Bank Stocks, BDCs Are Strong Sector Plays Right Now

by Bryan Perry | March 18, 2014 3:00 pm

Whether it’s suspect numbers from China or news out of Russia for its next land grab, we’re in a market that’s defying any concern and is really in love with the fact that bad news is good news, and good news is great news. It’s a market in which you really don’t want to fight that tape until you start to see good news getting treated with a “So what?” attitude and great news resulting in selling.

When you start to see selling pressure into it, then you know the perception has changed, but we’re not there yet. I’m riding the bullish tide a bit further in belief that you’ve got a lot of money that missed last year’s rally that has to get in because of performance pressure. At the same time, you’ve got a Fed that still has its foot on the gas to the tune of $65 billion a month and re-inflating balance sheets all over the banking system.

Recently, we’ve seen the bank stocks get back in the game. While they’ve lagged for the last two months, we’re now starting to see that sector wake up. We own a couple of select financials in my various portfolios, such as the Power Shares KBW High-Dividend Yield Financial ETF (KBWD[1]). The fund has started to move higher as Bank of America (BAC[2]) and Wells Fargo (WFC[3]) have strengthened.

Wells Fargo has come up almost 10% since the beginning of February when the rest of the market was fairly quiet. The financials are moving up, so we’re starting to see some juice there, but I’m keeping my exposure to financials limited as the banks are still loathe to lend to small- to medium-sized businesses.

My son is a credit analyst for small- to medium-sized businesses at SunTrust (STI[4]) in Richmond, Virginia. He tells me that they don’t loan money to almost anybody unless they have sterling credit and a tremendous history of successful experience.

So, for instance, someone hoping for a loan to open a new restaurant? Forget it. My son says maybe if you own 10 Buffalo Wild Wings (BWLD[5]), they’ll look at it with a liquid net worth of $2 million to $5 million dollars to back that up.

This just gives you an impression of how tight the banks are still feeling from five years ago, and they’re still licking their wounds from taking the same kind of risks that they did before.

Hence, while the banks are showing some strength, the sweet spot is really companies that are in the business development sector, or business development companies (BDCs), that are in the business of lending to small to medium-sized firms that need a couple of million dollars to grow, say, their Buffalo Wild Wings franchise. I’ve talked about some of my favorite BDCs[6] before, and they come into play serving a lending nice because they’re able to loan that money out at between 12% and 14%.

And, as a kicker, they get equity in those businesses.

This is why I am still very bullish with the business development companies; banks really haven’t changed their ways very much in terms of what they’re supposed to do, which is at the end of the day to lend money.

I want to stay in the BDC sector as long as those conditions persist. And, as long as the BDCs can borrow money at less than 2% all day long, this is right in their wheelhouse for making a huge spread, which translates into big yields for investors like my Cash Machine members who know which BDCs to target.

  1. KBWD:
  2. BAC:
  3. WFC:
  4. STI:
  5. BWLD:
  6. some of my favorite BDCs:

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