Wall Street Whispers: The Guts To Say 'Sell'

NEW YORK (TheStreet) - A prominent analyst called the case for buying Citigroup (C) shares a "'trust me' story" this week, the first time in awhile anyone has seriously questioned a large bank's ability to meet aggressive growth targets.

Kudos to CLSA's Mike Mayo for breaking away from the pack. The analyst community itself has been a "trust me story" regarding bank stocks for the past few years, but failed to provide investors much reason to retain confidence.

Shares of the country's six largest banks have declined by an average of 27% since mid-April, when the sell-off first took hold. Since mid-July, when second-quarter reports started trickling in, they're down an average of 12%. Bank of America (BAC) has taken the most brutal beating, with drops of 37% or 20% over those time periods, while Morgan Stanley (MS) has gotten hit the least hard, declining 21% or 4%.

Yet no analyst tracked by Thomson-Reuters has shifted to a sell rating on the stock of any large bank over the past three months. According to Briefing.com, the most recent "sell" downgrade came in January -- for Morgan Stanley, the stock that has retained the most relative value.

In fact, analysts have become even more bullish - adding 10 more buy ratings collectively to Goldman Sachs (GS), Wells Fargo (WFC) and JPMorgan Chase (JPM).

The key issue with analyzing bank stocks today is that old-school valuation metrics have gone the way of the abacus. The industry's uncertain outlook - due to the economy and regulatory reform - has made profit estimates and price-to-earnings ratios somewhat irrelevant. What good is book value if banking titans will be forced to divest unknown quantities of their books?

In a July 13 report titled "Heck With Normalized P/Es - What About 2011 P/Es?," Stifel Nicolaus' Chris Mutascio acknowledged as much. He cited the impact of financial reform, and when it will occur, as "the primary issue weighing on the bank stocks" recently.

"While seemingly everyone has their normalized earnings models built (us included) and can guess as to when they will occur, no one really knows the answer to this fundamental question," Mutascio said.

Mutascio is basing his ratings instead on 2011 earnings estimates, which are more guessable than the "normalized," post-reform-impact scenario. According to that metric, Mutascio considered Bank of America to be 72% cheaper than the average bank stock and Wells Fargo to be 67% cheaper, and rated both of them a buy. Since the time of his report, though, the shares of both firms have both declined another 15% to 20%.