Buy the Big Banks Despite Weak Q2 Earnings: Pavlik
From Goldman Sach's (GS) surprise earnings miss to Bank of America (BAC) posting a $9.1 billion quarterly loss, it has been a negative news cycle surrounding the Financial sector. But for Bob Pavlik, Chief Market Strategist at Banyan Partners, the case for owning the big money center banks follows the simple logic that it's not a question of if, but when, they will recover. "I am not smart enough to say when the beginning of the end is going to start, but I know it's going to come," he says.
And when it does, he says, watch out.
Right now, to most investors it feels like little more than headline risk, settlements, and set-asides from the beleaguered banks and it is reflected in the market with the Banks and Diversified Financial industry groups tied for last place so far this year with double-digit declines. "The news has been already priced into these things. The catalyst is going to be when we really start to see some improvement in the mortgage-related area, the housing stuff. Once we start to see the beginning of the end of this, then the stocks are going to start rising," says Pavlik.
According to Pavlik, maybe another 6 months, maybe longer, and he even concedes that "the shorts" could make more money for a while. But what makes him feel secure is that "the Citigroups, the JPMorgans, the Bank of Americas, these are the leaders in their industry despite what is going on with the stock prices. The government has essentially told you these companies are not going to go out of business."
Macke likens the group's "fishy" balance sheets to "little catacombs and corners and dark areas." Without a doubt Pavlik agrees, analyzing bank results is a highly specialized, full time job. And visualizing their long-term potential, well, that's investing.
Here's how Pavlik is investing: "Citigroup (C) is going to be a much different company three to five years from now" he says. And our nation's largest lender Bank of America (BAC), "certainly has great retail banking and trading operations...and eventually you are going to see a wonderful company." Further, JPMorgan (JPM) "is probably the best of the group, with the best management and you will probably see a double in the stock."
Even on the investment banking side, where a huge earnings miss by Goldman has seen its already withering stock price slip to a 2-year low, Pavlik says "there's a long way to go for companies like Goldman."
Ultimately, he says there is "a lot of money sitting on the sidelines" and an investment banking franchise that practically mints money to carry them through until things pick up. And remember, that day is not a question of if, but when.
What about you? Can you hang in there until things turn around or are you in the vulture culture that's circling its prey?
Let us know in the comments below, at BreakoutCrew@Yahoo.com or you can tangle with me on Twitter @MattNesto
