Displaying items by tag: KBW
Banks have been absolutely hammered since COVID erupted, and they have not come back very much at all. Overall they are down 33% on the year versus a 5% gain for the S&P 500. Worries about loan losses and low interest rates headline the set of fears for the banking sector. However, banks may have an ace in the hole. Early in the year they set aside tens of billions for loan losses—which hurt earnings, but that may now be their good fortune. Loan losses have not been as bad as expected and many suspect that banks may start to let some of those loss provisions flow through to the bottom line in the next couple earnings seasons.
FINSUM: In our view, this would be a double whammy to the upside for the sector. Not only would it result in blowout earnings, but it would officially alleviate a big fear—that loan losses are going to be very bad because of COVID. Altogether seems like a good opportunity.
Picking stocks is about the hardest thing one can do right now. The market has risen so much—and seems to be defying gravity—that it is hard to know where to allocate money. On the one hand, growth stocks look ludicrously priced, while on the other, value has been underperforming for over a decade. With that said, here are some stocks that are still providing a good discount but look likely to rise as the performance of their underlying business improves. The first place to look is at beaten-up financial stocks, such as those in the KBW bank index, which is down 30% for the year despite big gains in the market. However, sentiment is turning positive. According to RBC, “Based upon the valuations and the outlook for the economy in 2021, we believe bank stocks can be purchased with the expectation the group outperforms the general market over the next 12-18 months”. The stocks to look for are Bank of America, Truist, TCF Financial, Western Alliance, BankUnited, and Investors Bancorp.
FINSUM: Banks are always a bet on the economy, and given their heavily maligned share prices and the general trajectory of the recovery, seem a wise bet. The only lingering risk in our minds (other than a weak recovery) is how continued ultra-low rates might hurt their earnings over the long haul.
If financial shares are any indicator of the coming stock market environment, asset prices look set for a long rough patch. According to Morgan Stanley, financial shares are suffering as “The carefree days of rising rates and pristine credit quality could be coming to an end”. The bank’s research team continued, “We cannot ignore the growing risk of a bear credit market next year preceding a recession as well as the negative impact of weaker economic growth”.
FINSUM: Banks stocks are trading like the economy is headed towards a bear market, and we can’t help but think it may not be a bad call.