Banking stocks have had a good run this past year as the macro economy has improved and the equity markets have rebounded sharply. However, while yours truly thinks that the sector still has strong upside potential in the years to come, the near-term going is likely to be chock full of bumps.
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Don't Bank On A Straight Run Up
Take a look at the price charts of some of the larger more well-known banks like Goldman Sachs (NYSE:GS), or Bank of America (NYSE:BAC). They've clearly bounced back remarkably from the stock market's trough early in 2009. Of course, the bulls will argue that the momentum can be kept up given improving macro conditions and the more upbeat consumer.
However, from a big picture perspective there are a few things to be concerned about. For one, the Congress and the Fed can't keep supporting or boosting consumer spending and by extension the U.S. economy forever. The stimulus will eventually come to a stop. Also, interest rates can't really go much lower. If that happens, Americans could well have few dollars to invest or at the very least be more reluctant to invest. Not to mention that the appetite for new public offerings would be small.
Companies For The Long Run
With all of that in mind, there are a few companies in this space that do deserve some closer inspection and that could see considerable upside over the longer term. Goldman Sachs is one example. While its stock has had a huge run, its name and reputation are like gold, and the company is expected to generate earnings this year of $18.48 per share, which is very hard to look past. While the company isn't immune to the overall tenuous macro environment, it could definitely weather this hefty storm better than most of its peers.
Citigroup's (NYSE:C) near-term earnings outlook isn't overly impressive (it is expected to earn only 4 cents this year, and it trades under $5, which may be turn off some investors), but it has rallied recently. And Dick Bove, who has an excellent reputation as a bank analyst offered up some positive comments. This one may not be a buy just yet, but it is worth keeping on your radar screen. Its survival thus far says something about its resilience. And ultimately, if the government bails on its investment, it could be a lot more interesting.
Finally, JP Morgan Chase (NYSE:JPM) has beaten estimates consistently over the trailing year has some good long-term prospects too, thanks to its management team, which includes the high profile Jamie Dimon. The fact that the company's hands are in so many different and desirable financial businesses, alongside its excellent reputation and ability to generate big earnings, makes it an interesting prospect.
The Bottom Line
Long term it's hard not to be excited about the prospects for the big banks. But because the nearer-term outlook for our economy is sketchy, particularly since the Fed and the Congress will have to stop propping it up, the road may be filled with potholes. With all that in mind, keep JPMorgan, Goldman, and Citi on the larger radar screen as potential long-term winners. (Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis.)
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