When you flip on CNBC, they tell us we should. But I am not so sure about that. Accounting 101 and 102 would tell you that the write-offs and write-downs are two different types of losses. More importantly, when you look at the sentiment especially for companies like MER it seems as though the invisible hand (i.e. inside pumpers and dumpers) are moving this stock back and fourth. Could the news get any worse? No, we already know what is going on. Could the debt to income ratio continue to increase? Yes. But why would that be important? Right? I mean, it is all about chart reading, not fundamentals; right? I am going to valuate the broker industry and perhaps give you a little information on who is undervalued and who is overvalued. There is a simple way of doing this and it allows gives you a pretty good picture, especially if you want to act fast.
Key Analytic Tools
First and foremost, there are many key tools to look at when looking at financials. I would first like to see what the average P/E is. I would think that the average P/E would be 10 for this sector. Given the EPS, this would be relatively simple to look at.
Goldman Sachs: This is traded at 8.9 P/E. GS's earnings per share are 21.30 per share. If you were to multiply the EPS x the P/E, you would get the fair value of the stock. That would be around 213.00 give or take. Since it is trading at 190.00 per share, that is a nice gain in the short or long run, so I think that it is worth an undervalued rating.
Lehman Brothers: LEH has a 7.64 P/E. Their current earnings per share are 6.10. If you were to multiply the average EPS x the P/E, you would get around $61.00 per share. Given the fact that we are not certain of LEH full exposure to the sub-prime mess, I would put a hold on this. But if their numbers are consistent for the next two quarters and the P/E doesn't rise and the earnings per share do, I would place this in the buy category.
Merrill Lynch: MER amazes me, maybe I am missing something, but this stock is not even worth the paper it is printed on. MER P/E is traded on a Forward P/E (Which means the can not even calculate this number until 12/09, meaning that this number is guesswork or as I call it Wall Street Horse Shit) of 9.43. The EPS is amazing! It is -14.23 per share. So basically, this stock has no value, it has not book value. I think this is a strong sell. Stay away until these numbers flip. This stock is overvalued.
Morgan Stanley: Well, as you may already know, this pig needs to pop! First, it is traded at a P/E ratio of 26.20. Its EPS is only 1.92. Given the multiple of 10, the stock is really only worth $19.20. Given that it is traded at $ 50 dollars per share, any bad news would cause a sell of. Stay away! This stock is overvalued.
JP Morgan: This is in the same boat as Morgan Stanley, although investing in this company is a bit more realistic. The P/E is roughly 12.72 and the earning per share are 3.71. Given the average P/E of 10 and the EPS of 3.71, this stock should be traded right around $37.00. But it is not, it is traded at $47.00. Therefore, I think this stock is overvalued.
I am able to deduce that there is nothing to be bullish about in this sector; as a matter of fact it is probably one of the worst performing sectors on the market. Be aware and be ware.
