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.
Citigroup gave the market a welcome positive surprise this morning, posting earnings per share of 84 cents a share (excluding an accounting change), 3 cents above analysts' expectations and significantly higher than the 72 cents a share reported in the third quarter of 2010. Both it and Wells Fargo achieved higher profits despite a decline in revenues over the last 12 months. Nonetheless, the weakness in investment banking and trading limited those gains; excluding the accounting charge, revenue from fixed income trading fell 33% from year-earlier levels to $2.3 million.
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.
“It’s tough to say how long some of these products can be sustained; how much demand there really is for a cloud computing ETF or one that gives investors exposure to companies involved in making solid state hard drives,” says Pleines. So far, few have been liquidated or delisted – but not many have attracted much in the way of assets, either, with the top 25 plain-vanilla ETFs making up more than half of the $972 billion in assets. “It seems as if all the providers are desperate to find the new hot product that will catch on and are investing heavily in what they think might be that new new thing,” Plaines adds. Too bad for them that investors seem able to distinguish between hype and solid investment ideas.
The Nuclear Power Play
Japan is still struggling with the aftereffects of the crisis at its Fukushima nuclear power plant, a catastrophe that has also left uranium stocks radioactive. But while developed nations like Germany and Switzerland have vowed to phase out nuclear power programs, emerging countries such as China and India don’t have that luxury given their ever-rising demand for energy. Even oil-rich Saudi Arabia is building nuclear reactors. Until the day that green power sources can pick up the slack, it seems likely that many countries – however reluctantly – will continue or increase their dependence on nuclear power. That’s a positive for both prices of uranium itself (still hovering around $52 a pound, down from February highs of $73) and the share prices of uranium mining companies like Cameco, now trading at $21.13 a share, down from an early March high of $43.
Cameco – rated a “buy” by several investment firms, including Raymond James and Canaccord Genuity – is taking advantage of the distressed prices of some of the small producers that throng this sector by bidding $530 million for Hathor Exploration. It might be time for investors to follow Cameco’s lead. If giant industry players don’t appeal, there are plenty of other small-cap and microcap uranium mining companies out there to investigate, especially as more of them become the focus of acquisition bids. Bannerman Resources, an Australian player, has already received an offer from a Chinese company; Uranium Energy Corp. has been an acquirer, snapping up properties in Paraguay and Texas.
Star Burns: Big Names Having a Bad Year
Meredith Whitney last week announced she expects Goldman to report a loss of six cents a share this week, down from her previous forecast of 31 cents a share. She could well be right – but that won’t do much to restore the starry status of the banking analyst who memorably forecast the implosion of U.S. financial institutions ahead of the 2008 crisis. The problem? Whitney made a major prediction for 2011, trumpeted on 60 Minutes last winter, that up to $100 billion of municipal bonds would be hit with defaults this year has failed to materialize. The actual number is less than 10% of that forecast; muni bonds, meanwhile, have been one of the best-performing asset classes this year.
Whitney isn’t the only market crisis star to fall from grace. Revelations of the magnitude of hedge fund manager John Paulson’s losses during September – and for the year so far – has some former admirers wondering if the one-time market guru, famed for being one of a tiny handful to make outsize profits by betting that the real estate financing bubble was about to pop, might be a one-hit wonder. Certainly, Paulson’s conviction that the U.S. economy would rebound by the end of 2012 and his bets on financial stocks like Citigroup and Bank of America have been anything but lucrative for investors in his Advantage fund (down more than 32% as of the end of September) or his Advantage Plus fund (yes, as the name implies, down even more – over 47% by September 30).
Even Bill Gross, manager of the world’s biggest bond fund and admitted even by rivals to be a brilliant market strategist, is struggling. He unloaded Treasury bond holdings early this year, just before a rally took yields even lower and generated solid returns for investors who didn’t follow his lead. While few investors are likely to jump into Pimco Total Return Fund based on its recent track record (it’s now in the bottom decile of comparable funds), unlike either Whitney or Paulson, Gross publicly has admitted he misjudged the market. If you’re tempted to follow future recommendations from any member of this trio, make it Gross.