Bove: Why I Was Wrong on Bank Stocks
With a month left in 2011 and—barring a miracle—bank stocks headed for a negative year, Dick Bove is admitting he was wrong.
The widely followed Rochdale Securities analyst has been telling investors for a good portion of the year that banks have recovered from the financial crisis and are in much better shape than they were three years ago.
Investors, though, haven’t been biting.
Heading into Monday’s aggressive rally, the Standard & Poor’s 500 financials were off 26.3 percent on the year, and the KBW Bank Index had fallen 31 percent.
For Bove—Rochdale’s vice president of equity research—the decline has been a maddening ride spurred not by bank fundamentals but rather by investors’ belief that no matter how good the earnings look or how loans are performing or where capital levels stand, investor worry over bigger factors takes precedence.
“The macro factor will continue to be more important than the micro factors,” Bove conceded over the weekend in a moderate mea culpa to investors.
“On periods like this analysts, like me, who rely on traditional parameters like company results and historic relationships between interest rates and earnings yields, are going to have a tough time.”
In essence, Bove argues that he was wrong for the right reasons.
Liquidity, capital, loan performance, revenue, profits—all the metrics by which one would traditionally analyze banks—look good.
But worries over the world’s debt crises, particularly in Europe and the U.S., are making risk-averse investors unwilling to buy the banks in Bove’s coverage universe.
“The divergence between the economic and financial fundamentals, on the one hand, and the stock prices, on the other, reflects a change in risk assumptions,” he wrote.
“For multiple reasons, investors keep demanding a higher and higher risk premium on common stock investments, in general, and in bank stocks, in particular.”
Boiling down what he got wrong this year, Bove said: “I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like Bank of America and Citigroup would simply be ignored.”
Still, Bove believes that an improving economy and—in his view—the European crisis actually benefiting rather than harming U.S. banks will justify his optimistic outlook that persists for 2012, even if he’s been dead wrong so far.
“Bank stocks are being driven by fear despite the significant improvement in the industry and individual company fundamentals. Presumably, at some point, fear will either be realized or dissipate,” he told clients. “My assumption is that it will dissipate. At this point, the industry’s fundamentals will drive bank stock prices higher. This was my view at the beginning of 2011 and it is my view at present.”
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