Since mid-February, bank stocks have endured a death march. Even top-notch hedge fund managers like billionaire John Paulson have dumped large positions in the sector.
However, there are signs that things are improving. For example, the KBW Bank Index (BKX) spiked 3.3% last week.
There are several catalysts suggesting a rebound may be at hand. For example, according to a recent report from Goldman Sachs (NYSE:GS), 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.
In addition, the bad news – such as regulations and low interest rates — has 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 at three top names:
JPMorgan Chase (NYSE:JPM): In the latest quarter, the firm was able to increase revenue an impressive 7% and profit came to $5.43 billion. JPMorgan 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 JPMorgan is its CEO, Jamie Dimon, one of the world’s best bankers. He always seems to know how to find ways to capitalize on opportunities. Shares of JPMorgan are also incredibly cheap, with a price-to-earnings ratio of about 9. Moreover, the dividend yield is 2.8%.
Wells Fargo (NYSE:WFC): Of course, this is one of Warren Buffett’s top holdings. His firm, Berkshire Hathaway (NYSE:BRKA), owns 342.6 million shares. Apparently, he is still quite bullish on the bank’s ability to generate long-term returns. True, the company’s recent quarter was somewhat weak on the top line, and there continues to be issues with real estate and business loans. Yet the situation should improve as the U.S. 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 cost cutting.
Morgan Stanley (NYSE:MS): The firm has spent decades trying to beat Goldman Sachs, and in the second quarter, Morgan Stanley finally did one-up its rival. The firm posted stellar results for investment banking with revenue of $2.09 billion. Fixed-income also posted a topline of $1.47 billion. Why the strong performance? Simply put, Morgan Stanley was willing to take on more risks, but it was still 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, and more importantly, companies have huge cash war chests to do deals.
At the time of publication, Hilary Kramer owned shares of Morgan Stanley and Goldman Sachs.