Risk/Return: Bank Stocks for Steel Guts, NBA Jump Shot, ETF Jitters, Nuclear Power Play
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The Fiscal Times
October 17, 2011

Bank Stocks: Buying Op – or Value Trap?
If you’ve got any exposure to banking stocks, this may be the week to batten down the hatches and prepare to ride out some stormy markets. JP Morgan Chase last week reported profits fell 33% in the third quarter amid a slump in investment banking and trading that is likely to dent the results of other major banks scheduled to report this week, starting with Citigroup and Wells Fargo today.

Prospects for banks remain gloomy. Leaving aside the ongoing uncertainty of the new regulatory climate, there is the even greater uncertainty surrounding the future of Greece and the Eurozone economies. That has investors and dealmakers sitting on their hands – and damaging the profitability of financial institutions. Contrarians would like you to believe the banks can ride out the ripple effects of a European crisis, but all the headwinds make stocks in this sector great investments only for those with a medicine cabinet full of sleep aids.

 Among the most scrutinized earnings will be those of Goldman Sachs. Already, its return on equity – once well north of 20% and the envy of every other Wall Street firm – seems likely to end the year below 10%. That figure might not grab headlines, but it’s an important one for investors and management. Goldman insiders have said ROE has to be at least in the mid-teens to keep investors content.

If banks disappoint or events in Europe cause more market panic this week, the stocks will start to look like an even better value. But there’s a greater risk they’ll turn out to be value traps.

NBA Contrarian Jump Shot
The NBA lockout is dismal news for basketball fans, but analyst Camilo Lyon of Canaccord Genuity says investors should continue to snap up shares of athletic equipment retailers Foot Locker and The Finish Line. True, fans tend to buy more team-branded products and sneakers promoted by hoop stars during the season, and a lockout could dent that. But both companies are less reliant on those goods than they were during the last NBA lockout in 1998-99, when inventories were already at higher levels. Lyon is calling for fourth-quarter profits to jump to 78 cents a share at Finish Line, up from 66 cents a year ago, and for earnings per share to hit 49 cents at Foot Locker in the fourth quarter, compared with 39 cents a year earlier.

Maybe There Should Be an ETF for Anxiety
The world of exchange-traded funds, or ETFs, is “kinda getting scary,” says Kevin Pleines, an analyst at market research firm Birinyi Associates. That’s not just because September’s market jitters took a toll on ETF assets under management, driving them back below $1 billion for the first time in nearly a year. Rather, Pleines is referring to the fact that even as that was happening, investment firms were busily rolling out more than three dozen brand-new ETFs, offering investors such esoteric options as a chance to bet on everything from future volatility levels (ProShares) to the world of cloud computing.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.