“When you look at this incredible nine-day run in the financial stocks, there’s really only one way to interpret it: the banks are leading this market’s charge out of the bear-den abyss,” he said Wednesday on “Mad Money” after investment giant Goldman Sachs’ stock posted its best trading day in 10 years.
The surge stemmed in part from sharply better-than-expected earnings reports from Goldman Sachs and Bank of America, and partly from the “severe” selling that hit bank stocks in the fourth quarter of 2018, Cramer said.
In that brief, but vicious bear market, the group saw stark declines, the most dramatic being Goldman’s plunge from $234 at its November highs to $151 at its lows. The drop was likely worsened by a scandal in Malaysia, which Goldman’s CEO addressed Wednesday. Even after its 9.54 percent surge on Wednesday, Goldman shares were trading at just $197.08.
To Cramer, that action is emblematic of what investors are just beginning to grasp.
“Investors, I think, have started to realize that the banks are literally — not figuratively, but literally — making more money than ever, and they’re doing so with less risk and fewer employees as technology has replaced tons of white-collar jobs,” he said.
As such, “it is not too late to buy the banks,” Cramer argued.
What makes him so sure? First, based on tangible book value, his favorite metric for valuing the big banks, a stock like Goldman’s is trading at an extreme discount, he said. Tangible book value refers to how much a bank would be worth if it shut down and completely liquidated its operations.
“Goldman’s tangible book value is $196 per share, just a buck below where the stock is currently trading,” Cramer said. “That is absurd. They’re making a fortune off of that book value, yet they’re almost getting no credit for it whatsoever.”
Bank of America, which has 26 million active users on its mobile app, might not be getting the credit it deserves, either, he said. Cramer argued that, with 1.5 billion app log-ins in the fourth quarter alone, Bank of America goes beyond being “the millennials’ bank,” because everyone with a smartphone is a potential digital customer.
“As I see it, this is a growth company that’s merely masquerading as a staid and boring bank,” he said.
The “Mad Money” host added that he hasn’t seen action this “absurd” and disconnected from reality in the bank stocks in decades.
“Frankly, we haven’t seen a moment like this — where the banks are making far more money than people believe — since we came out of the [savings and loan] crisis in the early ’90s,” he said. “Back then, many investors sold these stocks after what seemed like big moves off the bottom, only to realize not long after that new buyers were flocking to the group after months and months of underperformance.”
Those new buyers, Cramer said, “recognized that something fundamentally had changed: the banks had gotten better. The bank stocks ultimately soared to new heights, and I wouldn’t be surprised if we got a similar scenario this time.”
And if the financial sector, which represents about 20 percent of the S&P 500, can get its groove back, the broader stock market could see “some remarkable gains,” Cramer said.
“There’ll be plenty of people who say, ‘Finally, I’m back to even, time to go.’ I’m urging you to think the other way,” he told investors. “There are a lot of investors who’ll look at these runs and decide … they want in, and, honestly, I think they’re making the right call, not the exiters, although, ideally, of course, you want to get in ahead of these latecomers.”
Disclosure: Cramer’s charitable trust owns shares of Goldman Sachs.
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