Should You Buy US Financials Stocks Now

October 18 00:00 2011

New York, October 18 ( – Uninspiring earnings from Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) have raised a very pertinent question – should you buy US banking stocks now? This sector has come under severe and renewed selling pressure on Monday and has been significantly down in recent months.

In the past year, financial shares on Wall Street have plunged as much as 40 percent, posing the question to the investment community about whether to buy now or whether the lenders should still sell.

Alec Young, chief global equity strategist with U.S.-based S&P Capital IQ, cites weak loan growth, margin compression and regulatory unknowns for being an “underweight” on the sector. He said, “The thing is with a credit crunch, we learned this with Lehman, things can get a lot worse, and these falling knives can be really treacherous. So we continue to err on the side of caution with financials, even though it is a crowded trade, we admit.”

On the other side is fund manager Bill Smead, who says that selling-off in the shares of US banks this year is exactly the reason to buy financial stocks. He believes that US financial stocks are now “deeply undervalued”, based on price-to-book ratios and price to normalized earnings. He said that, “The second thing is… we feel like we’re getting close to the end of that down-swing because the people that are overweight financials are paying a very, very stiff price for it right now,” and added that while financial stocks could still see some pain, investors with a medium to long term horizon could do well.