By James Dennin for Kapitall.
Even though stock markets haven't outperformed this year, the swoon predicted by analysts hasn't happened either. The S&P 500 is up around 3%, and global markets stabilized as concerns over Ukraine abated.
Manufacturing in the US is starting to gain steam. Tech has recovered from its self-off. In fact, there's really only one sector which is still underperforming: big banks.
Finance usually excels when the economy is booming, and big banking stocks are the most likely to benefit from higher interest rates. So it's unclear as of yet why these stocks haven't been able to make big gains despite their low valuations.Right now the S&P Banking Index is down almost as much as the rest of the major gauges have gained. This has created some seriously low valutaions. The average book value per share amongst big banking stocks is around 1. For the rest of the S&P it's about 2.7. By some counts that puts prices at their lowest levels since 2004. We decided to run a screen on undervalued banking stocks to see what some of the most steeply discounted companies were. Starting with a universe of 70 big banks—that is, financial services companies with a market cap of $10 billion or more—we screened to see who was trading below their Graham number, which looks at earnings and book value to find an approximate value for the stock. Since the market often overreacts to bad news, and finance's litany of legal troubles would probably count as bad news, the companies that trade at a discount to their Graham number are often thought to be undervalued. The entire finance sector, arguably, is a bit undervalued. So we set the parameters for this screen at a very high level of 30%. This means that the stock is trading at about a 30% discount to what its earnings and book value suggest it might be worth.