Financials = Value Trap

I don’t often find myself in agreement with bulge firm research, but this is in line with my beliefs:

“This year, inexpensive stocks have simply grown cheaper, with the most notable example of this being Financials. Three of nine industries that make it into our value trap model this month are in the Financials sector, and in aggregate, the sector appears to be inexpensive for the wrong reasons: prices are falling faster than earnings expectations are deteriorating.

We are underweight Financials in part because this model suggests it is too early to buy the sector . . . Risks from Europe, weak investment banking/trading, tepid loan growth, pressure on net interest margins, regulatory risks, and challenging mortgage fundamentals. When will valuation matter again? Valuation is generally rewarded when profits are accelerating and volatility is declining, neither of which we expect to occur in the near future.”

Ahh, I see its from the Quantitative Strategy group of Mother MER. (That makes it less of a surprise)

Of course, as this idea becomes more mainstream, I would have to start thinking of Banks as a contrary play — But we are not there yet . . .

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