Bank stocks are in free fall. Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) fell 10% just yesterday. While the panic feels the same as the sell-off of 2008, this time things are different. The U.S. financial system isn’t staring down imminent collapse. Instead, the worry is over a prolonged interruption of income streams for other businesses.
The malignant nature of this crisis is in its scope, because it affects all businesses worldwide. So far, bank stocks have fallen almost 45% from January highs. Yet this pales next to the carnage they suffered during the 2008 financial crisis. Back then the Financial Select Sector SPDR Fund (NYSEARCA:XLF) lost 90% of its value before bottoming. Plenty of banks didn’t survive the shock.
Sector recovery has been steady, setting higher-lows for a decade, but that trend is in jeopardy now. The point today is not to pick the absolute bottom of this correction, because this is a process not an event. Our time is better spent doing homework on bank stocks that have fallen into support zones. Bank of America, JPMorgan and Goldman Sachs are the three that we will discuss today. These are the three largest components of the XLF besides Berkshire Hathaway (NYSE:BRK-B), which accounts for 13% of that fund.
Spoiler alert: before we discuss these stocks further, I’m going to categorize them. To simplify it, Bank of America is the cheapest, JP Morgan is the best and Goldman Sachs is the most exciting. It is also important to note that U.S. Federal Reserve has embarked on a massive quantitative easing program, and we don’t know yet how it will impact banks in the long run. The situation is fluid, complicated and has no precedent.
Bank Stocks To Buy After The Crash: Goldman Sachs(GS)
My statement that GS stock is the most exciting is not necessarily a good thing. The upcoming price action is binary, so it could unfold in either direction. The ensuing move should be large, but where the stock is headed remains a mystery. It could either deliver big profits or even more devastating losses.
The drop of GS stock below $140 per share is triggering a bearish pattern that could cause it to lose another $40 from there. The actual neckline is a little bit higher and closer to $158, but the candle is still ongoing until the end of the month.
The fundamentals on Goldman Sachs are murky at this point because the company is in transition mode. They have announced their intentions to migrate towards more retail banking activities but the fruits of those efforts are still in limbo. Case in point is their credit card offer with Apple (NASDAQ:AAPL), which is still in its infancy.
Otherwise, from the traditional sense GS is cheap because it has a P/E of 7.5 and it is trading below its liquidation value. Consequently, it’s not likely to be a financial catastrophe to own some shares here. There is value already at these levels since this isn’t the same scenario of 2008. It is better funded and under the watchful eyes of the regulators. Nevertheless the nasty surprises are more likely in Goldman Sachs than the other two today.
JPM Morgan (JPM)
The attitudeon Wall Street is that JP Morgan stock is the cream of the crop and that it can do no wrong. So if banks are going to rally, it would be leading. So to bet on a recovery in the financial sector from this hideous correction means to buy JP Morgan stock. Perfect time or not, this is a trough and the bottom is actually a process, rather than a single line in the sand.
JPM is the most expensive of the three stocks we’re discussing today and carries a 40% premium in its price-to-book. Even so, it’s still trading at just 1.2 times book value, so that won’t be the reason investors sell this stock. It will, however, continue to fall for as long as this market correction persists. It’s anyone’s bet as to whether this all blows over in a few weeks, a few months, or the better part of two years.
Regardless, I anticipate a rally for JPM stock after the mess is over, with a caveat in regards to quantitative easing efforts. The Federal Reserve is making unprecedented moves in the credit markets, so there are no experts here to predict how this will affect the banks in the long run. So in this case, since I have value in all three stocks today, I would rather sell puts than chase rallies. That’s a subject for another write-up on how to use options to catch quality falling knives.
Choosing one of these three banks for a portfolio depends on personal preference. Conservatives will prefer Bank of America’s value or JPMorgan’s quality. Goldman Sachs fits better into the portfolios of those who can tolerate a little bit more risk.
Bank of America (BAC)
Bank of America has the lowest face-value price of the three stocks we’ve discussed today. This makes it more attainable to investors, but also the least exciting in a rally. Nevertheless this gives investors the intestinal fortitude to stick with it through tough times. And boy, has it ever seen tough times during the 2008 debacle. It emerged not only stronger and with a fortress-like balance sheet, it also rescued a few other banks along with it, albeit under duress by the Fed.
The bottom line is that BAC stock now represents a sure-footed company suffering through no fault of its own. And it has now fallen into a pivot zone that dates back to 1996. Since then, that zone has served as support in 2001, resistance out of the financial crisis in 2010 through 2015, and finally the breakout level after the 2016 U.S. Presidential election.
Prices are now at that same level, so I expect support. As edgy as Wall Street investors are now, I also expect it to be a cushion, not a hard stop, meaning I wouldn’t look for a surgical entry point to buy shares. You could buy some now and more later to manage my risk. Bank of America management has earned the trust that it knows how to manage a crisis, and cooler heads will always prevail.
If you haven’t panicked out of the stock yet from these higher prices, it’s probably too late to do it now. And that’s true for all three stocks today. However these are dangerous times, so some caution is warranted. Case in point, look at how the market reacted yesterday when billionaire investor Bill Ackman appeared on CNBC. During the interview he went on a ridiculously exaggerated rant about the current state of affairs. The DOW fell over 2,000 point as a reaction to his panic. Clearly, sentiment is rotten and markets have a lot of healing to do but not before we get a set schedule for a vaccine to COVID-19.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
