Bank Stocks Downgraded: Is the Trump Rally Kaput?

By Markets Fool.com

It's now been a week since Donald Trump was elected President of the United States, and the rally in bank stocks is in full swing.

Continue Reading Below

So far, The Wall Street Journal reports that the "KBW Nasdaq Bank index" is up "around 14%." Individual bank stocks are doing even better, with giant Bank of America (NYSE: BAC) up 18% in a week. As the Journal joyfully proclaimed, there's a new enthusiasm for "banks as growth stocks."

And yet, it's a truism on Wall Street: By the time news appears on the front page of the Journal, it's not really news anymore, and the time to profit from it has passed. And so it is that at the same time as the Journal is proclaiming the return of bank stocks to prominence, Wall Street bankers themselves are declaring the rally over.

Here are three things you need to know about that.

KBWB data by YCharts.

Continue Reading Below

1. Baird bashes banks

Beginning with the highest-profile downgrade of the day, well-regarded R.W. Baird (CAPS rating: 90.51) announced this morning that it is pulling its buy recommendation from Bank of America stock, and downgrading the shares to neutral. As explained in a write-up on TheFly.com, Baird believes that "the post-election rally has largely discounted the potential benefits of rising interest rates, lower taxes, and more aggressive capital return" under a Trump administration.

Nor is Bank of America the only stock on Baird's chopping block. Among its other downgrades, one that stands out is Baird's drastic ratings cut of Fifth Third (NASDAQ: FITB) stock to underperform. In addition to citing the same concerns that scared it out of B of A stock, Baird warns that Fifth Third stock is already pricing in the benefits of Fifth Third's "Project North Star efficiency program," leaving little room for profits improvement -- and leaving the stock looking overpriced.

2. Bernstein does, too

Analysts at Bernstein (CAPS rating: 96.41), too, are taking an axe to Fifth Third stock, downgrading to market perform, and pointing out that it's not just the Trump effect at work here. Bernstein notes that "mid-cap bank stocks have risen 33% since their June trough." What's more, the stocks' prices aren't tracking improvements in earnings so much as mere "multiple expansion." Bernstein says it "struggles to find compelling upside" in any regional stocks today. For this reason, Bernsteinadded KeyCorp (NYSE: KEY) to its hit list, downgrading that one to market perform as well.

3. Piper Jaffray joins the crowd

And then there's Piper Jaffray (CAPS rating: 87.24). Judging from the list of downgrades Piper announced this morning, it looks like just about every stock with "bank" (or "banc") in its name got downgraded today. This includes everyone from well-known Regions Bank (NYSE: RF) -- cut to neutral on concerns it has come "too far, too fast" -- to less famous banking players such as People's United Financial (NASDAQ: PBCT), which Piper now rates underweight, saying it is time to take profits.

The most important thing: Patience

So who is an investor to believe in this brave new world for banking stocks? The venerable Wall Street Journal, or the bankers themselves? That's hard to say. On the one hand, the Journal is right to point out that even after their rally, most bank stocks sells for discounts to the stock market as a whole, and significant discounts to their own book values as well.

Traditionally, investors have viewed bank stocks as bargain-priced whenever they trade below book value. From that perspective, you have to admit that Bank of America looks kind of cheap at a current valuation of just 0.82 times book value. On the other hand, Regions is coming close to fair value at 0.99 times book, while valuations at People's Financial (1.15 times book), Fifth Third (1.23 times), and KeyCorp (1.31 times), are all starting to look a bit stretched.

Sure, if growth returns to the banking sector under a President Trump, it's possible these banks will grow into their valuations in a few years' time -- but that remains to be proven. For now, the best move may be to heed the warnings of the folks who know banking stocks best: The bankers themselves.

Forget the 2016 Election: 10 stocks we like better than Bank of America
Donald Trump was just elected president, and volatility is up. But here's why you should ignore the election:

Investing geniuses Tom and David Gardner have spent a long time beating the market no matter who's in the White House. In fact, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Bank of America wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 314 out of more than 75,000 rated members.

The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.