After valuation reset, banks are back in play: Street

Published Tue, Aug 25 20151:47 PM EDTUpdated Tue, Aug 25 20152:49 PM EDT

Banking stocks received a flurry of upgrades Tuesday, as the market selloff in the past week reset valuations for the group, Wall Street analysts said. Veteran bank analyst Mike Mayo of CLSA was among the bulls, upgrading shares of JPMorgan Chase to a "buy," while others like John McDonald from Bernstein and David George from Baird chimed in, issuing upgrades for their favorite stocks in the sector. "Investors should use this pullback/sentiment shift to close short positions and selectively buy banks," said George in a note to clients Tuesday, pointing to valuations as one of the main catalysts for some of these names to move higher. Among the top picks from the Street, here are the two financial stocks receiving the most love. Source: FactSet "JPM has a balance sheet that is the most resilient since it has been in its current form, the most stable earnings of U.S. global banks for the past decade and a dividend level versus the 10-year that implies stock outperformance 85 percent of the time," said Mayo. Since reaching a record price of $70.61 on July 23, shares of the largest bank in the U.S. are down 11 percent compared with a 9 percent drop for the S & P financial sector. Read More 5 reasons to buy Apple right now: Analyst After the market selloff, JPM trades at 1.3 times tangible book value compared with a metric of 1.6 times, according to the analyst, who also notes that at nine times forward earnings, the stock is 10-15 percent below its historical range. "JPMorgan is a defensive, flight-to-quality play, aided by higher capital, stronger for longer credit and outperformance during tough times over the past decade," added Mayo, reminding investors that the bank also offers a 2.8 percent dividend yield. In the next 12 months, Mayo has a price target of $78 on ticker JPM, implying a 25 percent increase from here. Source: FactSet Shares of Bank of America , which are down 13 percent from their 52-week high of $18.48 on July 22, were upgraded to "outperform" this week by analysts at Bernstein, UBS, Baird, Macquarie Research and KBW. "The recent selloff has made the risk-reward more favorable in our view, providing investors with a more attractive entry point to a recovering franchise with longer-term potential to benefit from higher rates, improved operating leverage and expanding capital return," McDonald of Bernstein wrote in a note to clients Tuesday. From a valuation perspective, McDonald believes the stock looks "reasonably priced" relative to the group and its historical levels, trading at 9.9 times forward earnings compared with a long-term median value of about 11 times. One of the main catalysts for the shares to move higher, according to the analyst, pertains to the company's strong domestic presence, making the stock susceptible to the economic recovery in the U.S. "Given the gradual but steady recovery in the U.S. economy, and growing concerns over economic growth in Europe, China and emerging markets, BAC's domestic focus could leave the company relatively better insulated from global macro risks than universal peers on both the revenue and credit fronts," McDonalds explained, noting that about 87 percent of BofA's revenue derives from domestic operations. In the next 12 months, Bernstein predicts the stock could climb to $19, implying an upside move of around 20 percent from here. A review of the major investment houses shows that 6 out of 9 remain overweight the financial sector, while the other three have an equal weight stance, according to Birinyi Associates. —CNBC's Michael Bloom contributed to this story.

Mike Mayo

Scott Mlyn | CNBC

Banking stocks received a flurry of upgrades Tuesday, as the market selloff in the past week reset valuations for the group, Wall Street analysts said.

Veteran bank analyst Mike Mayo of CLSA was among the bulls, upgrading shares of JPMorgan Chase to a "buy," while others like John McDonald from Bernstein and David George from Baird chimed in, issuing upgrades for their favorite stocks in the sector.

"Investors should use this pullback/sentiment shift to close short positions and selectively buy banks," said George in a note to clients Tuesday, pointing to valuations as one of the main catalysts for some of these names to move higher.

Among the top picks from the Street, here are the two financial stocks receiving the most love.