Several signs suggest a rebound in the bank sector is on the way.
Since mid-February, the bank stocks have had a death march. Even top-notch hedge fund managers—like billionaire John Paulson—have dumped large positions in the sector.
However, there are some hopeful signs that things are improving. For example, the KBW bank Index spiked 3.3% last week.
So why might there be a rebound? There are some important catalysts. For example, according to a recent report from Goldman Sachs , there are positive trends in the overall growth for commercial loans, lower credit losses and stronger cost savings. It’s also encouraging that the balance sheets are fairly strong.
Besides, the bad news—such as regulations and low interest rates—have already been discounted by investors. In other words, the banks could be poised for some nice upside.
For investors, what is the best way to play this? I think the best strategy is to focus on quality operators that have overlooked earnings power.
Here’s a look:
J.P. Morgan Chase: In the latest quarter, the firm was able to increase revenues an impressive 7 percent and profits came to $5.43 billion.
J.P. Morgan is seeing lots of strength from its investment banking operation—in terms of equity and debt offerings. In fact, with the spike in IPOs, there should be much more growth.
But perhaps the biggest advantage for J.P. Morgan is the CEO, Jamie Dimon. He is one of the world’s best bankers. As a result, he always seems to know how to find ways to capitalize on opportunities.
Finally, J.P. Morgan is incredibly cheap, with a price-to-earnings ratio of about 9. Moreover, the dividend yield is 2.80%.
Wells Fargo: Of course, this is one of Warren Buffett’s top holdings. His firm, Berkshire Hathaway , owns 342.6 million shares. Apparently, he is still quite bullish on the bank’s ability to generate long-term returns.
True, the recent quarter was somewhat weak on the top-line. There continues to be issues with real estate and business loans.
Yet the situation should improve as the US economy perks-up. In light of Wells Fargo’s massive scale and breadth of product offerings, the firm is in a great position to benefit. At the same time, Wells Fargo has been getting aggressive with its cost cutting.
Morgan Stanley: The firm has spent decades trying to beat Goldman Sachs. And yes, in the second quarter, Morgan Stanley finally did one-up its fierce rival.
The firm posted stellar results for investment banking with net revenues of $2.09 billion. Fixed-income also posted a top-line of $1.47 billion.
Why the strong performance? Simply put, Morgan Stanley was willing to take on more risks. But it was well managed. For example, the firm lowered its exposure to commodities.
Also, on the corporate side, Morgan continues to be the top advisor for merger deals, which generate juicy fees. Granted, there has been some recent weakness. But the mergers business can comeback quickly. More importantly, companies have huge cash war chests to do deals.
Hilary Kramer has 20+ years of experience on Wall Street, first as an analyst, then as a portfolio manager, investment banker and hedge fund manager. She is editor of GameChangers, Breakout Stocks Under $5 and High Octane Stocks. You can learn more about her stock picks as well asher latest buy and sell recommendations here.
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