Time to Book Profits in Financial Stocks: Opinion

NEW YORK ( TheStreet) -- U.S. bank stocks held up well in the first half of the year, but they have slipped slightly so far in the third quarter. My analysis suggests investors should take profits in the financial sector.

One of the issues for banks in July was the record low yields on Treasuries. The yield on 10-year Treasury set an all-time low of 1.377% on July 25. These yields have hurt bank earnings, although yields in August are rising, reversing the trend.

Second-quarter earnings for U.S. banks were mostly in line with Wall Street estimates within the challenging environment of loan delinquencies in the mortgage market, and with overall tepid loan demand from both consumers and small businesses. We will learn more about these trends by the end of August when the Federal Deposit Insurance Corp. releases its Quarterly Banking Profile for the second quarter of 2012.

One of my benchmarks for the finance Sector is the Finance Select Sector SPDR ( XLF), an exchange-traded fund that tracks 81 stocks. I will be focusing on the top 10 stocks by index weighting. Each has a weighting of more than 2%.

The financial sector is 6.9% overvalued fundamentally, according to ValuEngine, which justifies some profit-taking.

The XLF traded to year-to-date high of $16.01 on March 27 and then declined 16.9% to the June 4 low at $13.30. Tuesday's high at $15.06 is up 13.2% from the June 4 low and down 5.9% from the March 27 high.

The daily chart below shows that XLF ($14.93) has a positive but overbought daily chart profile with the ETF above its 21-day, 50-day and 200-day simple moving averages at $14.57, $14.46 and $14.25, respectively. Another warning is that I do not have a nearby value level with my weekly pivot at $14.99. My quarterly and annual risky levels are $15.50 and $15.59, respectively.

The pop-up table above shows data from ValuEngine covering the top 10 of the 81 components of the XLF listed from top to bottom by percentage of index weight as of Aug. 13.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by that percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

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.

Analysis of the Finance Sector

Eight of the top 10 components are undervalued. Citigroup ( C) is undervalued by 67.5%, and Simon Property Group ( SPG) is overvalued by 14.3%.

There are five "4-Engine" buy-rated stocks and five "3-Engine" hold-rated stocks. MetLife ( MET) was downgraded to hold from buy on Tuesday.

Citigroup and Goldman Sachs ( GS) are the only two finance stocks in the table that traded lower over the past 12 months. They have declines of 3.5% and 9.7%, respectively. US Bancorp ( USB) was the biggest winner with a gain of 54.8% over the past 12 months.

Goldman is projected to move sideways to lower over the next 12 months, while US Bancorp should continue to outperform and log a gain of 11.6%.

The only stock with an elevated price-to-earnings ratio is MetLife at 21.3 times forward 12-month earnings expectations. Three of the four "too big to fail" banks -- JPMorgan Chase ( JPM), Citigroup and Bank of America ( BAC) have P/E ratios between 8.0 and 8.8.

Wells Fargo ( WFC) ($33.96) set a multiyear high at $34.80 on Aug. 1. My annual value level is $32.70 with semiannual and quarterly pivots at $33.99 and $34.08, respectively. Monthly and annual risky levels are at $38.30 and $38.69, respectively.

JPMorgan ($37.10) set a year-to-date high at $46.49 on March 27. The stock remains below the "London Whale" price gap at $40.12, which was the low price on May 9. My semiannual value level is $29.81 with a weekly pivot at $36.64 and semiannual and annual risky levels at $39.47 and $41.66, respectively.

Citigroup ($28.77) set a year-to-date high at $38.40 on March 19. My weekly value level is $26.53 with an annual pivot at $30.25, and a monthly risky level at $32.20.

Bank of America ($7.78) set a year-to-date high at $10.10 on March 19. My quarterly value level is $5.26 with a weekly pivot at $7.41 and a monthly risky level at $9.79.

US Bancorp ($33.02) traded to a multiyear high at $34.10 on July 30. My annual value level is $27.49 with a quarterly pivot at $32.57 and an annual risky level at $36.66.

At the time of publication, Suttmeier had no positions in any of the securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.