Are we finally getting some differentiation from the banks stock? Are there some that are better than others? And would you do better owning them than others after they report?
Sadly, the answer is no for the traditional banks, the ones that take in your deposits and lend despite the steadiness of the group's earnings this quarter. And I certainly wouldn't consider buying them over other groups that are reporting.
But there is good news, the non-traditional banks are starting to break the pull away from the ETFs that so dominate the sector.
First, when we look at the deposit banks there is no good news. JP Morgan (JPM) , Citi (C) and Bank of America (BAC) all reported what I regard as excellent quarters given the environment. It didn't matter. In fact, in an oddity, the best acting of the large banks was Wells Fargo (WFC) which I would say has clearly bottomed with the dividend cut and the glimmer of hope that CEO Charlie Scharf gave us by simply saying nothing good whatsoever. I am calling that one of the best de-risking jobs I have ever seen. Barring a total downturn, amazingly, his bank might be the one to own if you are attracted to the group. I say that because the other banks put up some terrific numbers -- past tense of course -- and it didn't matter.
Why the tepid reaction? Let's dig in.
Consider the case of JP Morgan. I was blown away from the consistency of the business with some excellent trading and underwritings. Didn't matter, it took a big charge for bad loans -- $10 billion -- and it just crushed the common. Sure it rallied over $100 initially but it finished pretty much unchanged for the week as did Citi, with an $7.9 billion -- very outsize -- and Bank of America with a $5.1 billion set aside, not by comparison.
Without any buybacks but with dividends still intact, these banks simply could not attract new buyers, including, perhaps most importantly, themselves -- all constricted by the government.
Wells slashed the dividend from 51 cents to 10 cents and took a $9.5 billion charge, and after getting hammered is stabilized at a higher price that it fell to, astounding frankly.
How about some good news, though.
First trading oriented Goldman Sachs (GS) took only $1.6 billion in charges and, get this, Morgan Stanley (MS) set aside only $239 million. Goldman's getting back to its core roots of not using its own capital to do anything with much risk, and Morgan Stanley has left the banking fray for advising. With the E-trade (ETFC) deal closing, Morgan Stanley will become even less of a bank. I think that will cause it to leave the group entirely and start to trade at a much higher level.
My conclusion: you can buy Goldman Sachs, which will have lower charges in the future, at least, in my opinion, so it almost has to be bought if you need a non fin-tech financial. It will trade with the much loftier Schwab (SCHW) then with the lowly majors. Congratz to James Gorman for his efforts to separate the bank. Ten years, capstone. Say goodbye to the regulators? I bet that will, one day, be the case.
All that said, how about the entire group? How does it stack up against others? I think that it's disappointing. UnitedHealth (UNH) reported, for example, and while it was equally as conservative as the banks when it comes to the future, its stock actually went up nicely. It was a strong buy after all.
My conclusion: you can start buying Morgan Stanley as it has transformed itself. Goldman Sachs may have one last large charge, to clean up the Malaysian scandal, and then it, too, is ready to roll. At eight times earnings, this Action Alerts PLUS could be a rocket ship.
Overall, the banks failed you again. But the future for two of them is much brighter than the past and must be bought, literally on any weakness, especially weakness related to the stimulus. Any stimulus will help them but no stimulus will not hurt them. That bodes very well for the future.
(JP Morgan, Goldman Sachs, Johnson & Johnson, and PepsiCo are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)