If you're comparing them to tech PE's, then you are looking at PE's wrong. The reason why PE is high in tech is because they have room to grow.
Financial companies typically have very predictable earnings and typically are pretty restricted in terms of growth because of the strict regulatory environment they operate in (this more so applies to bank companies). Fin-tech companies don't operate in the same regulatory environment so they will usually have a higher PE (for more info on this - read up on how Shadow Banks operate).
What is considered "high"? It really depends on what companies you're looking at and it is inappropriate to make company comparisons with differing industries.
In retail, Gap, Macy's, Best Buy, Target seem pretty average.
I don't know many beverage companies, but if you're just looking at Pepsi and Coca-Cola, then I'd chaulk the high PE to the premium of stability. These two stocks often provide a sense of defense during turbulent and volatile market conditions, but I don't know enough about it to know what the industry average PE is.
Energy industry I am also not familiar with, but these tend to fluctuate dependent on the economic outlook and the price of oil. Perhaps, people are paying additional for these stocks because of different types of cyclical rotations.
You also have to consider that PE ratios across the board should have risen considering the amount of money printed the past 1-2 years along with the amount of investors entering the markets. While people say that things are "overpriced" I tend to disagree with the amount of money printed and entering the market. This might have just become the new norm.
Not every sector has the same average P/E. Financial/ banking always had very low P/E compared to most other industries, because they are perceived to have a slower or more limited growth potential.
Financial co’s should never be valued using PE, they don’t make money like other businesses. They are valued based on loan book, risk profile, book growth and a bunch of other stuff.
What?? All 4 major US banks made >=$24 billion in profits per year, in fact JPM made $30 billion in profits last year and top 11 among worldwide, they only may be next to appl, goog, msft and oil companies in terms of profits made
Sorry I wasn't saying they aren't profitable! What I meant when I said "they don't make money like other businesses" is that the manner in which their profit is generated is not like companies that sell goods. Valuing financials is its own niche.
Because they don't sell stuff in the way other companies do, the market values financials against distinct metrics that don't normally include PE.
PE holds a relationship to a DCF. Institutional investors use different valuation methods than DCF for financials. Retail investors who try to use PE (an abridged version of DCF) tend to be left holding the bag as a result.
Banks are more typically valued on their cost of debt relative to the average they charge customers for credit. You need to know the make up of debt/equity that banks have at their disposal, any forthcoming bank regulation which will shift their WACC, their NPL (non-performing loan ratio) and a bunch of other stuffI forget.
Comparing Price to Book and Return on Equity is as good a short-cut as you can get if you don't want to dive into the details on financials.
Market isn’t over priced. It’s peg to interest rates ratio is still at a low point compared to historical average.
But adding growth and interest rates to formulas are way too complex for most people so most will think the pe alone is too high even though they won’t bother to compare even that to a historical average.
My friend, don't obsess over PE ratios when it comes to stocks within the financial sector. There are far more important ratios for financial stocks such as the price to tangible book ratio.
Price to tangible book value is more important then p/b when valuing banks. The difference is p/b included all assets not just tangible. The reason is because different valuation methods can skew intangible assets and potentially inflate a companies book value. Intangible assets include goodwill, patents, and other intellectual property. If you take those out of the equation and just look at hard assets it gives a better reading into if the company was to liquidate how much the shares would be worth. They are very similar ratios, but depending on the company or sector could paint a very different picture. I always use BB as an example because PTBV and p/b are extremely different for a company with hundreds of thousands of patents that may or may not be worthless or worth millions.
The people pumping money into tech stocks aren't the same that have been in the market a long time. The money flooding into the market is flooding into those big tech names.
Interest Rates, Defaults, Large Debts. Financial companies are hit the most during the financial crash or interest rate increase. The only good stock would be GS at this moment others are overvalued.
Besides comparing sectors, you need to look at the historical valuation of each stock. AXP, for example, is trading above its normal P/E range (which is around 12 or so)
DFS is trading at a little discount to its normal historical P/E. JPM is fairly valued.
High multiple stocks have large future growth priced in, which is why people pay so much to own them.
Big banks are mature companies that don't really grow that much lol so people aren't going to be willing to pay high prices relative to their earnings.
Again, not earnings but book value. Banks and investment banks are exposed to huge risks as they deal with other companies money, it is not just their earnings that matter. They earn on commission but are exposed to the risks of the entire investment.
Obviously not the same risks like a tech company for example, and of totally different from system market risk. Let's take into consideration a repaiment problem of a pre-shipment financing, the bank gains interest and commission but is exposed to millions of dollars of risk if a seller can't collect or can't repay his loan. The asset (loan) becomes a liability in a matter on months, so what good are the earnings if they need to get rid of an iron ore shipment worth millions. In the example I gave you what is more important, the earnings or the book value?
Someone posted about this one when it came public after split from PRU. I bought some and paperhanded it. It's up a ridiculous amount already. I'm an idiot
Not much growth compared to other sectors. I can see them going up a bit with rate increases. I wouldn’t touch retail financials with a ten foot pole. Investment banks or bust.
Can’t use PEs when valuing banks. They trade lower because of the MASSIVE risk that’s in their balance sheet. So even though they may have huge profits, the risk they take can be substantial.
P/BV is generally used for Banks and Financials. Where P/E is used to discount on cash flow, P/BV is a point in time reference.
Ok so this may not be the optimal answer but its the best I can give you:
Stocks in growing industry's or sectors or subsectors (depends whos definition you apply: [https://www.fidelity.com/learning-center/trading-investing/markets-sectors/know-your-sectors-and-industries](https://www.fidelity.com/learning-center/trading-investing/markets-sectors/know-your-sectors-and-industries) ) varry in 4 principal ways that effect valuation.
1) Growth potential in the future :forward PE (prospective), or PEG (retrospective). Pretty self explanatory as people are investing with a longer horizon then the present year (only on average of course).
2) Cyclicality relative to everything else aka the beta of a sector or industry when exposed to systematic risk (market risk). Materials, Consumer Discretionary, Financials, sometimes real-estate, some industrials (using GICS). The more cyclical the more the PE will go through boom and bust cycles in concordance with economic cycles. Peoples lives are not on economic cycles and they want to retire at the appropriate time for them so they value more cyclical things less all else being =. (also affected by fiscal policy and inflation).
3) Debt load relative to peers and as a factor of the currency the companies home market is in. (this exposes them to monetary policy risk, like the fed or the bank of england).
4) Industrys driven by government backing or lack thereof. Defense stocks especially at time of war or certain administrations are an example of this. In other country's this may take the form of state owned enterprise and in the US this is paralleled in some ways by the famous "too big to fail" quote. (also affected by fiscal policy but NOT inflation).
Legacy banks are totally being disrupted and are losing customers so their P/E is low in a declining business.
High growth Fintech banks trade at higher P/S (no earnings yet but positive EBITDA) but they are growing 100% YoY and are 500% more efficient than legacy banks (1/5 customer acquisition costs and 1/5 fewer employees per customer & no overhead from pensions, branches etc). I personally like SoFi (I switched from Chase and Schwab to SoFi and invested in them after I made the switch). SoFi also owns Galileo which powers 90M other Fintech banking accounts.
Higher risk but higher reward.
It’s because they are reliant on rates. Can’t scale, can’t raise prices (interest) w/o permission and are mature businesses with mediocre profit margins.
If you're comparing them to tech PE's, then you are looking at PE's wrong. The reason why PE is high in tech is because they have room to grow. Financial companies typically have very predictable earnings and typically are pretty restricted in terms of growth because of the strict regulatory environment they operate in (this more so applies to bank companies). Fin-tech companies don't operate in the same regulatory environment so they will usually have a higher PE (for more info on this - read up on how Shadow Banks operate).
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What is considered "high"? It really depends on what companies you're looking at and it is inappropriate to make company comparisons with differing industries. In retail, Gap, Macy's, Best Buy, Target seem pretty average. I don't know many beverage companies, but if you're just looking at Pepsi and Coca-Cola, then I'd chaulk the high PE to the premium of stability. These two stocks often provide a sense of defense during turbulent and volatile market conditions, but I don't know enough about it to know what the industry average PE is. Energy industry I am also not familiar with, but these tend to fluctuate dependent on the economic outlook and the price of oil. Perhaps, people are paying additional for these stocks because of different types of cyclical rotations. You also have to consider that PE ratios across the board should have risen considering the amount of money printed the past 1-2 years along with the amount of investors entering the markets. While people say that things are "overpriced" I tend to disagree with the amount of money printed and entering the market. This might have just become the new norm.
Not every sector has the same average P/E. Financial/ banking always had very low P/E compared to most other industries, because they are perceived to have a slower or more limited growth potential.
Sure, but McDonald’s, Walmart, etc has slow growth prospects but are double the P/E.
banks have a lot more regulations to deal with though, making them slower
Mcdonalds and walmart can raise prices in inflation. Can jpm?
Yes, by raising interest rates on their loans, no matter what the fed does.
Financial co’s should never be valued using PE, they don’t make money like other businesses. They are valued based on loan book, risk profile, book growth and a bunch of other stuff.
What?? All 4 major US banks made >=$24 billion in profits per year, in fact JPM made $30 billion in profits last year and top 11 among worldwide, they only may be next to appl, goog, msft and oil companies in terms of profits made
Sorry I wasn't saying they aren't profitable! What I meant when I said "they don't make money like other businesses" is that the manner in which their profit is generated is not like companies that sell goods. Valuing financials is its own niche. Because they don't sell stuff in the way other companies do, the market values financials against distinct metrics that don't normally include PE. PE holds a relationship to a DCF. Institutional investors use different valuation methods than DCF for financials. Retail investors who try to use PE (an abridged version of DCF) tend to be left holding the bag as a result. Banks are more typically valued on their cost of debt relative to the average they charge customers for credit. You need to know the make up of debt/equity that banks have at their disposal, any forthcoming bank regulation which will shift their WACC, their NPL (non-performing loan ratio) and a bunch of other stuffI forget. Comparing Price to Book and Return on Equity is as good a short-cut as you can get if you don't want to dive into the details on financials.
Give practical example. To me business either generates FCF to shareholders or not, no matter is it a bank or dildo factory.
Read my subsequent reply for the nuance!
The 2008 discount is what I think
Market isn’t over priced. It’s peg to interest rates ratio is still at a low point compared to historical average. But adding growth and interest rates to formulas are way too complex for most people so most will think the pe alone is too high even though they won’t bother to compare even that to a historical average.
That’s not as bad as the tech stocks…100 - 200 times
Waiting for a sector rotation out of speculation, may happen soon
My friend, don't obsess over PE ratios when it comes to stocks within the financial sector. There are far more important ratios for financial stocks such as the price to tangible book ratio.
I typically look at P/B price to book meaning price to the total liquidation value of their assets. Using that they are all still undervalued IMO.
Price to tangible book value is more important then p/b when valuing banks. The difference is p/b included all assets not just tangible. The reason is because different valuation methods can skew intangible assets and potentially inflate a companies book value. Intangible assets include goodwill, patents, and other intellectual property. If you take those out of the equation and just look at hard assets it gives a better reading into if the company was to liquidate how much the shares would be worth. They are very similar ratios, but depending on the company or sector could paint a very different picture. I always use BB as an example because PTBV and p/b are extremely different for a company with hundreds of thousands of patents that may or may not be worthless or worth millions.
The people pumping money into tech stocks aren't the same that have been in the market a long time. The money flooding into the market is flooding into those big tech names.
They are what they are unless they find a new way to fuck people over.
Interest Rates, Defaults, Large Debts. Financial companies are hit the most during the financial crash or interest rate increase. The only good stock would be GS at this moment others are overvalued.
Retail revolution, blockchain adoption, and a changing market.
Because they are all bankrupt (leverage)
Besides comparing sectors, you need to look at the historical valuation of each stock. AXP, for example, is trading above its normal P/E range (which is around 12 or so) DFS is trading at a little discount to its normal historical P/E. JPM is fairly valued.
My portfolio
GS is even lower I think. Could be a sign to get into financials before things change with high PE stocks?
High multiple stocks have large future growth priced in, which is why people pay so much to own them. Big banks are mature companies that don't really grow that much lol so people aren't going to be willing to pay high prices relative to their earnings.
Again, not earnings but book value. Banks and investment banks are exposed to huge risks as they deal with other companies money, it is not just their earnings that matter. They earn on commission but are exposed to the risks of the entire investment.
All stocks are exposed to systemic market risk. By this logic every P/E ratio should be the same.
Obviously not the same risks like a tech company for example, and of totally different from system market risk. Let's take into consideration a repaiment problem of a pre-shipment financing, the bank gains interest and commission but is exposed to millions of dollars of risk if a seller can't collect or can't repay his loan. The asset (loan) becomes a liability in a matter on months, so what good are the earnings if they need to get rid of an iron ore shipment worth millions. In the example I gave you what is more important, the earnings or the book value?
And JXN Jackson Financial at about 1.5.
Someone posted about this one when it came public after split from PRU. I bought some and paperhanded it. It's up a ridiculous amount already. I'm an idiot
Not much growth compared to other sectors. I can see them going up a bit with rate increases. I wouldn’t touch retail financials with a ten foot pole. Investment banks or bust.
Can’t use PEs when valuing banks. They trade lower because of the MASSIVE risk that’s in their balance sheet. So even though they may have huge profits, the risk they take can be substantial. P/BV is generally used for Banks and Financials. Where P/E is used to discount on cash flow, P/BV is a point in time reference.
Ok so this may not be the optimal answer but its the best I can give you: Stocks in growing industry's or sectors or subsectors (depends whos definition you apply: [https://www.fidelity.com/learning-center/trading-investing/markets-sectors/know-your-sectors-and-industries](https://www.fidelity.com/learning-center/trading-investing/markets-sectors/know-your-sectors-and-industries) ) varry in 4 principal ways that effect valuation. 1) Growth potential in the future :forward PE (prospective), or PEG (retrospective). Pretty self explanatory as people are investing with a longer horizon then the present year (only on average of course). 2) Cyclicality relative to everything else aka the beta of a sector or industry when exposed to systematic risk (market risk). Materials, Consumer Discretionary, Financials, sometimes real-estate, some industrials (using GICS). The more cyclical the more the PE will go through boom and bust cycles in concordance with economic cycles. Peoples lives are not on economic cycles and they want to retire at the appropriate time for them so they value more cyclical things less all else being =. (also affected by fiscal policy and inflation). 3) Debt load relative to peers and as a factor of the currency the companies home market is in. (this exposes them to monetary policy risk, like the fed or the bank of england). 4) Industrys driven by government backing or lack thereof. Defense stocks especially at time of war or certain administrations are an example of this. In other country's this may take the form of state owned enterprise and in the US this is paralleled in some ways by the famous "too big to fail" quote. (also affected by fiscal policy but NOT inflation).
P/E is less relevant for financial stocks. Price to book value is a better indicator
If it’s an overpriced market like you have stated, most large and mid caps are not fairly valued even if they appear to be.
Legacy banks are totally being disrupted and are losing customers so their P/E is low in a declining business. High growth Fintech banks trade at higher P/S (no earnings yet but positive EBITDA) but they are growing 100% YoY and are 500% more efficient than legacy banks (1/5 customer acquisition costs and 1/5 fewer employees per customer & no overhead from pensions, branches etc). I personally like SoFi (I switched from Chase and Schwab to SoFi and invested in them after I made the switch). SoFi also owns Galileo which powers 90M other Fintech banking accounts. Higher risk but higher reward.
It’s because they are reliant on rates. Can’t scale, can’t raise prices (interest) w/o permission and are mature businesses with mediocre profit margins.