A Bank Stock Renaissance
Few industries draw the public’s ire more so than the financial industry. In many ways I can’t blame folks for their rampant distrust of banks.
After all, many folks lost fortunes back in 2008 when unbridled bank policies ended up tanking the market and ruining people’s lives…
More recently Wells Fargo’s predatory and dishonest operations have cost the company billions in cold, hard cash. But perhaps the worst damage was to the company’s image.
Now bank stocks appear to be out of favor with the Wall Street crowd too, but this bearish sentiment in financials could be dead wrong.
Wall Street’s Bearish Outlook Explained
Nasdaq reports: “The Picture for Financial Stocks Looks Weak.”
The Washington Post called bank stocks “weak.” And Barron’s reports banks “will face some head winds in the coming quarters.”
Bank bears are out in full force, but so far this group is getting burned. Yes, banks face some head winds this year with a dovish Fed content with lower interest rates.
But there are many tail winds in place for banks that I think analysts are overlooking.
Despite lower interest rates, the truth is most big banks are beating expectations this earnings season.
Why Banks Should Surge
Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM) both posted surprise earnings beats and strong Q1 earnings, topping consensus estimates by 10% and 12%, respectively.
Bank of America (NYSE: BAC) also reported strong first-quarter earnings Tuesday. Earnings per share were up 13%, beating the consensus estimate of 66 cents.
And as legendary trader Jim Cramer notes, big banks could surge on any bit of good news:
“The banks are the group that sets the tone for earnings season, and that’s a lucky thing because this time their stocks are coming in ice-cold, which means that they should be able to rally on even the slightest positive provocation.”
Why Bank Stocks Stand Out to Me
A big reason financials stand out to me is they’ve underperformed for quite some time.
But that could be about to change. Big money is flowing back into bank stocks. Merrill Lynch data show $4.7 billion worth of corporate buyback money has flowed into bank stocks this year. This should stir institutional and retail investors alike and pump much more cash into this sector, boosting share values along with it.
Another reason why I like bank stocks is the fact that 80% of the time after the yield curve inverts, financials outperform the overall market by a margin of 11.5%
I’m also not so worried about the Fed’s dovish stance on interest rates. Most banks are well diversified with credit and trading services. These revenue streams should help minimize the damage caused by lower rates over time.
Bottom line: Big corporate money is now flowing into financial stocks, and I believe they’re on to something. The two I like most today, specifically because they have the most diversified revenue streams and strong, sensible leadership, are JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS).
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch