JPMorgan’s earnings are still down from last year.
And don’t forget about the turmoil surrounding commercial lender CIT Group (CIT) which is facing a possible bankruptcy and/or a government bail out.
What’s Your Point?
What I am trying to say is that while the financial industry is no longer the investment quick sand it used to be, but as with any area due diligence and common sense is still king. Smaller banks remain volatile as the titans of the industry soak up marketshare and government funding.
I screened for a few companies in the sector that hold a Zacks rank of #1 or #2, price-to-book ratio of between 0.5 and 2.0, and upward movement in the full-year consensus estimate for this year.
Some of the companies I currently like are:
Goldman Sachs Group (GS) in addition to the brief earnings info I mentioned before, I also like Goldman because of favorable upgrades from analysts, including Meredith Whitney. The consensus estimate for 2009 is up $3.59, to $13.61, over the past 3 months, including 54 cents since the announcement. Estimates for next year are averaging $14.50, up from $12.08 over the same time period.
Deutsche Bank (DB) is trading at a good value and has massive upward revisions. The consensus for this year is pegged at $6.36, up from $3.78 over the past 3 months. Compared to the $11 loss from last year and you have solid growth. Not only that, but shares will cost you just 7.5 times earnings.
Piper Jaffray (PJC) is another investment bank that is turning the corner and emerging from the abyss. Estimates for this year are now averaging a $0.25, up from a 17 cent loss after all 4 covering analysts have raised forecasts. The consensus estimate for next year is $1.40, up 45 cents after 6 revisions amongst the analysts. Compare this to the $2.35 loss last year, and you have triple-digit growth for the next 2 years.
In Closing
Like I said earlier, it is time to pull our heads out of the sand and start considering financials again. Now, more aggressive investors probably did this a while ago, so this is geared toward those of us burned by financial institutions in the recent past.
However, don’t just dump it into a diversified fund that contains those banks still suffering. Pick a handful of solid financials and beef up the once neglected segment of your portfolio.
Additional Resources
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