Roundtable: Sell This Bank

Recently, we answered the question, "If I had to buy a big bank ..."

Morgan Housel went for JPMorgan Chase (NYSE: JPM  ) , Alex Dumortier went for Bank of America (NYSE: BAC  ) , and Matt Koppenheffer went for Goldman Sachs (NYSE: GS  ) . Read their rationale and qualifications here.

Now, we'll tackle the ugly flip side: Which banks are sells.

The choices are the same as with the buys:

 

Market Capitalization

Share Price

JPMorgan

$180 billion

$46

Bank of America

$141 billion

$16

Wells Fargo (NYSE: WFC  )

$138 billion

$30

Citigroup (NYSE: C  )

$103 billion

$4.50

Goldman Sachs

$93 billion

$182

Morgan Stanley (NYSE: MS  )

$48 billion

$35

US Bancorp (NYSE: USB  )

$48 billion

$25

PNC

$24 billion

$53

Which big bank is a "sell" at today's prices?

Morgan Housel: I'll be thoroughly dull and single out Citigroup. Yeah, it's everyone's favorite bank to kick in the shins, but for good reason. Let's count the ways:

  • Recent news that one of its most profitable assets -- Banamex -- might have to be dumped thanks to Mexico's state-run banking regulations highlights the painful reality of being 34% owned by the government. Name one company that's rewarded shareholders long term while being largely state-owned. Stumped? That's reason enough to sell Citigroup.
  • It still can't earn a profit. Or at least a legitimate profit. When interest rates are zero and you're tripping over losses, it's probably time to look for new work.
  • More specifically, where future profit will come from is still a big, fat, black hole. One-third of its balance is quarantined in a segment called Citi Holdings. Management's currently "rationalizing" Citi Holdings, which is just a polite way of saying they're trying to liquidate a few hundred billion dollars of assets that only worked when the economy ran on Red Bull and leverage. The future Citigroup will look nothing like the old Citigroup.
  • It's got a $100 billion market cap. Someone, somewhere, is expecting big things from this company. Sadly, I think they'll be disappointed.                         

Alex Dumortier: In the "Buy This Bank" roundtable, I took a long-term view of the issue. When it comes to selling, I thought I'd adopt a shorter timeframe (say, three to 12 months). On that basis, I think any and all of these banks are a potential "sell" in this environment. In fact, I think an interesting short-term trading strategy (for very advanced investors) might be to sell short the whole group, hedged with a long position in the broader banking sector or the S&P 500.

The megacap banks have led the way during this year's market rally. On a float-weighted basis, this group of eight stocks (BofA, Citi, Goldman, JPMorgan, Morgan Stanley, PNC, US Bancorp, and Wells Fargo) has returned 195% from the March 9 market low, well ahead of the KBW Bank Index (+141%) or the S&P 500 (+61%). On a weighted basis, the group now trades a 39% premium to book value; meanwhile, its return on equity over the last 12 months is a piddling 4.7%.

In my review of Wells Fargo earnings on Wednesday, I wrote: "As investors come to terms with the ongoing costs of the banking crisis, [bank] valuations will come under greater scrutiny. As a result, I expect greater price volatility -- of the downward variety, that is -- over the next 12 months."

Apparently, I'm not the only one who thinks the prospects for banks are misunderstood. In a piece published yesterday in the Financial Times, Mohamed El-Erian, the CEO of bond giant PIMCO, wrote: "... It is clear that the banking system will soon be taking an important step toward the "utility" end of the institutional spectrum – a likelihood that is yet to be internalised, both in market valuations and ..."

The banks that are the most vulnerable to a short-term revaluation are, to my mind, those that have risen the fastest and sport the weakest fundamentals: Bank of America (+341%) and Citigroup (+325%).

Matt Koppenheffer: JPMorgan Chase has gotten a lot of press throughout the financial crisis as one of the best-run banks and a safe haven for investors. And if you ask me, the stock trades today as if the bank's management team walks on water. Maybe JPMorgan is just that good, but consider me unconvinced.

The most recent earnings report from JP showed results that were driven almost entirely by investment banking and proprietary trading. Meanwhile, the company's core banking operations looked green around the gills -- to say the least.

Right now the stock is trading at nearly 14 times 2010 earnings, which are going to be dependent on corralling that banking division back into solid profitability while keeping the party going in the i-banking halls. This ain't no Goldman Sachs, people, and I think investors should be demanding more of a margin of safety than JP's current stock price is offering.

All the picks
With the qualification that these are "if I had to" picks, our two banking roundtables summarize like this:

 

Buy

Sell

Morgan Housel

JPMorgan

Citigroup

Alex Dumortier

Bank of America

All

Matt Koppenheffer

Goldman Sachs

JPMorgan

There you have it. Three analysts. Three buys. Three sells. What are your thoughts? Share them in the comments section below.

This roundtable article was compiled by Anand Chokkavelu, who owns long-held shares of Citigroup. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 23, 2009, at 4:46 PM, miteycasey wrote:

    Citi.

    It's the dog with the most fleas.

  • Report this Comment On October 23, 2009, at 5:41 PM, fsx101 wrote:

    My recommedations would the opposite of Mr Housel.

    The one to SELL is JPM...

    This stock trades at the SAME price as it does in (boom time) 2006... That means it is priced for PERFECTION in 2009.

    And if anyone forgets, they have all of WAMU's Alt-A, Option ARM loans on their books, which will be resetting in 2010-12.

    The one to BUY is Citi...

    Citi trades at 40% (dilution/conversion adjusted) of what it did in 2006. Its now (post conversion) got one of the best TCE of all the big banks mentioned ($100+ BILLION) and its already booked its worst losses behind it (with $40 Billion more in loan loss reserves already on the books).

    The point of owning/holding onto a stock is that you expect it to go HIGHER.

    Can Citi trade at "only" 60% of what it did in 2006? Yes and it very likely will. And if so, its got a 50% UPSIDE.

    For JPM to do the same, it would have to trade at 50% more than what it did in 2006. Which is highly likely.

    Remember, buy low, sell high. Not buy high, sell low.

  • Report this Comment On October 23, 2009, at 6:06 PM, IIcx wrote:

    you missed a goodie - BCS was 2.75/share earlier this year... perhaps the title should have been "When to buy a Bank?"

  • Report this Comment On October 24, 2009, at 5:43 AM, wuff3t wrote:

    "...perhaps the title should have been "When to buy a Bank?"

    Or perhaps "Roundtable: Buy This Bank" - which, as they mention at least three times in this article, they've already published....

  • Report this Comment On October 25, 2009, at 12:03 PM, privatepolicy wrote:

    this crisis was brought on by the banks and the recovery has been largely led by the banks. you guys are so close to the action you can't see the big picture. if the banks are overpriced, how overpriced are the techs or the rest of the markets? In hindsight the only safe price would be the march lows.

  • Report this Comment On October 26, 2009, at 11:02 AM, KWT8011 wrote:

    I'd like to see Housel and Koppenheffer in a steel cage arguing over JPM. UFC 106 here we come!

  • Report this Comment On October 26, 2009, at 2:05 PM, pondee619 wrote:

    Alex, I have questions:

    On Oct. 20, 2009 you said: "All banks within this group are now trading above book value except for two "problem children" that have been lumped together: Bank of America and Citigroup" "At this stage, Bank of America could well be the best bet in this group"

    On October 23, 2009 you said: "The banks that are the most vulnerable to a short-term revaluation are, to my mind, those that have risen the fastest and sport the weakest fundamentals: Bank of America (+341%) and Citigroup (+325%)."

    What happened in those three days? Bank of America went from being one of two that were NOT trading above above book value and could well be the best in the group to being one of the two most vulnerable to a short term revaluation. Did something happen in those three days to effect BAC? Is BAC "the best bet in this group"? Is BAC vulerable to a short term revaluation? How can I buy BAC for the long term and sell it for the short term?

    Should I buy BAC for the long term or sell it? I don't believe I can do both.

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