This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Everything's coming up roses for JPMorgan
Never let it be said that JPMorgan rushes to judgment. Two and a half years after Warren Buffett and Ben Bernanke declared the recession "over," and a week after JPMorgan Chase (NYS: JPM) passed its own 2012 stress test, the banker is finally prepared to join the majority. Appearing on CNBC yesterday, CEO Jamie Dimon announced his opinion that (1) a double-dip into recession is unlikely, (2) the housing market is approaching its "inflection point," and (3) the Federal Reserve is going to keep interest rates low until it's convinced that unemployment is firmly on a downward trend -- 300,000 to 400,000 new jobs monthly being the likely target.

In short, the bad times are finally at an end, and everything's coming up roses today. There's just one problem with this sunny assessment: It may be 100% wrong.

Every rose has its thorn
Yesterday, the folks over at JPM's British banking analog, HSBC, argued that far from "all the ... signs flashing green," as Dimon asserted, things are actually looking pretty grim. At least for banking stocks they are.

Taking quick inventory of the performance of JPMorgan Chase, Morgan Stanley (NYS: MS) , Bank of America (NYS: BAC) , Goldman Sachs (NYS: GS) , and Citigroup (NYS: C) -- each of which has underperformed the S&P 500 over the past year -- HSBC recommends selling all but one of these stocks. According to the analyst, while JPM's stock may rise a bit over the course of the coming year, Morgan Stanley is already fully valued, while the other three stocks range from 7% overvalued (Citi) to 15% (Goldman) to Bank of America (priced to sell at a whopping 36% markup).


Growth Rate

Price-to-Book Value

Bank of America




Goldman Sachs




Morgan Stanley








JPMorgan Chase




All data courtesy of Yahoo! Finance.

I find it hard to disagree with HSBC. Valued on the traditional PEG ratio, only one of these five bankers comes close to looking like a fair value. Everyone else carries P/E ratios ranging from slightly to vastly higher than their projected growth rates. But that's not the end of my concerns. For one thing, the single bank that according to the numbers looks fairly valued, Citi, is also the one banker on this list that failed the Fed's stress test -- but, admittedly, only because it asked to raise dividends and/or share repurchases.

And while many of these bankers look cheap when valued on other metrics -- price-to-book, for example -- many investors worry that we still don't know exactly what makes up the banks' book values. Could there be Greek debt hiding in there, perhaps? Or maybe some credit default swaps, primed to activate if Portugal or Spain comes next in line to default? No one's quite sure, and what you don't know about a bank's balance sheet can hurt you.

Foolish takeaway
With no margin of safety in sight, and too many risks still hidden out of sight, I think HSBC's right to be cautious. There may be some value in the banking industry, but not enough to justify the risk.

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At the time thisarticle was published The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs. Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 377 out of more than 180,000 members. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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