Are 'Safest' Banks Becoming Overvalued?

Some of our nation's newly-anointed "mega-banks" may be reaching share-price levels that far exceed the companies' true values.

As the unprecedented consolidation of our nation's banking system continues, some of the "safest" banks are beginning to look overbought.

Take a look at Wells Fargo ( WFC) shares, which are up nearly 20% year to date. This recent jump has the company trading at 3.9 times its tangible book value, which is a measure of a company's net worth, disregarding intangible assets. Typically, investment returns are better when buying shares of banks whose valuations hover in the 1.5-to-2.5 times tangible book value range.

JPMorgan Chase's ( JPM) valuation is also a bit high, with the bank trading around 2.63 times its tangible book value.

But the true valuation hog in the midst of the financial crisis is the venerable U.S. Bancorp ( USB), which currently trades at an astoundingly high seven times tangible book value. USB stock has surged almost 15% higher year to date, and that has made its current valuation extremely difficult to justify.

We may be underestimating how much Bailout Bill 2.0 will actually aid these banks in growing into their current valuations. Only time will tell, but these three bank stocks are far from cheap, and that's a big reason why we would recommend being buyers of these stocks only on pullbacks.

Wells Fargo is a recommended dividend stock, holding a rating of 3.6 out of 5 stars.

JPMorgan Chase is a recommended dividend stock, holding a rating of 3.5 out of 5 stars.

US Bancorp is a recommended dividend stock, holding a rating of 3.5 out of 5 stars.

Downgrade Hurts Schering-Plough

Schering-Plough ( SGP) is down 3% today, after Merrill Lynch decided to cut its rating on Schering-Plough to underperform from neutral.

The analyst also lowered his price target on the company to $18 from $22. The focus of the call centered around potential efficacy and safety controversies around popular drugs Vytorin and Zetia, as well the company's currency risk, compared with its peers.

Back in July, the company released data on Vytorin, stating that the drug may not lower the risk of major heart valve problems and the need for related surgical procedures.

We have avoided the shares of SGP to this point, and we still believe investors are better off looking elsewhere for a better risk/return. The company has a 1.49% dividend yield, based on last night's closing stock price of $17.45.

Schering-Plough is not recommended at this time, holding a rating of 3.3 out of 5 stars.

Stimulus Checks Boost Family Dollar

Family Dollar Stores ( FDO) just reported fourth-quarter profit that rose 41 percent, on the back of government stimulus checks. Revenue rose 8 percent to $1.77 million from $1.63 million.

Management credits the results to strong sales of consumables and effective management of inventory risk, combined with disciplined expense control resulted in robust earnings growth. Same-store sales rose rose 5.6%.

The company is expecting its EPS range for the year of between $1.58 and $1.78 per share. The consensus is for earnings of $1.70 per share.

We have held off recommending shares of Family Dollar Stores till now, but we will be monitoring the stock for a potential upgrade on this news. The company has a 2.07% dividend yield, based on last night's closing stock price of $24.20.

Family Dollar Stores is not a recommended stock at this time, holding a rating of 3.4 out of 5 stars.

Buffett May Get Outbid for Constellation

Constellation Energy Group shares are up more than $1 this morning on talks that French-based Electricite de France SA may still yet outbid Warren Buffett in an acquisition deal.

Weeks ago, Electricite de France had originally proposed a buyout of CEG at $35 a share, which is 32% more than Buffett's offer. But Constellation Energy, strapped for cash and needing a deal to get done quickly, chose Buffett's lower offer amidst concerns about the longer time-line involved in the EDF proposal.

Now, it appears EDF is appealing directly to CEG shareholders to reject Buffett's offer in favor of theirs.

French power production company EDF already owns a 9.5% stake in CEG, and it sees an outright acquisition of CEG as a way to get into the U.S. energy market. Depending on CEG's relationship with its current lenders, the recently troubled power company may be able to buy some time and stave off liquidity issues long enough for the EDF deal to pass.

Regardless of the outcome of this bidding battle, Warren Buffett's MidAmerican Energy, a subsidiary of Berkshire Hathaway ( BRK.A), will still be a winner. Should another bidder purchase CEG, in accordance with the terms of MidAmerican's initial $1 billion investment in CEG preferred shares, MidAmerican would receive nearly a 20% stake in CEG and a $1 billion note paying 14% in annual interest.

We've said this before, and we'll say it again -- it's good to be the king. Warren Buffett will profit greatly from this situation, even if his company is outbid in its acquisition attempt.

Constellation is not a recommended dividend stock at this time, holding a rating of 2.7 out of 5 stars.
At the time of publication, the author had no positions in stocks mentioned, although positions may change at any time.

Tom Reese and Paul Rubillo are senior editors of Visit for more dividend stock ratings, picks, news, and analysis for long-term and income-seeking investors.