Stocks to sell

FRC Stock Outlook: How Far Can First Republic Fall?

Could First Republic Bank (NYSE:FRC) stock end up in penny stock territory? This question might have seemed absurd just a few months ago. Yet, First Republic Bank’s investors should now consider the urgent warnings of several experts on Wall Street. Before the year is over, the company’s shareholders could face increasingly steep losses.

By now, there’s a good chance you’ve heard about the collapse of SVB Financial Group (NASDAQ:SIVB) and its subsidiary, Silicon Valley Bank. Alarmingly, SVB Financial Group filed for Chapter 11 bankruptcy protection after regulators took control of Silicon Valley Bank.

Could First Republic Bank be the next one to fail, as Silicon Valley Bank did? Financial traders should be cautious right now, not hasty. Unless a miracle happens, don’t count on a near-term recovery for First Republic Bank.

Big Banks Give First Republic Bank a Capital Infusion

Like Silicon Valley Bank, First Republic Bank encountered problems after the Federal Reserve repeatedly raised interest rates on bonds. As the prices of those bonds cratered, the net worth of some banks, including First Republic Bank, declined sharply.

This made it more difficult for First Republic Bank and some other financial institutions to honor their depositors’ withdrawal requests. Consequently, FRC stock dropped from more than $120 to less than $25 on fears of bank runs and financial-failure contagion.

Granted, First Republic Bank is getting a financial injection. In particular, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC) and other big banks (11 in total) pledged $30 billion worth of deposits to First Republic.

FRC Stock Gets an Ultra-Low Price Target

Don’t assume that First Republic Bank will recover due to the $30 billion capital infusion. The company might claim that its “Capital and Liquidity Remain Very Strong.” Yet, there are signs that First Republic is in deep trouble.

For one thing, First Republic Bank suspended its dividend. This isn’t a positive sign for the company, and it probably won’t put First Republic’s loyal shareholders in a good mood.

Next, according to The Wall Street Journal, “three people with knowledge of the process” reported that First Republic Bank is considering deals that would involve “selling new shares.” I concur with the WSJ‘s assessment that this represents a “fresh level of urgency” for First Republic.

Finally, several experts on Wall Street are raising red flags for First Republic Bank. Analysts with Moody’s Investors Service, S&P Global Ratings and Fitch Ratings downgraded First Republic’s credit rating to the equivalent of “junk.”

On top of all that, Wedbush analyst David Chiaverini slapped a $5 price target on FRC stock. Like the analysts with Moody’s and other firms, Chiaverini doesn’t expect the $30 billion rescue package to secure First Republic’s financial future. Moreover, the Wedbush analyst envisions First Republic Bank potentially ending up with “significant negative tangible book value.”

What You Can Do Now

Clearly, the experts with Wedbush, Moody’s and other firms are trying to warn prospective investors about First Republic Bank. If their dour outlooks are spot-on, First Republic’s stakeholders could continue to face capital losses throughout the year.

So, there’s no urgent need for retail traders to invest in First Republic Bank right now. There’s a distinct possibility that FRC stock will fall to Chiaverini’s $5 price target. After that, the stock could stay in penny stock territory on a permanent basis — so by all means, be careful.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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