As we wait for Friday’s quarterly numbers from financial titans like JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), let’s take a look at a pair of stocks with wildly different trajectories for the future.
Financial stocks fall into two categories. There are the financial stocks that most savvy investors can understand. The business model is clear, and so are their financial reports. These are companies like the outrageously undervalued pawnshop operators such as EZCorp (NASDAQ:EZPW) — which is enjoying huge insider buying), or the bad-debt purchaser/collector Portfolio Recovery Associates (NASDAQ:PRAA). These are easy businesses to understand — and they’re not the focus of this piece.
The other group is much more complicated. These are the big investment banks, money center banks and large financial institutions. I’m talking about the aforementioned JPMorgan and Wells Fargo, among others. There are so many moving parts, so many accounting complexities, so many different subsidiaries and products, and so much money movement, it’s really hard for this investor to figure out what the heck these companies are really about when it comes to evaluating financials. (No wonder there was a financial crisis!)
To get around their complexity, though, I like to take a high-level at these stocks. It’s important to at least try to learn about them — they play a huge part in the American economy, and the macro issues in play can suggest a course of action for you to take with your portfolio.
SELL SELL SELL
I never thought I’d say this, but there is a must-sell stock in this sector. I’ve always said you should never be on the opposite side of a trade from this company, and that may still hold true. However, its reputation has been slaughtered over the past few years. It’s also in big trouble internally. Yep, I’m talking about Goldman Sachs (NYSE:GS).
Most of the time, investors don’t care about a company’s morals and ethics — the bottom line is the bottom line. Yet Goldman is suffering from a big-time PR nightmare. Thanks to countless congressional hearings, it’s the face of the financial crisis. Goldman is in need of some serious crisis communications, because it’s widely perceived as the primary purveyor of rotten mortgage-backed securities (MBS) and other derivatives that cratered the economy. The stink is so bad on Goldman that investors are selling the stock. The PR egg on Goldman’s face exists even though the Department of Justice dropped its investigation, citing lack of evidence in MBS sales. If a company escapes prosecution yet still looks bad, it’s got a serious PR problem — and it’s pervading the employee base.
The Wall Street Journal reported last month that the company is suspending its prestigious two-year graduate program. This once-vaunted program let Goldman groom junior analysts and build its workforce from within, and big bonuses were the norm. Apparently, graduates were blowing Goldman off after the program — maybe they don’t want to be associated with its sullied name — and Goldman ceased paying bonuses. So now Goldman is experiencing a talent drain, and that affects its competitive advantage.
Profits have been harmed as well, with second-quarter numbers down 11% year over year. (The company reports its third quarter on Oct. 15.) Goldman remains near its 52-week high but is still almost 50% off its five-year high. I see Goldman heading in the wrong direction presently and suggest selling the stock, but not shorting.
BUY BUY BUY
I wrote recently about Bank of America (NYSE: BAC) and how wrong I’d been about the company and the stock. My attitude hasn’t changed in the past month, and I suggest buying the stock as a long-term hold for capital gains. BofA will also likely reinstitute its dividend in the near term, which should further boost the share price.
The bank services 80% of the country’s mortgages, a huge source of ongoing, long-term revenue. BofA has cut back on employees and some weaker divisions. It’s also been finding ways to hit customers with fees here and there in its workarounds of the onerous Dodd-Frank requirements.
And the bank is ubiquitous, with 5,700 locations and almost 18,000 ATMs. It also offers brokerage, banking, retirement and advisory services, along with financing, securities clearing, settlement and custody services to institutions. It provides debt and equity and M&A advisory services. It does just about everything in banking. It’s a buy.
Lawrence Meyers does not own shares in any company mentioned.