Despite being given every advantage to repair the disastrous damage of the housing market crisis and financial crash of 2008, big banks and financial stocks are struggling to gain any positive momentum in 2011. The sector is one of the worst performing groups of stocks in 2011, compared with other areas of the market that have actually put up respectable gains of about 7% year-to-date as measured by the Dow Jones and S&P’s performance
Unfortunately that downward trend is likely to continue for bank stocks. There is no easy solution to the mess in the wake of a huge sub-prime mortgage crash, rampant foreclosures and a dramatic slump in the value of bank stock share prices. Time is needed to heal the damage, and unfortunately the hits keep on coming and revenue remains flat for the major financial stocks on Wall Street. It may not be a lost decade like Japan, but it will be close. Real estate values are still falling and consumers are still strapped and trapped in jobs that offer very little income growth.
Banks are to be sold in this environment, and big banks like Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are the biggest sells of all. Here are seven that should be jettisoned post haste.
The focus of late has been on the U.S. debt ceiling, but don’t forget about Europe. The dominos are falling and the risk of catastrophe is very real. London-based HSBC Holdings (NYSE:HBC) has been feeling the effects as it is quite exposed to all things Europe, even though it also operates within the united States.
Surprisingly shares of HBC are down only 7% in this uncertain environment. Selling now may be a wise move considering things really could get worse. Supporting the stock price is a low fundamental valuation. Shares trade for just over book value and 10 times current year estimates of earnings.
That low valuation falls apart in any default scenario. I would sell HBC to be safe.
JP Morgan Chase
JP Morgan Chase (NYSE:JPM), now run by superstar executive, Jamie Dimon impressed the market last with week with a strong earnings report. The company rode strong investment banking earnings to a quarterly profit of $1.27 per share. That was six cents better than Wall Street estimates.
The news sent shares higher in trading after its quarterly report was released. I would use that strength as an opportunity to sell. The stock is still down 7% for the year. Although the company does not have huge sovereign debt exposure in Europe, its fortunes are tied to the U.S. If the debt ceiling is not extended we could be looking at financial Armageddon and JP Morgan shares would get slaughtered under such a scenario.
Don’t forget that JP Morgan was the unfortunate buyer of mortgage mess maker Washington Mutual. That acquisition alone is good enough reason to ditch this stock.
Wells Fargo (NYSE:WFC) is one of the best performing big banks, but is being the best of the worst worth owning in a portfolio? Despite trouncing the competition in terms of revenues and earnings the company still has its fair share of problems. The company is still dealing with the integration of Wachovia. If you recall, it was Wachovia’s tip-top overpayment for Golden West Financial right before all heck broke loose that nearly killed what had long been a solid performing bank stock.
Regulatory concerns and residual issues with respect to mortgage defaults and foreclosures are likely to be here for the duration. Wells Fargo shares are down 14% so far this year and more losses could be forthcoming if the company fails to meet earnings expectations as it has come perilously close to doing over the last two quarters. I would sell Wells Fargo on any earnings-related bounce.
Don’t let a reverse stock split fool you. Shares of Citigroup (NYSE:C) are still as risky as any penny stock trading below $5 per share. The only thing the reverse split accomplished was to trick investors into thinking the higher nominal price represented greater solvency and value.
As is often the case, any bump in share price caused by a stock reversal is quickly surrendered. Shares of Citigroup rose smartly after the company rejiggered its shares outstanding, but those gains are evaporating. The stock is down 21% so far this year.
Last week the company reported results that showed a quarterly profit of $1.07 per share. That beat analyst estimates of ninety seven cents per share. I’d advise selling the good news. There are still headwinds including what the company states to be uneven macroeconomic trends.
Bank of America
Bank of America (NYSE:BAC) is a dog with fleas. If you haven’t sold this big bank by now you should. The stock is already down 27% this year making it one of the poorer performers in the market. More losses are likely.
Bank of America’s ill-advised purchase of Countrywide Mortgage is still pummeling the balance sheet. Sure earnings are likely to be strong, but so too are losses that have yet to hit the books. In addition the company is a poster child for what is wrong with loan modifications, short sales and foreclosure processing.
The sheer size of the problem makes it likely that it will be years before Bank of America recovers.
It is hard to fault Goldman Sachs (NYSE:GS) for taking advantage of the downtrodden market. Its borrowing from the Federal Government was wonderfully parlayed into massive trading profits. What is problematic for Goldman is its role in the collapse in the first place.
Investors were likely unaware of the extent of Goldman’s playing both sides of the market. They may not have broken any laws or even fiduciary responsibility, but investors should demand more from the crown jewel of Wall Street.
Now what is left is taint that impacts all facets of Goldman’s business. If the government should ever investigate the investment bank, who knows what is hiding under the rocks? The dent to reputation and potential for future claims or judgments for its role in the financial crisis make this stock too risky to hold. I’d be a seller.
UBS (NYSE:UBS) is the Swiss bank Europeans do not want to see fail. The giant financial concern has its fingers in all parts of the global economy. Its failure due to sovereign debt defaults would be a disaster of epic proportions. Only a very low valuation should entice investors to take the risk of owning UBS.
So far the bank is holding up very well. UBS shares are down only 1.4%. Shares trade for just over book value and earnings are growing. So what is the problem? The problem is the potential collapse in Europe and what that will do to the balance sheet.
Only a significant discount makes the stock worth buying. I would sell shares here and wait to acquire at a better price, perhaps when the dust settles, but not now.