At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
"May you live in interesting times ..."
On a day like today (or a day like yesterday), Confucius' old proverb springs quickly to mind. Investing in stocks, generally, got more "interesting" today, after Standard & Poor's decided to downgrade American debt. Investing in banking stocks -- which live and die on fluctuations interest rates -- got a whole lot more interesting.
As markets opened for business Monday, shares of Bank of America (NYSE: BAC ) promptly plunged on news of the downgrade and rumors of a $10 billion lawsuit soon to be filed against it by AIG (NYSE: AIG ) . Other bankers, such as Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , and Wells Fargo (NYSE: WFC ) , suffered as well, down 9%, 6%, 6% again, and 2% respectively.
Hold up a sec. Who was that 2-percenter?
Wells Fargo. And you're right -- out of the major too-big-to-failers, Wells Fargo initially took the downgrade in relative calm. For that, you can thank the friendly analysts at Sterne Agee, who upgraded Wells Fargo to "buy" this morning. Details on the upgrade are few and far between so far. What we do know is that according to Sterne, the S&P downgrade doesn't affect the worth of Wells a whit. The analyst is sticking with its $33 price target. And now that Wells has fallen to $24 and change, that gives investors today a shot at 37.5% upside on the stock -- and good reason to buy.
But is Sterne right to be counseling a banking investment in today's market?
Let's go to the tape
Chances are, it is. While something less than 50% accurate on its banking picks in the past, Sterne has still managed to rack up an enviable record with its recommendations. The banker ranks in the top 10% of investors we track on CAPS. Within the commercial banking industry in particular, Sterne has outscored the S&P 500 by a total of 256 percentage points across its 59 recommendations in the industry.
Will it post another win with Wells? Let's take a look at a few numbers:
|
Bank
|
P/E
|
Return on Equity
|
Projected 5-Year Annual Growth Rate
|
| JPMorgan |
7.5 |
11.4% |
9.4% |
| Wells Fargo |
9.4 |
11.4% |
14% |
| Bank of America |
N/M |
N/M |
11% |
| Citigroup |
9.6 |
6.0% |
14% |
| Goldman Sachs |
11.5 |
N/R |
9% |
Source: Yahoo! Finance. N/M = not meaningful; N/R = not reported.
Of the major investment banks, Wells Fargo is currently second only to JPMorgan in "cheapness" from a P/E perspective (Bank of America, currently unprofitable, has a P/E that technically stretches to infinity.) Wells' return on equity is top notch, tying JP for the most profitable operation. Meanwhile, Wells boasts estimated long-term growth rates that beat all comers save Citigroup -- which costs more than Wells.
Foolish takeaway
There's a reason Warren Buffett made Wells Fargo one of his largest equity holdings at Berkshire Hathaway (NYSE: BRK-A ) , and that reason isn't because it's a bad banker. To the contrary, Fools might want to take a lesson from the Oracle of Omaha: With a return on equity and a growth pace that are both second to none, and a P/E ratio that's second to only one, Wells looks like an excellent stock to buy -- if you hope to profit from the sell-off.
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