How to buy a bank for cheap

adamNote from editor: the purpose of this column from Adam is to give you an insight to how the pro money-managers work and think. Bear with it, and enjoy the insight…

Follow The (BIG) Money:

Since early 2013, I have consistently made the case in this column that financial stocks were deeply undervalued and were on track to push higher- much higher. Well, that is exactly what happened and yet again we saw capital flow into this very important space.

If you are looking for new ideas on where to put capital to work- the financials are beginning to re-emerge as a leading industry group after a very nice/healthy consolidation. Take a look at the following charts to see what happens, in real-time, when capital begins to flow into a strong area of the market. Remember, the financials also tend to serve as a good proxy for both Main Street and Wall Street. Barring some unforeseen event, that bodes very well for the economy and the broader market.

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P/E Ratio: What Is It? & Why Is It Important?

We have all heard that it is important to buy under-valued stocks. Well, how do you define if a stock is properly valued or not? The most common definition is to use what is known as the Price to Earnings Ratio or P/E Ratio. The P/E ratio is a commonly used valuation ratio that is calculated by dividing the current stock price by its earnings per share (EPS). Normally, the P/E ratio for the S&P 500 is in the mid teens and varies greatly for individual stocks. The P/E ratio is the most common way to quickly determine how a stock (or the market) is valued. .

A common example to illustrate how the P/E ratio is calculated would be: if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

There are a few ways you can calculate the EPS ratio. By far, the most common way is to use the last four quarters (a.k.a. trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (a.k.a. projected or forward P/E). A third way is to take the sum of the last two quarters and then use the estimates for the next two quarters.

Deeply Undervalued Space:

Right now the P/E ratio for the S&P 500 is just over 17 which is considered normal/fair value compared to historical levels. Remember, the P/E ratio for the S&P 500 during the past few major tops was over 22! Meanwhile, the P/E ratio for the Financials ETF (XLF) is only 9.7! For the astute investor, that represents a very strong opportunity to profit.

As always, here are the facts and we’ll let you decide:

The P/E Ratio for:

1. Financials ETF (XLF): 9.7

2. Citigroup (C): 11.3

3. JP Morgan (JPM): 13.3

4. Goldman Sachs (GS): 11

5. Wells Fargo (WFC): 12.1

Trade wisely,

Adam.

Note from Editor: Adam is the CNBC-quoted hedge fund manager and trading genius whose recommendations were actually UP 55% in 2008 and continues to provide great profits for subscribers to his Midas Wave Alert service.

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