Mind This Valuation Gap

After last week's disappointing performance, stocks are starting this week on a positive note. The Dow Jones Industrial Average (INDEX: ^DJI  ) and the broader S&P 500 (INDEX: ^GSPC  ) are up 0.06% and 0.16%, respectively, as of 10:08 a.m. EST.

The macro view
As a critical deadline looms, global markets are watching to see whether politicians will act in time. Is it the U.S. fiscal cliff? No; it's Europe's turn in spotlight today, as there are real doubts that eurozone finance ministers, who are gathered in Brussels today, will release the next tranche of financial assistance to Greece. Greece has a 5 billion euro debt repayment scheduled this week. No wonder gold remains near the three-week high of $1,738 it achieved on Friday.

The micro view
Leucadia, a value-oriented holding company, is acquiring investment bank Jefferies (NYSE: JEF  ) in a stock-for-stock deal that values the broker at $3.6 billion, or $17.66 per share -- a 24% premium to Friday's closing price and a 24% premium to the broker's tangible book value. (At Friday's closing price, the shares price was equal to tangible book value.)

The proposed deal illustrates the valuation gap between midsize and large investment banks, as the market applies a "too-big-to-fail" discount to the latter. Goldman Sachs (NYSE: GS  ) -- the best-of-breed -- trades at a 10% discount to its tangible book value. The discount on Morgan Stanley shares is 34%. Even JPMorgan Chase (NYSE: JPM  ) , which has a commercial bank to provide cheap funding and smooth out the earnings from its investment bank, only commands a 10% premium to tangible book value. That suggests an opportunity. Click here to receive our premium report on JPMorgan and find out why two of our top analysts think the shares are cheap.


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  • Report this Comment On November 12, 2012, at 12:11 PM, Kisei wrote:

    How did you figure the tangible book value of JEF? Thanks

  • Report this Comment On November 13, 2012, at 4:05 PM, TMFAleph1 wrote:

    Nothing complicated: I looked up the multiple directly on S&P Capital IQ. That's what data providers are for. ;-)

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