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Internationally Focused Financials Are Undervalued, Analyst Says

Tuesday, 8 May 2007 | 9:05 AM ET

Jeff Harte, analyst at Sandler O’Neill, told CNBC’s “Squawk Box” that many internationally focused financial stocks are undervalued.

“My thesis has been that it’s been a tough environment if you’re a domestic-centered bank,” Harte said Tuesday. “The yield curve is flat and credit is probably not going to get a lot better. But from a cyclical standpoint, there’s still a lot of upside revenue-wise from global investment banks.”

He likes Goldman Sachs, Morgan Stanley and Merrill Lynch.

Financial Sector Outlook
The financial sector, which accounts for about one-fifth of the S&P 500, has been one of the leaders of this market really, but without the long-anticipated Fed cut, is this a space you should continue to ride higher? Jeffery Harte, managing director in equity research at Sandler O'Neill, and CNBC's Carl Quintanilla discuss the sector.

“I’d probably highlight Morgan Stanley as the one that has some of the best positioning, but is trading at a discount to it’s closest peer, Goldman Sachs,” Harte said.

He said the stocks aren’t bargains, but aren’t expensive, either.

“The way you typically value a broker is a price-to-book multiple,” Harte said. “That’s because the earnings can be volatile. On a price-to-book basis, the stocks are trading a little over two-times book. They should be trading higher than that. So, they’re certainly not bargain-basement valuations, but given how good their earnings have been, I’d argue the price-to-book multiple should be quite a bit higher.”

Harte said the stocks offer investors the opportunity to get back to basics.

“One of the things I like about the investment banks is you’re making a play on the history of cyclical economics – not trying to forecast what the Fed is going to do next,” Harte said. “My bet is the Fed is going to stay pat for quite a while and maybe, if anything, start raising – not cutting. If the Fed starts cutting rates, it’s for all the wrong reasons, implying that the economy is going the wrong way.”

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