Are Financials Value Stocks or Traps?
Financial stocks may not be as cheap as they appear after having decoupled from earnings expectations, one analyst said Monday.
“There’s a lot of cheap stocks in financials across the board, but you have to differentiate between value stocks and value traps - and with earnings estimates coming down, those can turn into value traps,” Fred Cannon, KBW director of research and chief equity strategist, said on “Fast Money.”
Bank of America, the worst-performing stock in the Dow for 2011, was down 58 percent while earnings estimates were down 53 percent for this year, he noted.
However, year to date the stock was up 28 percent while earnings estimates were down 10 percent.
“That has to makes you step back and rethink that investment thesis,” he said.
Cannon called out a few stocks that have decoupled.
“I think a lot of things that looked really cheap are the ones where you’re at risk: Bank of America, Regions Financial, Synovus — all of those bigger downward revisions. At the same time, the stocks have outperformed,” he said.
Cannon said better plays were smaller regional banks like US Bancorpand others whose earnings estimates have increased and have seen some strong loan growth.
“A stock that is trading at 50, 60 percent of book may look cheap. But if they’re only returning 2 percent on equity, do you really want to buy that?” he said. “In my view, you want to stick to the quality. If you wanted to jump into Bank of America, you should’ve done it at 5 bucks not at 7½.”
Cannon said the financial crisis has reset evaluation criteria.
“Let’s face it, how do you value financials past the financial crisis, right? How do you look at these things? We talk about historic multiples, but what do they mean? These business models have changed, capital rules have changed, regulations have changed,” he said. “What’s normalized earnings when the Fed’s going to be on hold through 2014 to 2016? Very tough.”
Trader Dan Nathan said he would focus on financial stocks that have better Wall Street consensus year over year.
“Goldman’s consensus 150 percent year over year, so those are the ones where I think there’s a lot of wood to chop,” he said.
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Trader disclosure: On Jan. 30, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Terranova owns AXP; Terranova owns F; Terranova owns APC; Terranova owns WFM; Terranova owns OXY; Terranova owns XOM; Terranova owns TRLG; Terranova owns SBUX; Terranova owns JNPR; Terranova owns VRTS; Terranova owns IBM; Terranova owns LQD; Terranova owns SU; Terranova owns SJM; Terranova owns BRCM; Terranova owns MUB; Terranova owns EMC; Terranova owns CSCO; Terranova owns V; Adami owns C; Adami owns GS; Adami owns INTC; Adami owns AGU; Adami owns MSFT; Nations is long BAC; Nations is long C; Nations is long SPY;
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Bank of America Corp. (BAC - $7.29, Market Perform)
KBW expects to receive or intends to seek compensation for investment banking services from Bank of America Corp. in the next three months.
KBW currently makes a market and/or acts as a liquidity provider in Bank of America Corp. securities
Regions Financial Corporation (RF - $5.31, Market Perform)
KBW expects to receive or intends to seek compensation for investment banking services from Regions Financial Corporation in the next three months.
KBW currently makes a market and/or acts as a liquidity provider in Regions Financial Corporation securities
U.S. Bancorp (USB - $27.86, Outperform)
KBW expects to receive or intends to seek compensation for investment banking services from U.S. Bancorp in the next three months.
KBW currently makes a market and/or acts as a liquidity provider in U.S. Bancorp securities.