Large financial stocks have been the stars of the market rally for the past few years and have been closely followed for clues to market direction. Until recently, they have been happy to fuel trader optimism by riding waves of Quantitative Easing and low interest rates to lead the stock market higher.
But as the market thins out, financials are being shown for the mediocre performers they really are, and investors have started to avoid these stocks. The earnings gains in the financial sector have been a result of stock buybacks and cost cutting, while actual revenue growth has been hard to find.
When we put the large bank and financial stocks under the microscope of Portfolio Grader, we find that an ugly situation. The two big banks that attract all the attention, Bank of America (BAC) and Citigroup (C) earn only “C,” or “hold,” ratings. Both were downgraded in the past two months as their fundamentals began to slip and big money backed away from the shares. The same is true of Goldman Sachs (GS) — another closely watched financial bellwether, which was downgraded to a “hold” back in September.
Of the big four financials, the only stock with a “buy” rating is Wells Fargo (WFC). That stock was a hold for the past 3 months, but just received an upgrade to a “B,” this past week and remains a “buy.” Warren Buffett’s favorite bank stock is doing a better job of turning a profit in the slow-growth environment, and its fundamentals are attracting buying pressure from the big funds and institutions that drive the markets.
WFC just rolled out a new credit card program for high-spending wealthy cardholders, in order to compete with the American Express (AXP) Black cards. The market continues to move higher, which also helps the WFC brokerage division — one of the largest in the United States.
Most of the larger financial stocks have made strong price moves based on Fed policies. Now that investors are starting to focus on stocks with high-quality fundamentals, the major financial stocks are far less attractive for your portfolio. Of the big four, only Wells Favorite has the type of fundamentals that justify purchase.
Louis Navellier is the editor of Blue Chip Growth.