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What the Market Wants: Banks Fairly Valued and Contributing to Market Strength

Posted on the 20 March 2012 by Phil's Stock World @philstockworld

Banks Fairly Valued and Contributing to Market Strength

What the Market Wants: Banks Fairly Valued and Contributing to Market StrengthContinuing last week’s strength, Financials and Technology led the market again today. Banks were up nearly +2% intraday, although they lost some of their steam when put-option trades in Financial ETFs reached 4-month highs.  Last week, they roared ahead +7%, and they are now up more than +20% year-to-date.

The Financial sector was of course the leading sector last week and again today as our forward sector rating had forecasted last Monday.  Lest you fear that banks could be topping, consider that the entire Financial sector had fallen nearly -80% from its mid-2007 high, and despite having nearly doubled over the last three years from its March 2009 low, the entire sector remains at less than 50% of its high in 2007.

Economic news continues to be slightly better than the month before.  For example, retail sales were up a better-than-expected +1.1%, and the Empire Manufacturing Index came in at 20.2, its highest in more than a year. Price data was a tad higher-than-expected, but inflation remains under the Fed’s tight control.  Initial jobless claims continued to improve although unemployment is still far from reasonable levels.

Here are the market stats.

Large-cap Value, not surprisingly, due to interest in the banking sector, led the market caps last week up +2.5%, and it also has the best monthly cap performance, +3.3%.  The market continues to eschew Small-caps, with Small-cap Growth up only +1.2% last week and only +0.2% in the last month.

With our Sectorcast favoring Financials, Healthcare, and Energy, we like large-cap stocks from those sectors and avoid Utilities and Telecom.  We continue to see the benefit of maintaining a hedge (no pun intended) in the face of unresolved global pressures and shaky domestic debt issues.

You might be interested in current valuations compared to last year’s May high.  With the markets 4-6% above that high, surprisingly, valuations for our Sabrient Top 100 GARP stocks are still less than a year ago.  The average P/Es of the Top 100, 300, and 1000 are at 9.1, 13.73, and 19.88 compared to 10.33, 13.13 and 18.33.  Even better, the forward P/E of the Top 100 is only 7.54 compared to 8.23 in May 2011.

Even non-GARP P/Es are somewhat below historical averages.

4 Stock Ideas for this Market

This week, I created a custom search with MyStockFinder, emphasizing high value, high growth, high earnings quality, momentum, recent analyst revisions, dividend yield and only Large- and Mid-caps.  Here are four stock ideas for your consideration:

Assured Guaranty Ltd. (AGO)–Financials
Reinsurance Group of America, Inc. (RGA)–Financials
Ameriprise Financial Inc.  (AMP)—Financials
Cummins Inc. (CMI)—Industrials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
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Full disclosure:  The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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