The Biggest Banks Have Elevated Debt Ratios

NEW YORK ( TheStreet) -- As I scanned through a spreadsheet containing debt-to-equity ratios my first observation was that many financial and bank stocks had ratios of more than 5.

This included the four too-big-to fail banks. Bank of America ( BAC) has a debt-to-equity ratio of 8.2, while Citigroup's ( C) is 8.4, JP Morgan Chase's ( JPM) is nearly 11 and Wells Fargo's ( WFC) is 7.8.

The finance sector is 21.3% overvalued with an equal-weight rating. Of the 3,037 stocks in this sector, 82% have hold ratings.

In the wake of the financial crisis of 2007-2008, finance companies and banks raised capital via debt offerings, leaving many with high debt-to-equity ratios.

Today I will update my buy-and-trade parameters for the four too-big-to-fail banks, the two major investment banking companies, a major regional bank, and the premier credit card company.

The major banks are currently facing fines related to their questionable mortgage and derivatives activities, which led to the financial crisis.

In addition, the quality of third-quarter earnings can be questioned as better-than-expected results occurred in nonlending activities, including the reduction of reserves for losses, asset sales and write-offs for legal fees.

Most major banks have seen reduced trading profits and lower demand for mortgages, and many banks are cutting jobs in their mortgage origination businesses.

All eight stocks in today's table have hold ratings. All are overvalued by 11% to 67%. All have significant gains over the last 12 months. Those gains range from 26% to 71%. The debt-to-equity ratios range from 7.2 to 11.1. All are trading at more than their 200-day simple moving averages, reflecting the risk of reversion to the mean.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage, according to ValueEngine. Those with a black number are overvalued by this percentage.

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.

Value Level: Price at which to enter a good-'til-canceled order to buy on weakness. "W" stands for weekly, "M" for monthly, "Q" for quarterly, "S" for semiannual and "A" for annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC order to sell on strength.

American Express ( AXP) ($83.10) has a debt-to-equity ratio of 6.9, but the stock traded to a new multiyear high at $83.83 on Oct. 30. On Oct. 16 the credit card company reported quarterly earnings of $1.25 a share, beating estimates by 3 cents. My quarterly value level is $81.95 with a weekly pivot at $83.05 and semiannual risky level at $85.03.

Bank of America ($14.17) has a debt-to-equity ratio of 8.2, and the stock has been trading sideways or lower since setting a multiyear high at $15.03 back on July 23. This too-big-to-fail money center bank and former Dow component reported quarterly earnings on Oct. 16 of 28 cents a share, beating estimates by 10 cents. The stock is trading at more than its 200-day SMA at $13.17 but is just below its 50-day SMA at $14.28 with a weekly risky level at $14.45.

Citigroup ($49.89) has a debt-to-equity ratio of 8.4, and the stock has been trading sideways or lower since setting a multiyear high at $53.56 back on May 30. This too-big-to-fail money center bank and former Dow component reported quarterly results on Oct. 15. EPS was $1.00, missing estimates by 4 cents. The stock is trading above its 200-day SMA at $47.95 and is just above its 50-day SMA at $49.71 with a semiannual value level at $47.14 with a weekly risky level at $51.55.

Goldman Sachs ( GS) ($162.05) has a debt-to-equity ratio of 11.0. The stock set a multiyear high at $170.00 on Sept. 19 then tested its 200-day SMA on Oct. 9. The new Dow component reported quarterly results on Oct. 17. EPS of $2.88 beat estimates by 40 cents. The stock is above its 50-day and 200-day SMAs at $159.76 and $155.27, respectively. The monthly value level is $160.78, and the quarterly risky level is $164.72.

JP Morgan Chase ($52.60) has a debt-to-equity ratio of 10.9 with the stock setting a multiyear high at $56.93 on July 24 and then testing its 200-day SMA on Sept. 25 and Oct. 9. This too-big-to-fail money center bank and Dow component reported quarterly results on Oct. 11. Its EPS of $1.42 beat estimates by 15 cents. The stock is above its 50-day and 200-day SMAs at $52.31 and $51.35, respectively. My semiannual value level is $50.37 with a weekly risky level at $55.07.

Morgan Stanley ( MS) ($29.11) has a debt-to-equity ratio of 11.1. The stock set a multiyear high at $29.97 on Oct. 18. This high was in reaction to quarterly results released that day. EPS was 50 cents, which beat estimates by 7 cents. My quarterly value level is $27.72 with a semiannual pivot at $29.47 and weekly risky level at $30.53.

SunTrust Banks ( STI) ($34.14) has a debt-to-equity ratio of 7.15. The stock set a multiyear high at $36.39 back on July 19. On Oct. 18 the bank reported EPS of 66 cents, missing estimates by 2 cents. The stock is above its 50-day SMA at $33.20 with a weekly pivot at $34.72 and semiannual risky level at $35.18.

Wells Fargo ($43.10) has a debt-to-equity ratio of 7.8. The stock set a multiyear high of $44.78 on July 23. On Oct. 11 this too-big-to-fail money center bank reported EPS of 99 cents, beating estimates by 2 cents. The stock is above its 50-day SMA at $42.00 with a weekly pivot at $43.18 and monthly risky level at $44.97.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier is the chief market strategist at AlphaPlus Analytics in addition to ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com