Bank Stocks Do It Again: Fiscal Cliff Winners

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) was the winner among the largest U.S. banks on Tuesday, with shares rising 3.5% to close at $127.77.

The Dow Jones Industrial Average S&P 500 ( SPX.X) each rose 1%, while the NASDAQ Composite was up 1.5%, as investors grew more confident that President Obama and the Republican leadership of the House of Representatives would arrive at a budget deal to avert the fiscal cliff.

The President late on Monday backed off his insistence that federal income tax rates be raised for couples earning $250,000 per year or more, instead offering on Monday to limit the increased tax rates to couples with annual incomes of $400,000 or higher. Speaker of the House John Boehner (R-Ohio) on Tuesday said during a press conference that while the Republicans had offered a balanced approach to averting the fiscal cliff by cutting the federal budget deficit through revenue increases and spending cuts, "the president is not there yet," since the president's latest offer on Monday was "essentially $1.3 trillion in new revenues for only $850 billion in net spending reductions."

Boehner said that although discussions with President Obama would continue, he would introduce legislation that would "protect the American taxpayers who make a million dollars or less, and have all their current rates extended."

"I continue to have hope that we can reach a boarder agreement with the White House that would reduce spending, as well as have revenues on the table," Boehner said, "but at this point having a backup plan to make sure that as few American taxpayers are affected by this increase as possible... is the right course of action."

Shares of Apple weighed heavily on the NASDAQ, rising 3% to close at $534.00. With Apple's shares down 24% since their closing high of $702.10, on Sept. 19, Investors obviously are suspicious that earnings estimates could continue to be cut.

Still, Apple's shares look cheap, trading for just 10.9 times the consensus fiscal 2013 earnings estimate of $48.91 among analysts polled by Thomson Reuters. The consensus fiscal 2014 EPS estimate is $57.34, and Apple announced on Monday that it had sold over two million iPhones in China, "just three days after its launch on December 14."

National Association of Home Builders on Friday said its Housing Market Index showed that homebuilder confidence in December ticked up to 47, the highest level the index has attained since April 2006. The December print was up 2 points from a slightly downwardly revised November index reading.

Bank stocks lead the market for a second day, with the KBW Bank Index ( I:BKX) rising 2% to close at 51.60.

Bank of America

Bank of America ( BAC) was up over 3% to close at $11.36. The shares have now returned 105% year-to-date, which is, by far, the best performance among the components of the KBW Bank Index. This recovery followed an epic 58% drop in 2011, as the company's legacy mortgage mess springing mainly from its purchase of Countrywide in 2008 dominated industry coverage. Even with this year's stellar return, the shares are still down 14% since the end of 2010.

Bank of America's shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48, and for 11.8 times the consensus 2013 EPS estimate of 96 cents. The consensus 2014 EPS estimate is $1.25.

The shares have certainly been volatile this year, and opinion is divided, with 13 of the 35 sell-side analysts polled by Thomson Reuters rating Bank of America the equivalent of a "Buy," while 19 have neutral ratings and three analysts rate the shares "Underperform" or "Sell." Among the believers is Atlantic Equities analyst Richard Staite, who rates the shares "Overweight" with a $12 price target.

Staite estimates that following the completion of the next round of Federal Reserve stress tests in March, Bank of America will be approved to pay out $2.086 billion in dividends during 2013, while repurchasing $4.0 billion worth of common shares. The analyst expects the company's total return of capital during 2014 to be close to $14 billion, including $3.864 billion in dividends and $10.0 billion in buybacks.

Staite on Tuesday lowered his fourth-quarter operating earnings estimate for Bank of America by three cents to 17 cents, "to account for the relatively subdued trading environment in November and December." The analyst is way out in front of the consensus, estimating that Bank of America will earn $1.23 a share in 2013, with EPS rising to $1.53 in 2014.

BAC Chart BAC data by YCharts

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Goldman Sachs

Goldman's shares have now returned 44% year-to-date, following a 46% decline during 2011. The shares are down 22% since the end of 2010.

The shares trade just below their Reported Sept. 30 tangible book value of $129.69, and for 10.1 times the consensus 2013 EPS estimate of $12.68. The consensus 2014 EPS estimate is $14.12.

Staite has a neutral rating on Goldman, with a price target of $120 and estimates that the company will report fourth-quarter operating earnings of $2.97 a share. The analyst is slightly ahead of the consensus, estimating the company will earn $12.70 a share in 2013, followed by EPS of $14.30 in 2014.

Staite estimates that Goldman Sachs will be approved by the Fed to increase its stock buybacks significantly, from $4.612 billion in 2012, to $7 billion in 2013 and $8 billion in 2014.

GS Chart GS data by YCharts

Interested in more on Goldman Sachs? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.