Earnings season is kicking into full gear this week — and as always, bank stocks are leading the way. Bank stocks have been leaders in the five-year rally since the credit crisis, and every investor is asking the same questions … can they continue to power this rally?
Most traders will be watching the big bank stocks, but I don’t really expect much from them. Wells Fargo (WFC) reported an OK quarter last week that was entirely consistent with its “hold” rating in our stock-rating tool, Portfolio Grader. Although trading revenues were better than expected at Citigroup (C), they are still down year over year and revenues were up just 1% year over year, so I really don’t see much there to boost the stock from its “sell” rating.
Big banks will continue to have problems with a lack of market volatility that provides a large percentage of their profits. They also will not be able to continue pumping up earnings from loan-loss reserves — which they’ve done to the tune of billions of dollars over the past few years. I expect lackluster sales and profit growth from most of the big banks — avoid them until things improve.
But just because big bank stocks will be stagnant at best, that doesn’t mean there are no profits to be had in the financial sector. You just have to go smaller.
Independent Bank Group (IBTX) is based in McKinney, Texas, and is benefitting from two trends that are pushing the stock higher this year. First is the mergers and acquisition trend that has developed in the sector. Independent has been buying smaller rivals to increase its footprint across Texas, most recently opening a presence in the Houston marketplace by buying the smaller Bank of Houston.
The second trend powering IBTX stock is the state of Texas itself. Fueled by strong energy, technology and agricultural industries, Texas has performed much better than most of the U.S. in this recovery. Analysts have been raising their estimates for Independent Bank Group, and the stock was upgraded to an “A” this week — the shares are a “strong buy.”
Among the larger financial stocks, Capital One (COF) appears to be in decent shape as we come into earnings season. Capital One has large operations in credit cards and auto loans, both of which have been strong performers so far this year. Analysts have recently been raising their estimates for both the quarter and the full year — which could be an indication that Capital One may post its second consecutive positive earnings surprise. COF stock was upgraded to a “B” by Portfolio Grader this week and is a “buy” at the current level.
While all the attention is on the big banks, it is the second tier and smaller bank stocks that have the best odds of providing some upside fireworks this earnings season. Most of the “too big to fail” bank stocks should be avoided — the fundamentals just don’t justify investment right now.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth,Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.