Updated from 2:02 p.m. EDTA financial stock rally continued on Monday, as investors held out hope that Wells Fargo's ( WFC) preliminary earnings announcement last week was a reflection of the sector's improving health and not just a fluke. After the market closed, Goldman Sachs ( GS) followed up with its own preliminary report, topping expectations. The firm also confirmed widespread reports that it would issue new stock, in a $5 billion public offering, and look to use the money to repay federal bailout money. The KBW Bank Index closed up 7.9% at 36.47, as major financial components helped the Dow Jones Industrial Average pare earlier losses. American Express ( AXP) rose 8.7% to close at $20.46; Citigroup ( C) climbed 25% to $3.80; Bank of America ( BAC) gained 15.4% to $11.02; and JPMorgan Chase ( JPM) climbed a more moderate2.9% to $33.70. Other financial stocks outside the Dow had mixed results, with American International Group ( AIG) finished up 22.4% to $1.42 and Wells Fargo rose just 6 cents to $19.67 after soaring $4.72, or 32%, on Thursday to close the holiday-shortened week at $19.61. Some analysts became more positive on Wells following its surprise announcement that it expected a record first-quarter profit of over $3 billion. Fox-Pitt Kelton analyst Andrew Marquardt raised price targets on the firm, saying Wells is "in a better position than peers" because it is "ahead of the curve in recognizing credit costs" and poised to gain market share. Marquardt holds an outperform rating on Wells shares. Rochdale Research analyst Richard Bove also issued a bullish note, initiating Wells with a buy rating on Sunday evening. While both Bove and Marquardt acknowledged the risk of further losses on legacy assets from Wells' acquisition of Wachovia's troubled loans, they believe the company has the chops to come out ahead.
"The bears dispute the
earnings result," says Bove. "The bulls, of which I am one, argue that the company can earn its way out of its current dilemma. In either case, if one focuses on the earnings projected two years out, either by this comment or the consensus; this is a very cheap stock." However, KBW's Frederick Cannon said just the opposite. The analyst downgraded Wells to underperform from market perform, citing overvaluation and a belief that the company will need $50 billion in common equity over the next two years as economic conditions worsen, and it is forced to repay TARP funds. Bove also initiated JPMorgan with a buy rating. Despite concerns about further loan losses, trading losses and operating expenses, he says, an acceleration in deposit and earnings growth are not being recognized in the stock price. Bove also provided some thoughts on a Goldman equity raise, saying it would be "a horrible mistake" for the company to dilute shareholders to repay government funds. Speculation that the firm was preparing to do just that had ramped up over the weekend. Goldman shares climbed 4.7% to close Monday's session at $130.15. Shareholders also shrugged off a downgrade of BofA to hold from buy by NAB Research. Analyst Nancy Bush said Bank of America will likely face sharper scrutiny from regulators and Congress than competitors and be unable to pay back TARP funds "for several years." She also warned of "more headlines and 'drama'" as the shareholder meeting on April 25 approaches.
"In short, while I strongly do not believe that this company should be lumped in with Citigroup," Bush says in a note Monday, "from the standpoint of future franchise profitability, it will likely continue to be regarded as one of the more 'special' banks from a regulatory perspective for some time to come." Some property and casualty insurers also seemed in line for a boost from a bullish note from Sandler O'Neill, saying that most of such firms had "significantly positive" growth in book value and operating profits during the first quarter, as they prepare to report results. Growth, on average, was about 4.2% during the first three months of the year, with a few exceptions like Cincinnati Financial ( CINF), whose large equity investment portfolio held back results. Excluding Cincinnati, average growth would have 6.7% for the insurance segment, which has relatively remained healthy despite headwinds for life insurers and shockwaves from AIG's distress. Analyst Paul Newsome's top picks in terms of large-cap book-value growth were ACE ( ACE), Chubb ( CB) and Travelers ( TRV). Progressive ( PGR) and XL Capital ( XL) also performed well, though sharp gains come on the back of significant declines in 2008. ACE shares gained 4.4% to close at $47.51; Chubb rose 2.8% to $44.04; Travelers added 2.2% to $43.80; Progressive was up 1.6% to $14.96; XL was also up 5.9% to $8.13; and Cincinnati was up 3.4% to $26.71.