Time to Buy Big Banks Again?

07/07/2010 4:45 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

If you’ve been waiting for the three bank stocks I added to Jim’s Watch List on June 25 (see this post) to sell off before putting in a bid, this earnings season may give you the opportunity—for two of the three anyway.

Wall Street analysts have hugely optimistic earnings forecasts out on JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) that the banks are extremely unlikely to meet. Goldman Sachs Group (NYSE: GS), the third US bank on my Watch List, is expected to report a big drop in earnings—but investors who bid the stock up Wednesday seem to be counting on Goldman to pull a surprise out of its earnings report. If it simply meets low expectations, these shares, too, could sell off.

The consensus among Wall Street analysts right now calls for second-quarter earnings to be up by 164% at JPMorgan Chase and by 138% at Morgan Stanley when the two banks report on July 15 and July 21, respectively. (Wall Street is looking for a 46% drop in Goldman’s earnings when it reports on July 20.)

There’s a good chance, though, that those estimates of earnings growth are going to be massively high, thanks to a big drop in trading income due to tougher market conditions in the second quarter of 2010. Banks are facing especially tough year-to-year comparisons for the second quarter of 2010, since last year’s second quarter was nearly a perfect trading environment as the financial markets continued a non-stop rally off the March bottom.

According to estimates from Bloomberg, earnings at Goldman will fall the expected 46% and earnings at JPMorgan Chase will climb just 22% instead of the projected 164%.

On any selloff on disappointing earnings, I’d look to JPMorgan Chase for my first buy.

Full disclosure: I don’t own shares of any company mentioned in this post.

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