ETF Trends
ETF Trends

Investors may be undervaluing bank stocks and sector-related exchange traded funds as a low interest rate environment and fears over litigation costs cloud people’s judgement.

“There’s tremendous amount of value in these stocks which is simply not being recognized by the market,” Dick Bove, Rafferty Capital’s vice president of equity research, said on CNBC.

Many financial and bank-related ETFs are trading a cheaper valuations, compared to the broader market. For instance, the SPDR S&P Regional Banking ETF (NYSEArca: KRE) has a 15.7 price-to-earnings ratio and a 1.3 price-to-book. The iShares U.S. Regional Banks ETF (NYSEArca: IAT) shows a 14.7 P/E and a 1.3 P/B. The  PowerShares KBW Bank Portfolio (NYSEArca: KBWB) has a 13.4 P/E and a 1.1 P/B. The SPDR S&P Bank ETF (NYSEArca: KBE) is trading at a 15.8 P/E and a 1.2 P/B. Meanwhile, the S&P 500 index is hovering around a 18.4 P/E and a 2.6 P/B. [It’s About Time: Regional Bank ETF is Breaking Out]

Bove calculated that JPMorgan Chase (NYSE: JPM) has net cash per share of $148 but is trading at below $70 while Citigroup (NYSE: C) net cash per share stands at $70 but trades at around $55.

JPM makes up 1.6% of KBE and 8.4% of KBWB. C is 1.6% of KBE and 8.2% of KBWB.

Some observers have attributed to the underperformance in the financial sector to low interest rates as it has made it harder for banks to make money on deposits due to the near-zero rates. However, Rafferty research shows there is no correlation between interest rates and bank stock prices.

“It was almost impossible to see that there was a linkup between interest rates and what happened to bank stocks,” Bove said.

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