The Dow Jones Industrial Average closing at record levels three days in a row has resulted in a rash of mainstream media coverage, most of which says the same thing: “The Dow isn’t the economy. It’s not inflation adjusted. It’s only 30 stocks. It doesn’t mean anything,” etc.
The S&P 500 is often touted as a more reliable indicator and, while that index is not at record levels, it has still been remarkably resilient in the face of sequestration and an improving, but still fragile, economy. It is little wonder that many of us are getting a little nervous, expecting a correction some time soon.
This presents a particular problem for those with new money to invest. They may have already sat out a while, waiting for a dip to buy on, watching the market march on up. A 5%-10% correction now would only get them back to where they could have bought in the first place and they are afraid of missing out but, let’s face it, nobody wants to buy at the top. If that description fits you, then the trick is to find something to buy that, even given a rising market, could still be considered undervalued and have a limited downside, while participating in any appreciation.
Big banks have definitely been a part of the run up. Bank of America (NYSE:BAC) has risen 16.7% in the last three months, outstripping the S&P’s 9.25% net gain in that time. But, along with other big banks, BAC could still be considered undervalued at a P/E of around 14 given that the financial sector is the big beneficiary of Fed policy and the dynamics of an improving housing market.
The stock seems to have found a new floor at around $11.00, indicating that any drop as a result of a general market correction could be limited.
A similar case can be made for Citigroup (NYSE:C) which is up around 20% during the same three-month period, but still has room for P/E growth from the current level below 11.
In this case, the $40.00 level looks to provide a base should the worst case scenario unfold. The big difference between the two banks is that BofA’s balance sheet repair is further along. Citigroup failed its stress test last year and, with results of this year’s tests out next week, this is certainly something that should be watched. Most analysts believe that Citigroup will pass this time, allowing new CEO Michael Corbat to apply for an increase to its current measly dividend. Should that happen, a spike in C’s price can be expected, whatever the state of the broader market.
Neither of these are unknown names that will surprise you, but the ability to keep appreciating, regardless of the state of the broader market, makes me favor them if you are looking for a home for new money.