KBW Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Investment banker KBW (NYS: KBW) reported second-quarter earnings this morning, and the news wasn't great. Shares fell as far as 10% in early Friday trading (they've recovered somewhat since.)

So what: CEO John Duffy pronounced himself "disappointed with our results." As well he might be. KBW morphed last year's $0.13 second quarter profit into a $0.14 loss this time around.

Now what: Management blames (among other things) "the impact of the global market conditions," "a significant drop in the number of Capital Market transactions," and a dearth of deals in the financial mergers and acquisitions sector due to "concerns about asset values." It might have been better off keeping that last excuse in its back pocket, however, because it just highlights the overvaluation of KBW's own shares.

Based on the most recent results, KBW now sells for an astounding 89 times trailing earnings. And while analysts, on average, expect to see KBW post strong 18% earnings growth over the next five years, I wonder if that's going to be enough to support a P/E ratio now knocking on the door of triple digits.

My advice: Before plunking down your money on a bet that KBW bounces back, take a look at a proven performer -- and a cheaper bank stock, like Capital One (NYS: COF) . 6.4 times earnings. 8% growth rate. Sounds like a better bet to me.

Will KBW bounce back?Add it to your Watchlistand find out.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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