Goldman: Buy Large-Cap U.S. Banks for 2013

by Dan Burrows | December 10, 2012 1:23 pm

“It’s difficult to make predictions, especially about the future,” Yogi Berra said.

Too bad that with the new year fast approaching, investors have no choice.

Fortunately, some big calls for 2013 sound like slam dunks to us — notably Goldman Sachs‘ (NYSE:GS[1]) top stock trade for next year: Buy large-cap U.S. banks.

Partly that’s because, heading into the seventh anniversary of the bursting of the bubble, the housing market looks to have definitely stabilized[2], with more upside ahead. Indeed, two of the top S&P 500 stocks of 2012 are homebuilders[3].

Additionally, the Federal Reserve is more than doing its part. Mortgage rates continue to notch new record lows, thanks in part to the central bank buying up billions of dollars worth of mortgage-backed securities every month.

Put that against a generally favorable backdrop for U.S. equities, and the biggest banks look like a buy.

Here’s Goldman Sachs’ thumbnail thesis on large-cap banks, courtesy of Business Insider[4]:

“This recommendation is based on several features of our 2013 outlook: (1) a fairly supportive view of the economic and equity market landscape for 2013, particularly in the U.S.; (2) U.S. monetary policy that remains extremely accommodative, focused on MBS purchases and the transmission of its policy through the housing channel; (3) continued improvement in the housing sector in terms of activity and prices, building on advances already seen in 2012; (4) transmission of the housing sector strength into large-cap U.S. banks; and (5) the fact that financials have, thus far, lagged improvements seen in other housing-related equities over the last several months.”

True, just because Wall Street’s most powerful investment bank thinks large-cap banks will kill it next year doesn’t make it so. Heck, at least two of Goldman Sachs’ best ideas for 2012 went spectacularly bad, despite the fact that they got the basic reasoning correct.

  1. Figuring that the economies of Europe would deteriorate further (they very much did), Goldman Sachs recommended shorting the 10-year German bund. Eesh, did that turn into a slaughter. The yield on the benchmark German sovereign debt (which moves in the opposite direction of price) fell steadily throughout 2012, from 1.83% at the beginning of last year to about 1.29% today.
  2. Goldman’s call to short European high-yield credit also sounded like a great idea — except that it didn’t work out. The idea that another recession on the continent would put pressure on junk bonds made all the sense in the world. And Europe did indeed slip back into recession for all intents and purposes. Yet the voracious hunt for yield had junk bonds go bonkers. Indeed, the Barclays Pan-European High Yield Index has returned almost 27% for the year-to-date.

That said, Goldman Sachs’ buy call on large-cap banks sounds good to us. Indeed, we’ve been bullish on big banks stocks all year[5], especially Wells Fargo (NYSE:WFC[6]) and U.S. Bancorp (NYSE:USB[7]).

Meanwhile, JPMorgan Chase (NYSE:JPM[8]), the nation’s biggest bank by assets, looked like a buy on the selloff from the infamous London Whale trading debacle[9], which clobbered shares last spring. It’s up 17% since then and has gained more than 36% from its June low.

As a group, U.S. large-cap banks have put up some seriously strong market-beating return for the year-to-date: Bank of America (NYSE:BAC[10]) is up 90%; Citigroup (NYSE:C[11]) has gained 41%; JPMorgan Chase is up 27%; Wells Fargo has jumped 21%; and US Bancorp is up 18%.

The broader market, meanwhile, is up 13% on a price basis.

We expect more outperformance ahead. Given the strong tailwind of the long-overdue recovery in the housing market, Goldman Sachs’ case for big U.S. bank stocks sounds like one prediction that will pan out for 2013.

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

  1. GS:
  2. housing market looks to have definitely stabilized:
  3. two of the top S&P 500 stocks of 2012 are homebuilders:
  4. Business Insider:
  5. bullish on big banks stocks all year:
  6. WFC:
  7. USB:
  8. JPM:
  9. buy on the selloff from the infamous London Whale trading debacle:
  10. BAC:
  11. C:

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