Pickings Get Slim Among Bank Stocks

For bank stocks, the easy money has been made and lost enough times in the current stock market cycle that investors might want to forget the sector completely.

The vertigo is especially pronounced now, given financial stocks' recent resurgence. Over the past two months, the Philadelphia Bank Index is up about 5%, bringing the big-cap proxy into the black for the first time since early this year. On the other hand, the index has gained just 1% for all of 2004, reflecting Fed-related fears of last spring that many assumed would sound the death knell for the financials as a whole.

Macroeconomic factors have left luck the primary determinant of success in bank investing so far this year. Choosy investors can find a bargain or two, but they'll have to look in some pretty remote corners of the market to find them.

Some of the big movers in the banking sector since early July include J.P. Morgan Chase(JPM Quote), up 3% to $39.10, Bank of America(BAC Quote), up 6%, to $44.57 and Wells Fargo(WFC Quote), up 4% to $58.39.

The bear case on big-cap names is pretty straightforward. The Federal Reserve remains hellbent on raising interest rates. The economic recovery shows signs of stalling. Consumer debt is running at record levels. And many business are reluctant to borrow money.

It's not so much that bank stocks are necessarily overvalued, just that they seem fully priced on the basis of current earnings estimates.

Indeed, a wide swath of bank stocks ranging from Citigroup(C Quote) to J.P. Morgan to Wachovia(WB Quote) to SunTrust(STI Quote) are trading at either 12 or 13 times earnings, which is the current industry average.

Historically, stocks of big money-center banks, such as Citigroup and J.P. Morgan, have traded at valuations in the midteens. But while an argument might be made that these shares are currently on the cheap side, it would have to ignore these banks' dependence on their brokerage arms, a business that is mired in a brutal downturn.