As you can see from the graph of Deutsche’s profits and return on equity, the last twelve months have delivered blow after blow to the company, but that drop has been a long time coming. To make an assessment of whether Deutsche is now “cheap”, you have to revalue the company with these new realities built in, to see if the market has over reacted, under reacted or reacted correctly to the news. When a boutiques is down more than 50% over a year, as Deutsche is, it is often irresistible to many contrarian investors, but knee jerk contrarian investing, i.e., investing in a stock just because it has dropped a lot, is a dangerous strategy. The market has, not surprisingly, reacted to these stories by marking up the default risk in the bank and marking down the stock price, most strikingly over the last two weeks, but also over a much longer period.
At close of trading on October 4, 2016, the stock was trading at $13.33 as share, yielding a market capitalization of $17.99 billion, down more than 80% from its pre-2008 levels and 50% from 2012 levels. stock Market: Why has the stock market been selling off this week? To understand why the terminal value is such a high proportion of the current value, it is perhaps best to deconstruct a discounted cash flow valuation in the form of the return that you make from investing in the equity of a business. To see why, let me take the simple example of a firm with after-tax operating income of $100 million in the most recent year, a five-year high growth period , after which earnings will grow at 2% a year forever, with a 8% cost of equity. While it is true that Deutsche Banks has lost a large portion of its market capitalization in the last five years, it is also true that the fundamentals for the company have deteriorated, with lower earnings and hits to regulatory capital. Not only is this a dangerous leap of logic, but it is also not true. As rumors swirled in the last few weeks, Deutsche Bank found itself in the midst of a storm, since the perception that a bank is in trouble often precipitates more trouble, as rumors replace facts and regulators panic.