A debate is raging between those who believe financial stocks have another leg down and those who believe they’re now screamingly undervalued.
The former group, headed by Meredith Whitney, believes that the plunging housing market will soon blow more holes in bank balance sheets, forcing them to raise yet more capital on yet worse terms, diluting current shareholders to hell.
The latter group, headed by Tom Brown, believe that many banks have plenty of capital and that their stocks have long since dropped below “franchise value.” As the economy improves, these folks say, the banks will mint money, sending their stocks to the stars.
Both arguments make sense: The critical issue is what happens to the value of the assets the banks are carting around on their balance sheets. Time will tell.
One fact that could be used to support either argument but that likely lends more credence to Tom Brown’s: On a revenue-to-price basis (which takes into account franchise value), the average financial-stock valuation has finally dropped to a level that, if not “cheap,” could at least be called “average.” Specifically, it has erased all of the premium the sector carried during the credit expansion phase over the past 15 years.
Bill Hester of the Hussman Funds:
Business Insider Emails & Alerts
Site highlights each day to your inbox.