No U.S. industry has faster profit growth than banks and brokers, and no group is more bad-mouthed by investors. It may be time for them to get over their distaste, says Mark Giambrone, a fund manager for San Antonio-based USAA Investment Management, which oversees about $74 billion. "The stocks are clearly too cheap," says Giambrone, whose USAA Value Fund (UVALX) owns Wells Fargo (WFC), PNC Financial Services (PNC), and Bank of America (BAC), among other financial stocks. "There may be some bumps in the road ahead, but for the most part those are reflected in valuations." The Standard & Poor's 500 Financials Index (S5FINL) of 78 banks, brokerages, and insurance companies is down 60% since peaking in February 2007, more than twice the drop of the S&P 500-stock index.
Many of Giambrone's peers remain unconvinced that all the pain has been taken in financial stocks. A survey by Bank of America found financial shares the least favored stocks among 123 money managers. But earnings at financial companies rose an estimated 120% in the fourth quarter, accounting for all the income increase in the S&P 500, data compiled by Bloomberg show. Those financial company earnings should triple by 2011, climbing four times as fast as the market, analysts figure. Should those estimates prove correct, financial shares are trading at about a 15% discount to the S&P 500.
THE BIGGEST GAINER
Analysts are more bullish on financial stocks in the S&P 500 than on any other sector, based on average share-price forecasts. Those calculations call for a 16% rally over the next 12 months. That would follow the group's 140% runup since last March, which was spurred by better economic data and government rescues of companies from Citigroup (C) to American International Group.
Investors in financial shares will get a lot of information to mull over in the next few weeks. Goldman Sachs (GS), American Express (AXP), and 26 other S&P 500 financial companies are scheduled to release earnings by Jan. 22. Bank of America is forecast to post the largest gain among the biggest U.S. banks. Profit may climb to 95 cents a share in 2010 from a 19 cents loss last year, analysts estimate. "What we're looking at is an improvement in the economy that will result in consistent declines in loan losses over the next two or three years, which will result in huge increases in bank earnings," says Richard Bove, an analyst at Stamford (Conn.)-based Rochdale Securities. Favorites of Jennifer Thompson, of New York-based research firm Portales Partners, include PNC Financial Services and Fifth Third Bancorp (FITB), which she says are poised to rally.
Some money managers worry that rising interest rates will hurt bank interest margins. Bob Doll, who helps oversee $3.2 trillion as vice-chairman and chief investment officer for global equities at BlackRock (BLK), thinks that investors need more proof that all the bad news is factored into bank stocks. "Are all the assets that are classified as performing going to perform?" he asks. "That is the concern. We would wait for some price pullback and have patience before buying."