Today shares of troubled bank Credit Suisse have fallen -13.2%, vindicating the analysts who have given the stock an average rating of underperform. But could they be wrong? Some factors show that Credit Suisse may actually be undervalued at today's prices, giving long term investors a potentially interesting opportunity.
Over the last year, Credit Suisse shares have moved -52.3% while trading between the prices of $4.08 and $11.04. This represents a None% difference compared to the S&P 500, which moved -15.7% over the last 52 weeks.
At its current price of $4.09 per share, CS has a trailing price to earnings (P/E) ratio of -6.0 based on its 12 month trailing earnings per share of $-0.68. In comparison, the average P/E ratio of the Financial Services sector is 13.34 and the average P/E ratio of the S&P 500 is 15.97. Clearly, the company's dismal earnings do not justify a higher price.
The real point of interest for value investors is Credit Suisse's price to book ratio. This is its market price divided by its book value, which is what would be left if the company sold off all its assets and paid off all of its debts today. CS has a book value of 0.2, which is exceptionally low. Some investors may be willing to overlook the negative earnings in light of this.
A comparison of the share price versus company earnings and book value should be balanced by an analysis of the company's ability to pay its liabilities. One popular metric is the Quick Ratio, or Acid Test, which is the company's current assets minus its inventory and prepaid expenses divided by its current liabilities. Credit Suisse's quick ratio is 7.14. Generally speaking, a quick ratio above 1 signifies that the company is able to meet its liabilities.
At Market Inference, we will keep monitoring Credit Suisse to see if the contrarian thesis in this stock will be vindicated. A turnaround is still possible in the long term. There may also be an arbitrage potential in the short term: if CS is acquired by another bank, it is likely that the purchase price per share will be higher than the current market price. In June, for example, it is rumoured that asset manager State Street offered to buy Credit Suisse at a price of 9 dollars per share.
Going against the grain can be an excellent way for investors to extract value from the stock market, but it's never a good idea to apply a strategy for its own sake. Do your own research and make sure that the facts support your decision. To stay informed about the market, make sure to subscribe to our free daily newsletter!