Why I Like the Banks Going Into Earnings Season

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Until the Fed tapped the brake last week, Wall Street’s appetite for financial stocks was out of control.

I did not mind. My subscribers were making good money buying puts against the big banks, as well as the sector as a whole.

Now, however, the pendulum has swung. Financial stocks plunged 9% after the Fed statement took the wind out of interest rates, but across all my portfolios I am now overweight in the sector.

From a fundamental perspective, nothing has changed. The Fed remains on hold for the foreseeable future, leaving lenders starved for interest income.

But while the banks remain rate-sensitive, the decade after the 2008 crash taught them to be less dependent on interest charges alone. They capture a wider and healthier mix of fee income now.

The only thing that’s shifted on that front in the past week is Wall Street sentiment. World-class banks that once looked a little overheated now have cooled off to create fresh entry points worthy of new investment.

That’s when we buy. After all, while the Fed might not be ready to tighten interest rates, there doesn’t seem to be much systemic risk in the credit market these days.

Bank CEOs just got a green light to raise dividends and buy out shareholders. And I think the run up to their quarterly earnings reports is going to validate those of us who aren’t ready to sell these stocks.

Why I Like the Banks Going Into Earnings Season: Start With the Fundamentals

Investors who love the banks tend to be Warren Buffett types, more interested in locking in an attractive dividend yield and then holding on for decades, if not forever. There just isn’t a lot of sizzle on that end of Wall Street.

But right now, those dividends add up a lot faster than the coupons you will collect on Treasury debt, and that’s what makes the banks interesting.

Citigroup Inc. (NYSE:C), for example, currently pays 2.85% a year and could theoretically distribute a lot more income to shareholders now that the latest round of stress tests suggested healthier operating conditions ahead.

Why I Like the Banks Going Into Earnings Season: Citigroup Offers One Example

We’ve already seen demand for Citi shares whenever a dip pushes the yield to my 3% target. Here around $71.60, all it takes to make that happen is an extra $0.02 per share every quarter.

I think the institution my mentor Vikram Pandit helped build can handle that. And so does Wall Street.

While Citi’s stock price went down after last week’s Fed statement, the whisper numbers on earnings have actually come up.

Earlier this month, consensus was looking for Citi to book $9 per share in profit this year. As analysts revise their math, that target is now more like $9.13.

Next year’s whisper number is up a little, as well. When looking out beyond 2022, the interest rate outlook hasn’t changed at all. Even though some investors were disappointed that the Fed didn’t do Citi any favors last week, this isn’t the kind of company that needs a handout to make long-term shareholders happy.

Why I Like the Banks Going Into Earnings Season: JPMorgan Chase Provides Another Example

The outlook for JPMorgan Chase & Co. (NYSE:JPM) has improved even more. Again, long-term shareholders weren’t looking for a windfall from this massive financial institution. These aren’t growth stocks.

All we really want is a reasonable yield and some confidence that JPM bankers will make the most of the rate environment and keep the dividends flowing from quarter to quarter.

A decade ago, JPM could only write quarterly checks of $0.25 per share. Now, shareholders can look forward to $0.90. Those who built a position below $40 per share back in 2011 are cheering.

And that’s why Warren Buffett loves these stocks. They’re one of the greatest long-term cash machines ever invented. Everything else is just chatter around the Fed.

Why I Like the Banks Going Into Earnings Season: Big Numbers on The Horizon

Of course, the pandemic bent the shorter-term trends enough that these stocks superficially resemble their high-growth counterparts in Silicon Valley. We’re looking for the financial sector to report 116% year-over-year earnings expansion in the current quarter.

None of the Big Tech titans like Microsoft Corp. (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) can claim to be growing anywhere near that fast at this stage in their evolution. Compared to the banks, they look sluggish and sedate.

This will change as the pandemic rolls off the trailing comparisons and the Fed lets interest rates revert to a normal level. For now, however, investors attracted to big growth numbers seem to have piled into the big banks hoping for a windfall.

When they didn’t get it, they bailed out. It’s their loss. Right now, I’d cheerfully buy the banks even if they slow below 14% growth.

Why I Like the Banks Going Into Earnings Season: These Stocks Are Cheap

These stocks are cheap. And as a result, while we’ve made a lot of money trading bank puts across my High Octane2-Digit Trader and Triple-Digit Trader portfolios, I favor the calls now.

2-Digit Trader subscribers practically doubled their stake in one day last month betting against the sector as a whole. Our next position might be built around calls instead.

Either way, we won’t follow the market herd. The goal is to be in place when the herd changes direction.

Meanwhile, Value Authority keeps the dividends flowing. We love the financials there. I just exited one of them, Old Republic International Corp. (NYSE:ORI), as a 60% win.

A year ago, stocks like ORI were poison. Look at them now. And while we’ve moved on to other financial stocks since then, you’ll simply need to subscribe to see what they are.

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