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TheStreet Open House

The Biggest Banks Have Elevated Debt Ratios

Stock quotes in this article: JPM, BAC, C, AXP, GS, MS

NEW YORK ( TheStreet) -- As I scanned through a spreadsheet containing debt-to-equity ratios my first observation was that many financial and bank stocks had ratios of more than 5.

This included the four too-big-to fail banks. Bank of America (BAC) has a debt-to-equity ratio of 8.2, while Citigroup's (C) is 8.4, JP Morgan Chase's (JPM) is nearly 11 and Wells Fargo's (WFC) is 7.8.

The finance sector is 21.3% overvalued with an equal-weight rating. Of the 3,037 stocks in this sector, 82% have hold ratings.

In the wake of the financial crisis of 2007-2008, finance companies and banks raised capital via debt offerings, leaving many with high debt-to-equity ratios.

Today I will update my buy-and-trade parameters for the four too-big-to-fail banks, the two major investment banking companies, a major regional bank, and the premier credit card company.

The major banks are currently facing fines related to their questionable mortgage and derivatives activities, which led to the financial crisis.

In addition, the quality of third-quarter earnings can be questioned as better-than-expected results occurred in nonlending activities, including the reduction of reserves for losses, asset sales and write-offs for legal fees.

Most major banks have seen reduced trading profits and lower demand for mortgages, and many banks are cutting jobs in their mortgage origination businesses.

All eight stocks in today's table have hold ratings. All are overvalued by 11% to 67%. All have significant gains over the last 12 months. Those gains range from 26% to 71%. The debt-to-equity ratios range from 7.2 to 11.1. All are trading at more than their 200-day simple moving averages, reflecting the risk of reversion to the mean.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage, according to ValueEngine. Those with a black number are overvalued by this percentage.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast One-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a good-'til-canceled order to buy on weakness. "W" stands for weekly, "M" for monthly, "Q" for quarterly, "S" for semiannual and "A" for annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC order to sell on strength.

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