Goldman Sachs (NYSE:GS) increased its rating on a number a large banks based on the premise that current stock prices aren’t reflecting the real earnings power the huge banks have.
While Goldman has already had conviction buy ratings on Bank of America (NYSE:BAC) and J.p. Morgan (NYSE:JPM) , they’ve also recently added Capital One Financial (NYSE:COF) and Wells Fargo & Co. (NYSE:WFC) to the mix.
Some of the reasoning behind the upgrade for Capital One is the thought they are positioned strongly for when consumer spending starts to pick up again and unemployment increases slows down, and form Wells Fargo, Goldman believes they are the leader in tangible assets.
It is assumed by industry watchers and the banks that these assets will generate earnings, driving the large bank stock prices even higher. So with that in mind, it’s believed that earnings are more sustainable in the long term than the current large bank stock prices are reflecting.
To me these assertions and projections are dubious at best. Just because a bank has larger assets and is bigger than before can’t in any way be a measure of whether it’ll be profitable or not. Look at the need for bailouts from taxpayer dollars to understand that. Are those in the industry already forgetting what has brought us here?
A couple of other factors that haven’t played out yet are the re-set of the Alt-A loans, as well as commercial loan failure rates which are rising.
This could be nothing more than Goldman Sachs not wanting to be left behind in the ratings race, as other analysts have made similar projections about the larger banks over the last several weeks, and Goldmans may not want to look like they’re out of the loop, and so joined in the positive-thinking chorus.
It sounds to me like they’re trying to influence the market through trying to convince us things are on a much more solid basis than they really are in the banking industry.
We are a long way off from even beginning to see real improvement in the economy, and banking will reflect that as much as any industry.
No one knows if the banking stocks are really undervalued because many of the loans that will help give a more accurate assessment of that are being held off the books by not foreclosing on them within the usual time-frames allotted, making the books of the banks look better than they are.
In other words, we have no idea of the overall banking picture as far as it relates to the value of the stock, because we don’t have the accurate data needed to make that call; and in my opinion neither do the analysts or Goldman Sachs.
I’m not saying the stock prices of large banks won’t go up, I’m saying they won’t go up because they’re undervalued, but simply because some investors may temporarily and artificially drive up the prices based on assertions like we’re hearing from Goldman Sachs and analysts, not because of available data we can make informed decisions over.
