With earnings season winding to a close, I've started to search for the next investment to add to my portfolio. Since I spent most of April looking at bank earnings, I figured financial companies would be as good as any place to start looking. Not all financial companies are created equally, however, so I've decided to break my search into four distinct groups: "too big to fail" banks, regional banks with more than $1 billion in market cap, regional banks with less than $1 billion in market cap, and other financial-service companies. From each group, I plan on selecting one company to potentially add to my portfolio, but in the meantime, I'll make a CAPScall with hopes that they can help my CAPS score.
Truly big banks
The first group of banks I'll examine are the five largest bank holding companies in the United States based on total assets. They're all household names to most investors and could almost be "too big to fail." They are all firmly entrenched in our financial system, but their size does not automatically make them good investments.
|
Company |
Total Assets |
Market Cap |
P/E Ratio |
P/B Ratio |
Dividend Yield |
|---|---|---|---|---|---|
|
JPMorgan Chase |
$2,828.9B | $155.4B | 8.1 | 0.76 | 3.2% |
|
Bank of America |
$2,181.4B | $83.3B | N/A* | 0.37 | 0.5% |
|
Citigroup |
$1,944.4B | $89.4B | 7.8 | 0.45 | 0.1% |
|
Wells Fargo |
$1,333.8B | $172.9B | 11.0 | 1.27 | 2.7% |
|
Goldman Sachs |
$950.9B | $53.1B | 14.8 | 0.81 | 1.7% |
Sources: Finviz.com, company filings, and Motley Fool CAPS.
*N/A because of negative earnings.
On with the eliminations!
The first of the five that I'm eliminating from consideration is Citigroup. It does have a couple of positives: the lowest P/E and second lowest P/B ratio. However, there are many more negatives about this bank beyond the numbers. Leadership matters, and CEO Vikram Pandit is highly compensated even though the stock has failed to perform since he took over, and shareholders recently rejected his latest pay package. Citigroup was also one of only four banks to fail the recent round of Federal Reserve stress tests, most likely relegating its dividend to its current level until 2013.
After eliminating the cheapest option for reasons other than price, Goldman Sachs is the next bank to feel the cold kiss of executioner steel. With other options available at cheaper valuations, Goldman gets bypassed for now, despite trading at a 19% discount to book value and a recent rise in its quarterly dividend. However, while its recent earnings release showed a 64% increase in revenue, underlying results showed a fall to third place in equities underwriting, as well as an increase in total compensation despite laying off some of its workforce last year. The bank is among the best at what it does, and worth keeping an eye on, but it won't find a home in my portfolio right now.
And then there were three …
To be perfectly honest, I'd be content owning any of the three remaining banks. Bank of America is currently trading at a steep discount to its book value. JPMorgan is helmed by Jamie Dimon, a respected voice in the financial industry whose annual shareholder letter is read by Warren Buffett for the insights it provides. Wells Fargo originates one in four U.S. mortgages and services one in six, and it manages to do it more cheaply than all its competitors.
The second runner-up in this bank beauty pageant has plenty to offer if the two ahead of it should falter. But Bank of America is still a little risky for my tastes, and it's had a hard time returning to profitability, though its progress is promising. Even though it passed the same stress tests that Citi failed, there are no immediate plans to raise its paltry penny-per-share quarterly dividend, something that JPMorgan and Wells Fargo jumped at the chance to do. While it will probably double much quicker than the other banks, I'm passing right now.
There can be only one
The first runner-up, and up until last Thursday, my first choice, is JPMorgan. But a $2 billion loss is not easy to dismiss, even for a bank of JPMorgan's size. The loss led analysts to downgrade the stock on Friday, and even Dimon had his aura of greatness dinged by the whole sad affair. Nevertheless, the damage done by the loss still leaves the country's largest bank an attractive option -- as long as the loss is a one-time event.
My choice, then, is Wells Fargo. There's a lot to like about the San Francisco bank: Its mortgage business is top-notch, and it keeps itself pretty far removed from the European debt crisis, with only 5% of its loan portfolio invested overseas. It's a large holding of Berkshire Hathaway and often lauded by Warren Buffett and Charlie Munger as a bank that does things right. Finally, an 83% increase to its dividend boosted its yield to a market-beating 2.7%.
Accountability time
Though I'm not planning on purchasing shares of Wells Fargo at this time, I will be keeping an eye on the company and tracking its performance at Motley Fool CAPS. I currently have the bank rated there with a "green thumb" and will continue that rating unless something dramatically changes with the company. I encourage you to do the same.
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