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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll 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'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best...
Is the worst over for American Express
For the time being, let's put aside Goldman's move -- for one thing, we don't know much about the reasoning behind it. For another, Goldman still stubbornly refuses to report its ratings to Briefing.com, stymieing investor efforts to hold the banker accountable for its past advice. Instead, let's focus on Citibank's more recent advice:
Given the stock performance over the past four months (shares down 40%) and some signs of a credit market recovery, the bear case scenario for [AmEx] is simply less compelling. ... [W]e don't believe sentiment for the stock can get much worse. ...While the stock could quickly trade back down to the ~$12 level on weaker-than-expected Q1 bank earnings, it could easily rebound to the high-teens on the back of a more convincing credit market recovery, making the risk/reward much more balanced. Investors will want to own AXP into a recovery due to the franchise quality and leverage to a better economy.
In essence, therefore, Citi is saying the benefits outweigh the risks on AmEx at this price. But what investors should be asking is: What are the risks of listening to Citi?
Let's go to the tape
Not to put too fine a point on it -- they're about the same risks as you get from flipping a coin. While Citi makes a fair number of winning bets in the financial sphere...
Stock |
Citi says: |
CAPS says: |
Citi's Pick Beating S&P By: |
---|---|---|---|
Capital One |
Underperform |
* |
26 points |
SunTrust Banks |
Underperform |
** |
35 points |
Regions Financial |
Underperform |
** |
43 points |
... it also makes its shares of blunders -- and in some cases (I'm talking 'bout you, Bank of Ireland), those blunders are passing expensive:
Stock |
Citi says: |
CAPS says: |
Citi's Pick Lagging S&P By: |
---|---|---|---|
Bank of Ireland |
Underperform |
*** |
224 points |
AIG |
Outperform |
*** |
58 points |
Mastercard |
Underperform |
*** |
35 points |
Indeed, the pattern you see reflected above has held true across the length and breadth of the two years-and-change that we've tracked Citi's performance. With well over 800 stock ratings to its "credit" over this period, Citi has managed to make right calls just... 50% of the time. (A little less than that, in fact.) Considering Citi's middling record for accuracy, you have to ask yourself whether an upgrade from this banker justifies placing a bet on AmEx.
One word: Yes
Not because Citi says so, mind you, but because AmEx's own numbers so command. Right now, AmEx sells for just 6.5 times trailing earnings, despite widespread agreement among brokers that a sterling franchise like AmEx should be able to grow its profits at better than 10% per year going forward. To me, that seems a safe assumption in light of the even greater consensus that the banking industry as a whole will post nearly 12% growth over the next five years.
Consider, too, that, when judged against its historical valuations, AmEx is selling at a bargain price relative to its tangible book value. Three years ago, shares of AmEx fetched north of $50 a stub -- yet each share contained within it just $7.21 in tangible book value. Today, TBV per share has grown to $7.61, while the stock price has been chopped to just $15 -- a price-to-book ratio of almost precisely two, versus the seven-and-up ratio that AmEx shares fetched not that long ago.
Foolish takeaway
Assuming investors in years past were not totally out of their noggins in paying seven-times multiples and more for AmEx, it seems clear that today's prices offer at worst a relative bargain -- and at best, an out-and-out steal. Seems to me, Citi might even have been too cautious in only upgrading AmEx to "hold" -- the better move just might be to have gone all the way to "buy."