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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Goldman says "enough"
Does Goldman Sachs (NYSE: GS) read minds? Just hours before the Fed announced a $600 billion capital infusion into the American economy, setting off a buying spree on the Dow, Goldman unleashed a whopper of a prediction: The banking crisis is over. Losses are known, and they're baked into the stock prices already.

Goldman didn't use these exact words, but it might as well have. According to the megabanker, the four largest U.S. banks could lose as much as $26 billion from the mortgage crisis as affronted buyers "put back" to the banks the faulty mortgages sold to them as supposedly good deals. Now, $26 billion in potential losses isn't chump change, admittedly, but even if they reach that figure, these losses will be spread out over several years, making them easier to absorb by banks recording better-than-expected core results. By definition, $26 billion worth of future dollars is not worth as much as $26 billion today.

Now here's the really good part: By Goldman's calculation, investors afraid of incurring those losses have already sliced $28 billion from the combined market caps of Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC). In short, the losses won't be as bad as feared, and they've already been more than factored into the banks' stock prices.

Let's go to the tape
Putting its reputation where its mouth is, Goldman then proceeded to lay odds on which banks it expects to benefit most from this mispricing of "put-back" risk:

  • It ratcheted back earnings estimates for Bank of America (and dropped its price target from $19 to $16).
  • It increased its earnings projections, but tweaked its targets lower, on PNC (NYSE: PNC), at a targeted price of $60, and Wells Fargo at $37.
  • Last but not least, Goldman confirmed its "conviction" that the two best bargains in banking today are Citigroup and JPMorgan. Both banks' projected earnings, price targets ($5.50 a share and $51, respectively), and ratings (buy, natch) remain unchanged.

Yet I can't blame you for remaining skeptical of the new ratings. After all, Goldman has a seriously blemished record in banking. According to our scorecard at CAPS, Goldman's gotten the majority of its Commercial Banking picks wrong this past year. Its Capital Markets bets are losing to the market by worse than a 2-to-1 ratio. Worst of all, its recommendations in the Diversified Financial Services sector -- the category under which most of these megabanks fall -- have yielded simply stunning underperformance.  Four times out of five, Goldman made the wrong call.

So why would investors pay any attention to what Goldman says about the banks today?

Why, indeed?
Despite Goldman's lousy record, by any objective measure, the banks really do look cheap. Here's how Goldman's latest picks stack up -- and just for good measure, I'll toss in Goldman's own stats (as a banker, not a banking stock picker) as well:


Forward P/E

Projected Growth Rate


Bank of America 7.9 8.7% 0.3%
JPMorgan 8.2 7.5% 0.5%
Goldman Sachs 9.1 8.0% 0.9%
Citigroup 9.2 25% -
Wells Fargo 9.6 9.5% 0.8%
PNC Financial 9.6 6.3% 0.7%
US Bancorp 11.4 6.5% 0.8%

Admittedly, I still have my doubts about Goldman's guidance in this sector. While I agree that Citigroup looks massively undervalued if it manages to grow at anywhere near the rate analysts project for it, JPMorgan doesn't really seem worthy of the top-shelf ranking Goldman gives it, at least according to these numbers. B of A, Wells Fargo, or even Goldman Sachs itself seem to offer better bargains.

Nonetheless, the overall upshot of Goldman's prognosis -- that there are great deals waiting in banking stocks -- seems right on the money.

Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 617 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.