How much longer till big banking stocks get their mojo back?

By James Dennin for Kapitall.

Even though stock markets haven't outperformed this year, the swoon predicted by analysts hasn't happened either. The S&P 500 is up around 3%, and global markets stabilized as concerns over Ukraine abated. 

Manufacturing in the US is starting to gain steam. Tech has recovered from its self-off. In fact, there's really only one sector which is still underperforming: big banks

Finance usually excels when the economy is booming, and big banking stocks are the most likely to benefit from higher interest rates. So it's unclear as of yet why these stocks haven't been able to make big gains despite their low valuations. 

Right now the S&P Banking Index is down almost as much as the rest of the major gauges have gained. This has created some seriously low valutaions. The average book value per share amongst big banking stocks is around 1. For the rest of the S&P it's about 2.7. 

By some counts that puts prices at their lowest levels since 2004. 

We decided to run a screen on undervalued banking stocks to see what some of the most steeply discounted companies were.

Starting with a universe of 70 big banks—that is, financial services companies with a market cap of $10 billion or more—we screened to see who was trading below their Graham number, which looks at earnings and book value to find an approximate value for the stock. 

Since the market often overreacts to bad news, and finance's litany of legal troubles would probably count as bad news, the companies that trade at a discount to their Graham number are often thought to be undervalued. 

The entire finance sector, arguably, is a bit undervalued. So we set the parameters for this screen at a very high level of 30%. This means that the stock is trading at about a 30% discount to what its earnings and book value suggest it might be worth. 

Companies trading 15% below their Graham numbers are still considered to be undervalued. So these discounts are almost double what they would normally need to be to make it through this screen.  

Click on the interactive chart to view data over time. 

 Will big banking stocks get their mojo back? Use the list below to begin your analysis. 

1. The Travelers Companies, Inc. ( TRV, Earnings, Analysts, Financials): Provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. Market cap at $32.47B, most recent closing price at $93.45.  

Diluted TTM earnings per share at 10.35, and a MRQ book value per share value at 73.06, implies a Graham Number fair value = sqrt(22.5*10.35*73.06) = $130.44.

Based on the stock's price at $93.45, this implies a potential upside of 39.58% from current levels.  

 

 

2. Regions Financial Corp. ( RF, Earnings, Analysts, Financials): Operates as the holding company for the Regions Bank that provides a range of commercial, retail, and mortgage banking services in the United States. Market cap at $14.05B, most recent closing price at $10.19.  

Diluted TTM earnings per share at 0.76, and a MRQ book value per share value at 11.39, implies a Graham Number fair value = sqrt(22.5*0.76*11.39) = $13.96.

Based on the stock's price at $10.19, this implies a potential upside of 36.96% from current levels.  

 

 

 

3. PNC Financial Services Group Inc. ( PNC, Earnings, Analysts, Financials): Operates as a diversified financial services company. Market cap at $45.55B, most recent closing price at $85.27.  

Diluted TTM earnings per share at 7.48, and a MRQ book value per share value at 73.74, implies a Graham Number fair value = sqrt(22.5*7.48*73.74) = $111.40.

Based on the stock's price at $85.27, this implies a potential upside of 30.65% from current levels.  

 

 

 

4. Capital One Financial Corp. ( COF, Earnings, Analysts, Financials): Operates as the bank holding company for the Capital One Bank (USA), National Association and Capital One, National Association, which provide various financial products and services in the United States, Canada, and the United Kingdom. Market cap at $45.09B, most recent closing price at $78.89.  

Diluted TTM earnings per share at 7.15, and a MRQ book value per share value at 74.96, implies a Graham Number fair value = sqrt(22.5*7.15*74.96) = $109.81.

Based on the stock's price at $78.89, this implies a potential upside of 39.2% from current levels.  

 

(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research. Earnings and BVPS sourced from Google Finance. All other data sourced from Finviz.)

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

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