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 this, 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.
B of A says "bigger is better"
When it comes to buying banking stocks, bigger is better. That's the upshot of a series of new reports out of Bank of America (BAC -1.07%) this week, assigning buy ratings to Citigroup (C -1.09%) and JPMorgan Chase (JPM 0.15%). According to the analyst, shares of Citi are undervalued by about 25%, while JPMorgan investors could gain as much as 13% over the coming year (before dividends).
Meanwhile, however, B of A downgraded regional bankers Fifth Third (FITB -1.10%) and US Bancorp (USB -1.49%). Why?
Let's go to the tape
While it may not come as much of a surprise that one of the nation's biggest bankers thinks "bigger is better," what might indeed surprise you is that Bank of America actually has a pretty good record of getting these things right.
Ranked among "the best" professional analysts we track on CAPS, B of A gets most of its stock picks correct, outperforming about 96% of investors globally in the process. B of A is particularly good at picking banking stocks, where the majority of its recommendations outperform the S&P. And chances are, it's right to be leaning toward bigger bankers today as well.
Bigger is cheaper
Consider: Both of the banks recommended by B of A -- indeed, B of A's own stock, if it were allowed to pick it -- currently sell for less than book value. JPMorgan shares currently cost about 86% of book value, Citi a little more than half, and B of A a little less than half. In contrast, Fifth Third stock carries a price-to-book value of 1.1. US Bancorp, meanwhile, costs nearly twice book -- 1.98.
The more familiar P/E metric tells a similar tale. All of the major investment banks named above cost about 10 times trailing earnings. Granted, on this metric Fifth Third also costs 10 times earnings -- but USB carries a P/E ratio 27% higher, at 12.7. So even if you have some doubts about the quality of assets on the major investment banks' books (and I've got a few reservations there myself), a simple examination of bank profit as compared to banking stock prices suggests that B of A may be on the right track, recommending bigger bankers over smaller.
Foolish takeaway
With their share prices up 41% and 42%, respectively, over the past year, Fifth Third and US Bancorp have both had nice runs. But their valuations now look the worse for it. JPMorgan and Citi have performed almost as well, but their share prices -- and in particular their share prices as compared to their much larger book values -- suggest now's the time for the pendulum to swing the other way, and begin favoring bigger bankers over smaller.
