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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best...
Over the first 30 days of 2012, Bank of America (NYSE: BAC ) has added 30% to its market cap -- about $17 billion. Not bad for a month's work, but if you ask the analysts at Goldman Sachs (NYSE: GS ) , B of A has run up too far, too fast. (And they should know. Goldman itself has tacked on nearly 24%!)
So what did Goldman do? Same as you or I should do with an investment that has performed well. It crunched some numbers and tweaked its portfolio to shift its money into stocks that had the most potential to go up some more. Specifically, Goldman ratcheted back its rating on B of A from buy to neutral. Conversely, Goldman upped its ratings on Citigroup (NYSE: C ) and Morgan Stanley (NYSE: MS ) -- up "only" 17% and 23%, respectively -- to buy. Curiously, Goldman rounded out its list of America's biggest bankers by removing JPMorgan Chase's (NYSE: JPM ) coveted "conviction buy" rating. This despite the fact that JP has gained only 13%. (Goldman still thinks the stock is worth owning, though.)
What's behind the ratings moves? Well, in B of A's case, the answer is simple: It's run up the farthest, and now that investors are pretty sure the bank will pass any stress tests with ease, Goldman doesn't see any further catalysts to lift the stock. Yes, B of A is cutting costs, but Goldman worries the bank has passed the point of diminishing returns, and warns that any cost-cutting B of A does from this point forward "will result in continued reduction to its earnings power." (A similar argument is raised against JP, which Goldman perversely warns has "outperformed" in several of its business units recently -- leaving less upside to be gained from bad units turning good.)
Citi, on the other hand, does have catalysts to work with. It could soon win permission from the Feds to increase its dividend payout -- perhaps to as much as $0.40 to $0.50, according to Goldman. Such a dividend, worth 1.6% on its own, could be combined with the potential for share buybacks (which Goldman predicts will amount to $3 billion to $4 billion in value) to create a "4.3% effective yield this year."
Finally, Goldman gave Morgan Stanley a strong endorsement (the more significant as Morgan and Goldman are fierce rivals in the market for taking companies public, as in the imminent Facebook IPO). Says Goldman: "With the stock currently trading at around 65% of tangible book value, we believe the risk/reward is skewed favorably for MS."
Let's go to the tape
Is Goldman right about all this? It's possible -- although I have to say that a lot of its sunny talk rings hollow, and I'd prefer to hear the analyst spend more time gauging the banks' exposure to Europe. But on the surface level, at least, Goldman is right that a lot of these stocks look attractive. Let's take a quick look at the numbers -- and just for fun, let's throw Goldman itself into the mix, and see how it stacks up against the competition.
|B of A
P/E and growth rate data courtesy of Yahoo! Finance; free cash flow from S&P Capital IQ.
What do these numbers tell us? Well, right off the bat I'd say that Bank of America's valuation of 707 times trailing earnings suggests Goldman's right to be cautious about that one. Sure, B of A has the lowest P/B of the bunch. But if its assets can't earn a decent profit, how much are they really worth?
On the other hand, I'm not quite so sanguine about Morgan Stanley's chances, as Goldman is. Fifteen times earnings seems quite a pretty penny to pay for 9% earnings growth. (On the other hand, Goldman itself costs far more than Morgan Stanley.)
JP Morgan? I don't think I'd be too quick to write this one off. Not at a valuation of just eight times earnings, and with a growth rate nearly equal to that. (Then again, Goldman did say it was still a buy. It's just a less convincing buy than it used to be.)
And last but not least: Citi. Here I've got to agree with Goldman again. Eight times earnings for an 11% grower? If it weren't for Europe -- and credit default swaps, derivatives, and the whole host of other unknowns that make up banking balance sheets post-crisis -- I might even be tempted to buy that one myself. As it is, about the best I can say for Citi is that it looks like the least risky bank of the bunch.
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