In market rallies, companies sometimes get left behind. So it is for Citigroup and Met Life, which have failed to pick up anywhere near the kind of traction as their competitors in the recent market surge.
In the last month, shares in Bank of America have risen 63 percent while Wells Fargo is up 70 percent. Citigroup, on the other hand, has gained just 30 percent in the mad rush towards financial stocks. The same is true in the insurance sector. AIG and Genworth Financial, which are hardly rock-solid, have surged around 60 percent in value, while MetLife is up only 18 percent.
That's strange, since it's not as if either is very expensive -- or in much worse shape than its competitors. In fact, Met life has a price to earnings ratio of around 8 times earnings, while Citigroup goes for nearly a quarter of what rival Bank of America does.
And that's after Bank of America is rumored to have to clobber together $34 billion to pass the government stress tests, while Wells Fargo may need $15 billion. At $5 - 6 billion, estimates for Citigroup's capital needs are far lower than either.
A glance at recent earnings statements fails to paint the picture why Citigroup and Metlife are lagging their competitors so much.
Although Bank of America and Wells Fargo both made more money than Citigroup last quarter, the latter proved to be the best turnaround artist, converting a $21 billion loss last quarter into a $1.5 billion profit in the first three months of this year. And while AIG's loss is shrinking, it's still expected to come in at around $5 billion when it reports on Thursday. MetLife, on the other hand, lost just 10% of that amount.
My BNET Finance colleague Ed Leefeldt points out in a recent post that as well as being an insurer, MetLife is also a bank because, like many insurers, it bought a bank earlier in its life to enable it to diversify.
In a similar sense, Citigroup is a both an investment and commercial bank, providing deposit and investment banking activities in pretty much equal portions. In fact, Citigroup was one of the first commercial banks to branch out into investment banking when Glass-Steagall, which mandated the separation of both activities, was abolished several years back. Of course, Bank of America is involved in both functions too, but, save its Merrill Lynch business, to a lesser extent.
The message is hard to miss. By avoiding Citigroup and MetLife, it seems that investors may be punishing diversification in the financial industry right now. In an environment of unpredictable writedowns and capital adequacy notices, for many any complexity at all is a bad thing. In addition, steady, sober earnings results are not nearly as exciting as multi-billion dollar swings in a market where lots of financial firms were going for just a few bucks at the beginning of the year.
That's a mistake, because if anyone's going to get through the financial crisis intact, it's going to be companies with a diverse business base and consistent earnings results. After all, a steady ride up is preferable to a wild one.