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Welcome to part two of Market Maneuvers—our special series to profit through market volatility.
Last week was a heck of a roller coaster ride for the global stock markets. Greece fears and the selloff in the Shanghai Composite Index had investors heading for the exits, as both the S&P 500 and Dow pulled back sharply. But by the end of the week, those losses were erased as China’s efforts to curb the selling in Shanghai were working and a Greece bailout bill was imminent.
Speaking of the Greece bailout…after all-night negotiations on Sunday, it looks like Greece, the Eurozone and International Monetary Fund (IMF) have come to a resolution that will prevent Greece from going bankrupt and exiting the Eurozone. Of course, there are several hurdles to be overcome this week before the Greek tragedy’s final curtain call.
First, Eurozone finance ministers met yesterday to consider “bridge” financing to help keep Greece’s banking system from collapsing. Greek banks have been shut down for two-straight weeks and aren’t likely to reopen until at least Thursday. But since the amount of money exchanging hands as screeched to a stop, Greece’s economy simply cannot function without its banks being open and functioning. So the European Central Bank (ECB) is deciding whether to boost emergency funding to Greek banks.
In addition, Prime Minister Tsipras must start implementing austerity reforms, and Greece’s government must legislate to overhaul its pension system and increase taxes by Wednesday. Otherwise, the whole deal goes south. And, of course, Eurozone parliaments also need to approve Greece’s bailout by the end of the week.
So, as I mentioned, there are many hurdles to overcome but recent developments look promising. As a result, U.S. markets roared back this week, with both the S&P 500 and Dow climbing more than 1% higher yesterday. And I look for the move higher to continue as second-quarter earnings announcement season really gets underway in the coming days and weeks.
Financials are always one of the first sectors to release results in earnings, and given that a couple big-name companies are reporting this week, I’d like to take a closer look at this sector today.
Two Big-Name Financials with Buy Ratings
If you’ve been a Market 360 reader for a while now, then you know that I largely avoid financial stocks. I was a banking analyst for years, and I’ve seen what goes on behind the scenes—and the recent financial crisis only makes me more wary of these financial giants. So I closely monitor these stocks but rarely get close enough to get burned.
For the second quarter, many financial institutions are expected to show improving profitability—but only modest gains are expected given margin pressures and cost cutting. Right now, of the nearly 5,000 stocks covered by Portfolio Grader, 301 are classified as banks. And, on average, they are a pretty healthy group—earning a solid B rating. A year ago, this same group with 302 companies qualifying was rated a very low C. Going back much further, looking all the way back to 2007, and these stocks were nearly untouchable. They ranked very low as a group and this was before the collapse.
Now, while I have a long history of steering clear of financial stocks, that’s not to say that some of these companies haven’t turned around their businesses since the financial crisis. In fact, two big-name stocks are announcing results on Thursday—and both currently receive “buy” ratings from Portfolio Grader.
Citigroup (C) is a leading global bank, providing a range of financial services and products to individuals, corporations, institutions and even governments. In the first quarter, Citigroup reported a 23% year-over-year increase in earnings and a 2.5% decline in sales.
Looking to the second quarter, to be announced on July 16, Citigroup’s earnings are expected to surge 4,400%. Analysts are expecting earnings of $1.35 per share, up from $0.03 per share in the same quarter a year ago. Sales are expected to slide about 1.2% in the second quarter.
Given Citigroup’s robust forecasted earnings growth, it’s no surprise that this Conservative stock receives an A for earnings momentum and a B for earnings growth. Areas for concern, though, are the company’s sales growth (D rating) and operating margin growth (D rating). In the past Citigroup has had a mixed record for earnings surprises, but it receives a B rating for both earnings surprises and analyst earnings revisions.
So taking everything into consideration, Citigroup earns a C Fundamental Grade and a B Quantitative Grade. Overall, Citigroup is a B-rated Buy.
As a leading investment bank, Goldman Sachs (GS) provides banking and investment services to high-net-worth individuals, financial institutions, governments and corporations around the world. Recently, Goldman Sachs Asset Management, a division of the financial institution, announced that it was acquiring Imprint Capital, which will help expand the division’s investment opportunities, portfolio analytics and advice.
In the first quarter, Goldman Sachs posted its highest quarterly sales result in four years. Revenues increased about 14% year-over-year to $10.62 billion, while earnings per share surged 48% to $5.94. For the second quarter, though, the bank’s earnings and sales are expected to be down slightly. Analysts are looking for earnings of $3.88 per share on $8.78 billion in sales, which is down from $4.10 per share on $9.12 billion in sales last year.
Still, the company has a strong history of producing earnings surprises. In Portfolio Grader, the Conservative stock earns a B for its Fundamental Grade and an A for its Quantitative Grade. Looking closer at GS’s fundamentals, it earns an A for earnings growth, earnings surprises and analysts earnings revisions, and a B for earnings momentum. Sales growth, operating margin growth and return on equity all earn a B rating, while cash flow is rated an A. Overall, Goldman Sachs is an A-rated Strong Buy.
I’ll be in touch on Thursday with your next Market Maneuvers, so make sure that you’re signed up to my mailing list before then. We’ll be covering the latest headlines and the best opportunities in the biotech/biopharmaceutical sector.