The Federal Open Market Committee has initiated the countdown to the first meaningful change in interest rate policy in years. Amidst uncertainty in the economy, Janet Yellen and her backup singers in the FOMC, have been quietly pounding the drum that signals higher rates are likely to happen at their next meeting in December.
A look at the current odds shows that the Federal Reserve is 68% likely to raise rates, down from about 77% this time last week. This outlook moves the financials sector to the top of the “1 Percent” investor’s lists.
The math is easy, higher rates should help the balance sheets of the financials expand in the right direction over the intermediate-term and in a Goldilocks style; the apparent brevity of the Fed’s likely movement will also mean that the credit markets will still see demand from consumers bullish for financials.
As always, we like to separate the one percent opportunities from the sector by analyzing the stocks, in this case the financials, using our behavioral valuation approach. This uncovers leaders within a sector by using technical and sentiment analysis to gauge which stocks are likely to surge as the crowd begins to migrate to them.
Of the nearly 200 companies associated with the financial sectors (including banks and insurance firms), there are a number of companies that stand out as bullish candidates.
The following four are our “1 Percent” companies based on their behavioral valuation model scores.
The “1 Percent” in Financials: Wells Fargo (WFC)
Wells Fargo (WFC) is coming off of eight consecutive quarters of meeting or beating analyst earnings expectations in addition to seeing year-over-year revenue growing by an average of 2.8%. The company’s fundamentals are reflecting a strong balance sheet that is likely to grow stronger with slightly higher rates.
Looking out over the last year, the stock’s performance has been lackluster, though slightly better than the S&P 500 and the financials, as WFC shares are trading about 5% higher than 12-months ago. This is likely to change for the better according to our data and analysis.
WFC shares are in the process of breaking above their 200-day moving average, a critical trendline for support. A move above this level, currently at $55 will improve the technical outlook for shares as we head forward.
In addition, a move above $55 will likely begin to fetch upgrades from the analyst community, driving prices higher. With only 56% of the analysts recommending the stock as a “buy” there is plenty of room for upgrades.
We see the fundamental and technical picture targeting a price above $60 early in 2016 as the company leads the financials higher.
The “1 Percent” in Financials: Ace Limited (ACE)
Ace Limited (ACE) may not be a headline financial like others, but investing is all about finding opportunities, not just buying names that everyone knows. And ACE stock had a strong October as the insurance company beat earnings expectations by more than 15%; but since then, shares have been resting over the last two weeks (although remaining well above critical support at $108).
Where ACE stands out from the majority of the financials is the short interest activity on shares. Financials, along with the rest of the market, saw massive declines in short interest over the last reporting period.
In contrast, ACE saw an 8% increase in shorts. The increase in short-selling activity puts ACE in position for a covering rally that will likely be triggered by a move above $114.
We expect the strong technical and short covering rally to move ACE shares from $112 to $120 over the next few months and to continue leading the financials.
The “1 Percent” in Financials: The Travelers Companies Inc (TRV)
Another financial that is set to outperform is The Travelers Companies Inc (TRV). TRV shares are consolidating between $112 and $114 after having a terrific October. Another solid earnings report provided the catalyst for Traveller’s 15% move, but according to our research, there’s more in the tank.
The recent move above $110 builds another step in TRV’s move higher and forges a target of $130. The rally in this financial will be driven largely by the crowd moving into this attractive name.
Currently, only 17% of the analysts covering the stock have it ranked a “buy.” This percentage is nearly half of the “buys” from a year ago (32% in October 2014) and a third of the “buy” recommendations from two years ago (44% in October 2013). The fact that the analysts are on the wrong side of this name means that we will see upgrades driving prices higher soon.
The current consolidation should provide a good buying opportunity at $112 for investors to get ready to ride these financials higher on upgrades for the next quarter.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
