It’s a ‘Good Time’ to Take Profits From Financials: Fund Manager

Financials led the stock market into negative territory on Tuesday, on fresh evidence of a weakened global economy . That’s a good excuse for some long overdue profit-taking, Todd Hagerman, managing director at Sterne Agee, told CNBC.

“The sector had a great run at the beginning of the year. But valuations are now looking a bit stretched. So investors are using the slow down in global growth, whether that’s in China or the EU, as a starting point to take money off the table,” said Hagerman.

Tuesday’s sector laggards are: Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs Group, and Morgan Stanley.


Without issuing a rating, Hagerman says they’re too expensive.

“Right now we’re looking at a group trading just north of 13 times forward earnings, above the relative S&P multiple,” he said.

Year to date, the financials sector has outperformed the S&P 500 indexby 4.18 percent. Some might say a 13 times multiple is justified, compared to the S&P 500 forward price to earnings multiple of 12.7.

But Hagerman thinks extended low-interest rates, likely reaffirmed in the Federal Reserve’spolicy meeting next week, is “a good reason to start taking profits off the table.”

Instead, Hagerman encourages investors to “rotate out ofhigher beta names,” and into quality names such as PNC Financial Services Group, Fifth Third Bancorpand Wells Fargo,each of which have a “buy” rating from Sterne Agee.

“Higher beta” is simply a comparison between a stock and the index. For example, if you have a stock with a beta of 2, the market always has a beta of 1. Such that if the market goes up 1 percent, you expect the stock to go up 2 percent.

If you think the market will go down, perhaps Hagerman’s low-beta buy list is for you.

“They're going to do well,” Hagerman added. “They’ve got a nice growth trajectory coming on board for the course of the year. Investors are going to be rewarded for getting into those names.”

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Todd Hagerman does not personally own PNC, Fifth Third, or Wells Fargo. Sterne Agee does, however, make a market in these securities.