Thomson Reuters recently reported that third-quarter average profit estimates for Goldman Sachs Group (GS) have been slashed more than 18% over the last month to $2.28 per share. What's more, full year estimates have dropped 8% and 3% for 2011 and 2012, respectively.
Goldman's not alone. Other big banking firms have taken a hit too, such as Bank of America (BAC), whose average forecasts fell 9%, while Morgan Stanley's (MS) fell 4%.
"Goldman has fallen particularly hard because it has a greater dependence on traditional investment banking businesses like buying and selling securities, underwriting stock and bond offerings, and advising on mergers," reports Reuters.
The recent market volatility and general uncertainty do not sit well with analysts. "Even fans of the stock have gotten more cautious about how much it might rise. "The median price target for Goldman is $155, down from $170 a month ago and $198 three months ago."
Goldman Sachs hit a new 52-week low on Monday at $99.80 but had already rebounded by Tuesday's closing to $104.09 per share.
So which banks are bucking the trend? Here is a list of banking stocks that have recently seen an increase in their earnings projections.
What's more, all of these banking stocks are undervalued, as measured by the Graham Equation (developed by Benjamin Graham, a.k.a. the godfather of value investing).
Graham's principles of value investing serve as the basis for the Graham Number, or the maximum price an investor should pay for a stock. It's derived using only two data points: current earnings per share and current book value per share.
The Graham Number = Fair Value Of A Stock = Square Root of (22.5) x (Earnings Per Share) x (Book Value Per Share)
For Graham, the price-to-earnings (P/EPS) ratio should be no more than 15 and price-to-book value (P/BVPS) ratio should never exceed 1.5.
As a general rule, Graham insisted that the product of the two shouldn't be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5.
Put another way:
(Price/EPS)x(Price/BVPS) = 22.5
Price(sqr)/(EPS x BVPS) = 22.5
Price(sqr) = 22.5 x EPS x BVPS
Take the square root of both sides, and you get the equation for the Graham Number.
Fair Value PricePrice = Square Root of (22.5 x EPS x BVPS)
It's a useful way to help determine a stock's relative value -- but it's no substitute for your own research. Use it as a starting point for further analysis.
The following banks are bucking the trend, and seeing their earnings projections rise. What's more, they all appear undervalued -- do you think the market is underestimating these names? (Click here to access free, interactive tools to analyze these ideas.)
1. Northern Trust
2. East West Bancorp
3. SVB Financial Group
4. National Penn Bancshares
5. Bank of the Ozarks
6. City Holding Co.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data sourced from Fidelity.
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