President of Freed Advisors in Chevy Chase
Sunday, April 27, 2008
When will financial stocks be a good investment again?
Financial stocks will be a good investment when valuations are attractive and future earnings prospects are above average. It will be a while before either of these conditions exists.
Current valuations are suspect because of unknowns associated with balance sheet liabilities. If we accept current valuations, financial stocks don't look cheap by historical standards. According to Bloomberg, the average P/E ratio since 1998 for the Standard & Poor's 500 Financials is 16.29. For the week ended April 18, that indicator traded at a high of 24.64.
Future earnings are another key indicator of whether to buy a stock. Looking forward, the earnings of bank stocks are likely to be significantly lower than in the past. Banks will have to restructure to have a profitable business plan. Success will depend upon the creation of new products, increased demand for lending and ultimately a healthy U.S. economy.
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