Bank stocks are a touchy subject for many investors, particularly after financials caused so much pain in portfolios a few years ago.
Still, time heals all wounds, even on Wall Street, and now may be the time for investors to consider bank stocks as a key holding once more.
First, let’s consider the big picture in which bank stocks are just a small part: namely, a volatile stock market in 2015, where investors are concerned about stretched valuations, trouble in overseas markets and the general sense that this bull market is out of gas.
While lots of investors are focused on the risks and rewards in high profile sectors like tech and energy, bank stocks shouldn’t be shoved aside so quickly just because they are harder to understand, and the financial crisis caused such mayhem six years ago.
Remember, bank stocks should be a part of EVERY portfolio if you’re truly working toward a balanced allocation of equities. Take a tip from Warren Buffett, who despite calling “dubious maneuvers” of bankers in his latest shareholder letter to Berkshire Hathaway Inc. (NYSE:BRK.A) investors still owns $25 billion in Wells Fargo & Co (NYSE:WFC) stock — about 9% of the entire financial’s market cap. Berkshire Hathaway and Warren Buffett have another $3.5 billion or so in U.S. Bancorp (NYSE:USB) and $2.5 billion in Goldman Sachs Group Inc (NYSE:GS).
But don’t take my word — or Warren Buffett’s word for that matter — when thinking about bank stocks to buy right now. Here are a few headlines to consider that should show the opportunity in hard facts:
Strong Earnings: Bank stocks reported very nice Q1 numbers over the last month or so, and FactSet has reported that the financial sector is enjoying a nice 13.4% earnings growth rate — the second highest among the 10 core sectors, behind only healthcare. One prime example is JPMorgan Chase & Co. (NYSE:JPM), which enjoyed top- and bottom-line beats and saw double-digit earnings growth fuel a double-digit dividend increase to go with it.
Dividend Potential: Speaking of the JPM dividend boost, a host of great dividend opportunities exist in the financial sector right now thanks to recent increases and very sustainable payout ratios. While payouts were indeed slashed during the financial crisis, the fact that the Federal Reserve finally gave Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) permission to increase their dividends is a welcome sign of stability and faith in those dividends.
Shares Buybacks Are Bullish Signs: Equally important is the Federal Reserve’s approval of increased buybacks at financial stocks, including permission in March to let Citi boost its repurchase plans to $7.8 billion from $1.2 billion previously. The buybacks are encouraging in part because of the upward lift they will give earnings but perhaps even more because of the confidence these plans indicate.
Regulators Easing Up: Senator Elizabeth Warren is hardly known for letting bankers off easy. So, when the legislator and outspoken Wall Street critic said a few months ago that she’s willing to ease up on some regulations in the interest of lending to boost economic growth — even controversial measures in the high-profile Dodd-Frank package passed in the depths of the financial crisis.
Furthermore, the Republican powers in Congress have been struck by a case of bipartisanism and are working with President Obama and Democrats on trade and financial reforms to keep the recovery going. That all bodes well for the financial sector, which hasn’t had a lot of friends in Washington over the last few years. Considering Obama is a lame duck and the GOP has power at least until 2016 … the climate should continue to be easier for banks going forward.
Yield, Don’t Stop: Profit spreads have been challenging at banks under the current low interest rate environment. And while I remain convinced that yields will remain low for the foreseeable future, long-term investors would be wise to think beyond the next Federal Open Market Committee (FOMC) meeting and explore what will happen once rates DO rise. Considering the 10-year Treasury is up to around 2.2% from around 1.8% a month ago, the timing is right for such thinking.
Cyclical Opportunity: It’s worth pointing out yet again that all manner of economic indicators are looking good — from a 5.5% unemployment rate to a robust housing market — in most regions of the nation. This will prop up both business and consumer lending and thus, bank earnings in the years ahead.
So, while you may not be too enamored with financials after the financial crisis, don’t write off bank stocks forever. Given the decent yields, strong earnings and hopes for long-term share appreciation, these could be some of the best — and most fairly valued — opportunities right now.
As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.