Big Banks = Juicy Opportunity?

At this point of my career I have worked for three of the four largest banks in America - Bank of America, JPMorganChase, and Wachovia - so I, of course, love the opportunity to focus on some banks.

Financial stocks are always considered "boring" by the "experts". You don't necessarily get the huge volatility that creates "big money opportunity", but you do get normal cyclical rotations in and out of the sector that provide some multiple expansions and provide profit-taking opportunities.

Try not to yawn. Bank stocks aren't boring, they just look that way. You might say they're so colorless they're colorful. Why? Because what they lack in glamour they more than make up in compelling numbers.

The thing about banks that has gone overlooked in recent years is that the banks actually pay you (in dividends and growing earnings) to hold them in the slow cycles. While everyone has recently been worried about the impact of the flat yield curve on the sector, most big banks have continued to log legitimate earnings improvements.

Says Goldman Sachs analyst Lori Appelbaum: "Bank stocks don't look sexy until you look at the potential returns."

This article from Fortune is a really good one that I wanted to share. (I will paste the entire text of the article in the comments section of this entry). The article divides the compelling thesis related to bank-stock-investing into two parts - the big, steady guys and the takeover targets. (Nothing really new to the story from the last decade.)

The story comes in two parts. First, the biggest banks, from Citigroup to Wachovia, are paying rich dividends and are likely to increase them steadily, practically guaranteeing double-digit returns far into the future. Second, regional banks and thrifts are prime takeover candidates as the giants rush to expand - witness Wachovia's $26 billion deal for Golden West Financial.

I thought the summarizing the core of the opportunity in the following paragraph:

Bank stocks still look cheap. On average, Citi, BofA, Wells, and Wachovia have P/Es of just 12.4. That's far lower than the multiples in the other big-dividend-paying sectors - pharmaceuticals, utilities, and telecom - even though the banks' earnings are growing just as fast as profits in those three industries. In fact, it's more probable that banking multiples will rise to the 15 or so that prevails in the other big-dividend sectors, adding a big kicker for shareholders.

How Cheap is the Market Right Now?

How cheap is the market right now?

The answer will probably surprise you.

The again, if the 'E' part of the P/E ratio continues to grow to all-time highs, will a lower P/E ratio really be that big of a surprise?

The root of this conversation started in this entry at "Crossing Wall Street"...but, the basis of the conversation made it all the way to Larry Kudlow's Kudlow & Company on CNBC tonight. (Link to Kudlow's Blog)

This entry at "The Big Picture" takes a deeper look at the current situation.

Eddy observes "S&P 500 is now trading at just under 16 times trailing operating earnings. The P/E ratio hasn't been this low since October 1995." Note that he references actual trailing earnings. This is more accurate than using forward forecasts, which tend to be very wrong at key turning points.

The real good comments about the topic are found in The Big Picture's follow up: "Will Cheap Stocks Get Cheaper".

Today's rising market further supported the perspective of some pundits to whom I have listened over the last week who cite the following: despite the volatility and sell-off that we have experienced the last few days, the lows that were set on the broader indexes in the middle of May have served to produce a floor. They feel as though the market it catching its breath and the fact that the indexes have found support at these levels is a positive sign.

I'm not sure how much longer the market can withstand the downward pressure with the slow and (traditionally) painful doldrums of summer approaching. But, times like these are when the good money gets made.

PGN: Know the History; Make Some Money

Click on this chart and study it while realizing that you are looking at a FIVE YEAR time horizon. Do you note the amazingly CONSISTENT variances that Progress Energy has experienced between the general price points of $40 (low) and $45 (high)?

(Feel free to plot a shorter time period at Yahoo Finance to get a more impactful visual of my point).

This extremely consistent trading range was actually brought to my attention about TWO YEARS ago on one of Fox News' business television shows.

The guest analyst was recommending PGN because it was about $40 in price and he commented that his firm routinely buys around $40 and sells around $45 to make easy money. He said that you could set your watch by the way that this stock trades. I have followed the stock for two years and I'll be damned that these fluctuations happen without fail.

Over the last two days, this stock has appreciated about 2.5%...so, we've missed some of the bottom when it was trading below $40.50 on Tuesday/Wednesday. But, it was just something that I wanted to share that I thought was interesting.

MSFT: Still A Growth Stock Carrying a Value Price

I can see Microsoft being one of the more hotly debated stocks on the blog.

"It's dead money" (down almost 10% this year after doing nothing for the last 5 years vs "Its financial condition is too strong to be discounted this much this long"

I tend to agree with the latter of those perspectives. This company has way too much going for it NOT to be considered at these bargain-basement prices (around $23-$24 right now). This article from the WSJ on Wednesday, May 10th supports my thoughts about the company. (I will paste the full body of the article into the comments section of this entry)

So let's look at the usual criteria for value stocks: a relatively low price-to-earnings ratio; low price-to-earnings-growth ratio; a steady and predictable cash flow; low debt; and out-of-favor status with growth investors. For Microsoft, trading around $24 a share, its trailing P/E is 18.9; its forward P/E based on this year's expected earnings is 18.7, just above the S&P 500-stock index average trailing P/E of 17.5, but well below the software-industry average of 23.6. Its price-to-earnings-growth ratio is 1.67, also well below the industry average of 2.24. Its price-to-sales ratio, at 5.81, remains a little high, albeit in line with industry norms.

I also theorize that one of the SAFEST ways to pick up easy (albeit smaller) profits is to do so on unvolatile stocks of super companies selling at extreme discounts. Over the last three to six months, similar investments in Wal-Mart and Anheuser-Busc would have yielded easy 5 point gains (approx 15%) on dividend-paying companies that one would want to own at any fair price (let alone a significant discount).