So let’s say you are in the bullish camp and think the US-China trade spat will be resolved soon. What is the best way to profit from that development? All stocks will likely rise, and bond yields will probably rise too. But where will the best gains be? How about small caps. The argument here may seem counterintuitive, but shows an evolution in thinking on the part of investors. At the start of the trade war, many thought small caps would do well as they are less exposed to international trade. However, thinking has changed and investors are now much more focused on which sectors are most exposed. This has led small caps to have a rough year compared to large caps, mostly because there are so many financial stocks in the small cap sector. That said, a resolution of the trade war would suspend downward pressure on rates and allow the sectors which have beaten up to flourish, offering disproportionate gains for small caps.
FINSUM: This is a fairly sophisticated argument based on the proportion of beaten up stocks that are in the small cap asset class. However, it does make a lot of sense.
One of the biggest stocks in the country is sitting relatively unloved and appears ready for an investment. That stock? Bank of America, only the biggest deposit holder in the US. The single most important thing to recognize about the bank is that is a well-run powerhouse commanded by the architect who rebuilt it after the Crisis—Brian Moynihan. The bank has a 2.46% dividend, which is looking sweeter every day. JP Morgan just went bullish on the stock, and if Moynihan sticks with the trend and boosts the dividend and adds buybacks, the future looks very bright.
FINSUM: There are some headwinds given the likelihood of falling rates, but that situation also tends to juice all stock prices, which provides some good downside cover.
Bank stocks are probably not a good bet right now. They suffer when rates fall and they are quite exposed to economic slowdowns (in other words, ignore the new idea that banks are safe dividend producers like utilities). However, there are some banks and financial stocks that look likely to win in the near- to medium-term. Three names to consider: JP Morgan, Amex, and Discover. JP Morgan is basically just a very healthy bank with increasingly competitive pricing which looks likely to grow EPS nicely over the next few years. Amex is an interesting pick because it has a very high quality customer base, and its unique charge card revenue base is not so exposed to falling interest rates, making it much more defensible in a low rate/recession environment.
FINSUM: The Amex pick is quite unique. Their customer base is higher end, so less affected by recession. And their unique revenue model (for a card company) means they have lower interest rate exposure.
It has been forecasted for some time, but now it is finally happening—US banks are hiking dividends. After getting the all clear from regulators after successful stress tests, US banks are beginning to hike their dividends. For instance, Morgan Stanley and Citigroup hiked their dividends by 13%+ recently, with both now yielding 2.5% or over. Bank stocks have been beat up over the last year, with Morgan Stanley down 10%, for instance.
FINSUM: On the one hand, bank stocks looked undervalued and now have attractive yields. On the other, if you think we are headed towards a slowdown, then it is not a good time to buy financial shares.
Dividend stocks have been an interesting case over the last few quarters. In the fourth quarter, when interest rates looked to be headed higher, they actually outperformed the market (counterintuitively). This year, as rates look to be headed lower, they have performed quite well (up 16%), but still lagged a bit behind the S&P 500. The question is where they go from here, and all signs point to higher given the prevailing rates environment and general anxiety. The trick is buying the right ones, as financials and healthcare offer better value than more traditional areas like utilities, real estate, and consumer staples.
FINSUM: We think these are good sector selections as they have not seen as much price inflation as the more common dividend choices. Healthcare seems particularly interesting given that it is quite recession-resistant.