This week kicks off earnings season in a big way. There are a slew of major financials and big bank stocks reporting earnings this week, so traders will be watching closely to see if America’s finances continued to rebound in Q4.
Financials have provided most of the earnings growth in 2013 and are expected by most analysts to shoulder the load again this year. However, what most analysts are overlooking is that revenues in the sector have lagged, and most of the so-called “growth” in earnings has come from improving credit and the release of loan-loss reserves, as well as cost cutting in the form of layoffs.
In other words, as we enter the Q4 earnings season, the fundamentals of these banks and other financials really aren’t that great.
This is borne out by a look at the nation’s biggest banks by market capitalization with Portfolio Grader. Of the 15 U.S. banks with a market capitalization of more than $10 billion, just four are rated a “buy,” and zero get a “strong buy” from the Portfolio Grader system, which measures things such as earnings growth, cash flow and other fundamentals.
Two of these banks — Citigroup (C) and SunTrust (STI) — are rated “sell” by the stock-grading service and should be avoided no matter how optimistic the analysts might be about their fourth-quarter earnings season projections. The remaining nine banks are ranked more neutrally, at “C,” and thus are “holds” at best right now.
Wells Fargo (WFC) is the only big bank among the major financials meriting a “buy” ranking from Portfolio Grader. The bank was thought to be the best of the biggest during the credit crisis and has held that role as conditions have improved in the industry. WFC is one of the best banks when it comes to cross-selling, and is able to get more products such as mortgages, investment products and credit cards into the portfolios of their banking customer. Wells Fargo reports earnings tomorrow, and analysts expect it to earn 98 cents per share.
WFC stock has strong fundamentals and was upgraded to a “B” back in November. It still warrants a “buy” rating at current prices.
Pittsburgh-based PNC Financial (PNC) also makes the grade with a “B” rating as we approach financials’ part of earnings season. Wall Street has continually underestimated the bank, and PNC has posted four consecutive positive earnings surprises. The analysts have been raising their estimates over the past few weeks, and that usually is a good indication of another positive surprise. PNC reports Thursday, and the expectation is for the bank to earn $1.65 per share.
The other two buy-rated banks identified by Portfolio Grader fall more into the super-regional class than true money-center banks. Cincinnati-based Fifth Third Bancorp (FITB) was upgraded to a “B” just last week as analysts have been raising estimates following four consecutive upside surprises. Cleveland-based KeyCorp (KEY) has been rated a “B” since October of last year. Both banks still have their “buy” ratings as we move into earnings season.
For the most part, the larger financials are a “show me” sector as we see fourth-quarter results. If any are able to post the type of real growth in profits that make them a best-in-class stock, that will be reflected in Portfolio Grader in the form of an upgrade. If so, we’ll be in a position to buy and enjoy the ride higher as they eventually reflect the improvement to their fundamentals.
Louis Navellier is the editor of Blue Chip Growth.