Financial Stocks are Having the Worst Year Ever Versus S&P 500

The financial sector (NYSEARCA:XLF) is down 20 percent this year — the worst ever against the S&P 500 (NYSEARCA:SPY). Standard & Poor’s Equity Research says weakness is so widespread, the S&P would be up 3.3 percent if financials were excluded. Yet, S&P is down 1.8 percent. Of the 10 S&P sectors, only financials are trading at less than the value of their assets.

Most would agree these stocks will rebound, but right now are too risky for short-term traders. While bargain hunters should be grabbing up these stocks, problems with banks doesn’t seem to be going away. John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York said, “Our job is to buy low and sell high. With financials, I’m still questioning — what is low?”

According to Thomson Reuters’ Lipper U.S. Fund Flows database, assets under management in the U.S. financial and banking funds sector have dropped a net of $8 billion in the last six months. “The things that made these stocks cheap are still around. It’s still a risky business and you have no idea how bad business can get until they really get bad,” said Manley.

Are valuations the answer? Peter Coleman, director of research at JMP Securities in San Francisco said, “Valuations are attractive, but there has to be a catalyst to move prices higher and I just don’t see that.”

StarMine’s estimates financials are priced at 57 percent of their intrinsic value, compared with 72 for the S&P. Intrinsic value is where StarMine thinks a stock should trade, based on likely growth over the next decade.

The options market is not optimistic either. Last week, open interest on the Select Sector Financial SPDR fund (NYSEARCA:XLF)), reached its highest since the financial crisis. Interactive Brokers says put options outpaced call options by a ratio of 1.7, while they normally range from 1 to 1.2.

Option traders moved to hedge themselves against more declines, when Bank of America (NYSE:BAC) shares fell to a new two-year low of $5.03 last week. Instead of betting on a rebound, Marty Mosby, a Guggenheim Partners analyst in Memphis, Tennessee said, “There’s a group of high-quality banks that have bottomed, but Bank of America isn’t one of them.”

Mosby listed Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB) and Bank of New York Mellon (NYSE:BK) among those where, “We haven’t yet reached an inflection point where their strong fundamentals will drag prices up in a risk-averse market.”

In New York, chief investment officer for Wealth Management at BNY Mellon, Leo Grohowski said, “As a group, banks are fairly valued, however it’s understandable that we’re going to be cautious about moving to a large overweight at this time. This could turn out to be an outstanding entry point, but it depends on your risk appetite…there could be more risk than potential reward.”