The 3 Best ‘Big Six’ Bank Stocks to Buy

by Dan Burrows | July 18, 2013 12:38 pm

Just acknowledging ahead of time that this will probably jinx things, and maybe it’s all too good to be true … but we’ll say it anyway:

The “Big Six” banks look like they’re back.

Morgan Stanley (MS[1]) closed out a strong season for big bank earnings in fine fashion Thursday. The investment bank even got a green light from the Federal Reserve to buy back its own stock.

JPMorgan Chase (JPM[2]), Bank of America (BAC[3]), Wells Fargo (WFC[4]), Citigroup (C[5]), Goldman Sachs (GS[6]) and now Morgan Stanley all posted impressive, Street-beating earnings for the second quarter.

More importantly, the big overhangs that have been weighing on the sector and investors’ psyches have largely receded.

For the big money-center banks, we’re no longer fretting about balance-sheet health and loan-loss reserves. On the investment banking side of things, the great weights of a dearth of deal activity and sleepy capital markets have largely been lifted.

Business and consumer lending is up (even if rising rates are a new worry for banks’ mortgage operations), mergers and acquisitions are picking up, and return of volatility to markets — as they hit nominal record highs — means good things for I-bank trading desks.

Perhaps most encouraging, the big banks posted better-than-expected results in a quarter in which the U.S. economy actually slowed down. If the economy and corporate earnings really do accelerate in the second half — as they are widely expected to do — the best-performing bank stocks could have even more upside ahead.

As good as the S&P 500 and Financial Sector SPDR ETF (XLF[7]) have been this year, the top-performing big bank stocks have smoked them. Here’s the scorecard for year-to-date price performance:

Indeed, if you created a mini-ETF of just the three top stocks, you’d have a market- and sector-crushing bet that would actually offer some decent industrywide diversity.

A market cap-weighted index comprised of Morgan Stanley, Citigroup and Wells Fargo would have posted a price gain of 30% for the year-to-date, according to data from S&P Capital IQ.

Furthermore, that ETF would give you exposure to a wide swath of the broader industry. MS offers a play on deals, trading and wealth management. Citigroup gives you retail and investment banking, as well as unparalleled international exposure. Wells Fargo, the biggest mortgage lender, plugs you into a resurgent housing market.

MS, Citi and WFC have some key catalysts, too:

The bottom line is that if you’re bullish on equities, you have to be bullish on financials — and banks, in particular. The market doesn’t deliver sustained gains without them.

And if you’re looking for outperformance among the Big Six, MS, C and WFC look to have plenty of upside left.

As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.

  1. MS:
  2. JPM:
  3. BAC:
  4. WFC:
  5. C:
  6. GS:
  7. XLF:
  8. plans to buy back stock:

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