Goldman’s Richard Ramsden makes an interesting observation about recent U.S. financial stock performance:
This year being good has not been good enough as YTD stock performance and last six month earnings show a -65% r-squared – i.e. the more money a bank made, the worse it performed.
Investors seem to have disregarded improvements in bank fundamentals due to U.S. regulatory concerns.
Akin to last quarter, better fundamentals were overshadowed by regulatory concerns. Thus, while pre-provision earnings, credit and capital all came in better than expected in 1Q, bank shares are 10% lower than pre-earnings.
Nevertheless, he believes (hopes?) that fundamental performance will eventually be recognised.
Ultimately stocks should follow earnings power and favour banks with low multiples on normalized EPS (JPM, BAC, STI, KEY).
We remain focused on price to normalized earnings and tend to favour stocks that look attractive on this metric. Investors are also focused on price to pre-provision earnings and price to tangible book which we also show in the scatter plots below. Overall, we estimate the sector is now trading about 9X our updated normalized EPS vs. a long term P/E multiple of 12X, and is trading at about 1.5X tangible book vs. a long term average of about 2.5X.
(Goldman Sachs, United States: Banks, Richard Ramsden, 3 May 2010)