4 Big Bank Stocks Sinking in Rough Waters

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It’s the news that no one wants to hear, but the major bank stocks colloquially known as the Big Four are in equally big trouble.

4 Big Bank Stocks Sinking in Rough Waters

Although we haven’t hit a nuclear bunker type of panic yet, the financials are undoubtedly among the key laggards of the broader markets. Despite jobs numbers that many economists have found encouraging, sentiment as a whole is weak, as evidenced by the rapidly bearish trades that have taken Wall Street by storm.

One needs to look no further than the benchmark exchange-traded fund Financials Select Sector SPDR (XLF), which at one point was down nearly 6.5% for the year. In the two days to start the week beginning January 11, the XLF — which prominently features the Big Four bank stocks in its holdings — could only muster slightly less than a 1% gain in the markets.

In the XLF’s opening week for 2016, it fell 5.3%. Such a steep loss hasn’t been witnessed since the beginning of 2009, when the financials ETF shed more than 8%.

Back then, there was a very reasonable excuse for such a poor start — namely, that the entire planet stood on the precipice of a meltdown in financials. Today, no such excuse, at least from an official perspective, exists. The U.S. Federal Reserve has promised that the economy is showing signs of continuous strength, and thereby raised key interest rates on Dec. 16, effectively ending the era of former Fed Chair Ben Bernanke’s quantitative easing program.

Far be it from anyone to question the Fed — except that their intention to softly steer the country into a soft financial landing hasn’t quite worked. Because the major bank stocks are often a pulse of the real machinations of the economy, their underperformance is a sore spot for millions of investors.

Bank Stocks in Trouble: JPMorgan Chase & Co. (JPM)

JPM stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

The “Hero of the Great Recession” — depending upon whom you ask — is in desperate need of its own lifeline.

The much-maligned and always controversial head of JPMorgan Chase & Co. (JPM), Jamie Dimon, once played prominently in stemming the tide resulting from the 2008 global financial crisis. Love him or hate him, it was his uncompromising and, yes, callous attitude towards his acquisitions of heavily deflated banking stocks that ushered in a level of stability that may not have otherwise been there.

Ironically, it’s this very attitude that is needed to turn around JPM’s fortunes in the markets.

Like the rest of the financials, JPM is having a rotten 2016, down nearly 9% for the year. In the opening week of January, JPM outpaced losses in the broader markets by dropping nearly 8%. As with the XLF ETF, this is the worst such start for the banking firm since 2009, when it lost 15.5% in its opener.

Besides that unprecedented disaster, one would have to go back all the way to 1998 to see a loss of similar scope.

A lot, of course, is hanging on JPM’s fourth quarter of fiscal year 2015 earnings report. This time around, Wall Street slightly trimmed down its earnings per share target to $1.27, eight cents above its year-ago EPS.

Still, investors will be nervous. EPS growth has been taking a hit over the past three years relative to other bank stocks. Additionally, JPM has missed Q4 earnings estimates over the past two years.

Needless to say, the fundamentals really haven’t improved that much for bank stocks in general, which puts JPM in a rather tricky situation.

Bank Stocks in Trouble: Citigroup Inc (C)

C stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

Leave nothing to chance — that seems to be the motto among today’s embattled bank stocks.

Facing extra scrutiny in light of the upcoming Q4 earnings season, several companies, such as Citigroup Inc (C), are turning to a tried-and-true methodology — the chopping block. Without the assurance of revenue growth, the best way for bank stocks to breathe life into their profitability margins is through cost-cutting measures.

Citigroup has been particularly aggressive, reducing expenses by 17% since the end of FY 2010. Nevertheless, results for C stock have been noticeably mixed.

On a year-to-date basis, C stock is down 8.3% — paring some of the losses of rival JPM, but not by much. However, the 9.1% underperformance by C stock in January’s opening week was the worst start in 18 years. Citigroup started the second week of 1998 bearing a 12% fall in the markets.

Technically, C stock is hanging on a thread, with its present price approximately 11% below its 50-day moving average.

Despite the volatility in the markets, C stock is widely expected to meet its Q4 EPS target of $1.06 primarily off the back of its cost cuts. It will not be an easy task, though, since Citigroup has one of the weaker profitability ratios of the major bank stocks. In addition, it has missed Q4 consensus estimates over the past three years.

Will the fourth time be a charm? Even if it turned out that way, C stock and the broader financials have a mountain of challenges to overcome, and that risk factor may be too much for most investors.

Bank Stocks in Trouble: Bank of America Corp (BAC)

BAC stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

It’s difficult to get around the obvious so why bother trying? Among the Big Four banking stocks, Bank of America Corp (BAC) is easily the most desperate.

After being named one of the co-conspirators of the toxic-mortgage fiasco — ultimately leading to a historic $17 billion civil settlement involving a single entity — BAC has carried the stigma of a bad boy reputation.

Before feeling sorry for BAC, recognize that their reputation was earned through a series of inept management decisions that once nearly put them off of the radar.

It should come as no surprise that BAC happens to be the most aggressive overall when it comes to trimming unnecessary weight. Since 2010, BAC has reduced business expenses by a whopping 33%, doubling the rate of the second-highest competitor. A huge chunk of the self-imposed austerity is the 75,000 jobs terminated over the past four years.

A leaner, meaner BAC should in theory perform better in the markets. In reality, the results have been mixed. While BAC stock skyrocketed in the two years after it bottomed in December of 2011, investors have largely been taken on a sideways ride since the start of 2014. Obviously, 2016 hasn’t been a source of encouragement so far, with BAC down 9% YTD.

Regardless of their newfound direction, the company will be facing strong headwinds in 2016 and possibly beyond. As one of the weakest links among banking stocks, BAC should be reserved for only the most risk tolerant.

Bank Stocks in Trouble: Wells Fargo & Co (WFC)

WFC stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

Moving from one of the worst names among banking stocks to one of the brighter options, next is Wells Fargo & Co (WFC). Under Forbes‘ most recent ranking system, WFC is at number 47 of the world’s most valuable brands, beating out prestigious offerings such as Cartier and Porsche.

On a more relevant scale, WFC also had the distinct honor of handily outranking all the other banking stocks featured in this article.

Thank management’s steady-as-she-goes approach to its business structure and strategy. WFC is the only institution among the Big Four that has a pristine earnings record, meeting or exceeding Wall Street expectations over the past 15 quarters.

It’ll be a stretch to make it 16 quarters, considering the headwinds troubling financials. Nevertheless, revenue growth on a quarter-over-quarter basis came alive in 2015, averaging roughly 4%, which should boost confidence for WFC investors.

The markets have been rough on banking stocks, and WFC is no exception. Here too, though, WFC stands conspicuously above its competitors. While it carries a YTD loss of 3%, this is substantially less than the majors, which are down at or near double digits.

In addition, WFC essentially broke even in 2015, while BAC and C stock suffered an average loss of 5%. Only JPM did better with a return of 6%, yet this month, it’s the biggest laggard.

Does that make WFC a buy among the embattled financials? Inarguably, there’s comparatively less risk involved, but banking stocks in general are simply suspect at this juncture.

A safer approach is to wait out the storm before diving in.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/bank-stocks-sinking-c-bac-wfc-jpm/.

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