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Too Big To Fail Banks Are Overvalued In The Short-Term

 December 20, 2012 03:44 PM

(By Rich Bieglmeier) Recently, there have been a slew of upgrades on bank stocks. For example, Meredith Whitney, head of Meredith Whitney Advisory Group LLC told CNBC, "Bank stocks offer the best opportunity in years."

She says that housing's bottom is an anchor that's been cut free from the ankles of the banks and that the rebound should turn from a head to a tail wind in the years(s) ahead. Although, the analyst believes revenues won't climb much in 2013 – come again? Instead of rising revenue, Whitney believes the Fed will OK increasing dividend and share buyback programs following the next round of stress tests.

There is no doubt that bank stocks are hot. In fact, CNN Money reports, "The S&P 500 Financials index, which tracks 81 companies and also includes insurers and asset managers, is up about 24% with two weeks left in the year. That's nearly double the return of the full S&P 500, which is up nearly 13% in 2012."  The finance sector even made iStock's most recent sector performance review.

[Related -Bank Stocks: The Misbegottenness of the Volcker Rule Truly Knows No Bounds]

Studies do confirm that hot sectors tend to remain strong for up to three years at a time. But, is now the time to jump into bank stocks without concern?

Since Whitney thinks the "too-big-to-fail" (TBTF) banks are attractive, iStock decided to run through the charts of the seven United States based TBTF banks to see if now is the time to jump in head first.

Bank of America Corporation (BAC) is trading with a relative strength (RS) reading of more than 75. Typically, stocks that trade above a 70 are considered overbought. In another sign the stock might be overpriced in the short-term; BAC is currently trading 3 standard deviations above its 20-day moving average. It can stay that way for a while, but 67% of the time, most stocks will bounce around between 1 standard deviation higher or lower than the 20 day mark. One standard deviation – in this case – is defined as 20-day price volatility.

[Related -Gold hasn’t lost its allure in my portfolio]

On a price to book (P/B) basis, one of the key metrics for bank stocks, BAC currently trades at 0.56 times book, slightly below its five-year average of 0.64.

The Bank of New York Mellon Corporation (BK): Much like BAC, Bank of NY is trading with a RS reading above 70 at 73.76 and is more than two standard deviations higher than its 20-day moving average. P/B wise, BK is valued at 0.85, versus the five-year average of 1.12.

Citigroup, Inc. (C) isn't as overpriced as BAC or BK based on RS and relative to its 20-day moving average; however, Citi's relative strength of 71.30 is still higher than we'd like and is more than one standard deviation higher than the 20-day mark. C's P/B of 0.62 is only a hair below the five-year average of 0.66.

The Goldman Sachs Group, Inc. (GS) makes it four for four above a 70 RS reading at 72.06. Again, plus 70 is a condition that can last for a little while, but not too long usually. While GS isn't too far away from 70, it is currently trading three standard deviations higher than the 20-day benchmark. GS currently trades at 0.90 times its book value and below the five-year average of 1.15.

JPMorgan Chase & Co. (JPM) doesn't break the streak with  symmetrical RS of 71.71. Meanwhile, JPM is two standard deviations above the 20 day and is discounted relative to its five year average P/B of 1.19 at 0.88.

State Street Corporation (STT) is the first of the lucky seven to trade with a relative strength reading below 70 at 64.49. Not surprisingly, STT is also within the normal trading boundaries based on 20-day volatility, but it is borderline upper edge. At 1.09 time book, State Street has a way to go to reach its five-year average of 1.48.

Wells Fargo & Company (WFC) as you may have guessed already, WFC also trades with a RS score of less than 70 at 66.43; however, WFC is two standard deviations higher than its 20-day moving average. Compared to its average five-year P/B of 1.42, WFC is mildly undervalued at 1.29.

Ms. Whitney might be correct that bank stocks still have room to move higher, especially with seven out of seven TBTF banks trading below their respective five-year average book values. However, all seven are overvalued based on their 20-day averages, and five of the seven on a RS basis. iStock believes shares will either flatten out or correct some in the next few days/weeks. Patient investors could get better entry points than they offer today.



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