Bank stocks kicked off the second quarter earnings season with a bang.
Pretty much all major U.S. banks reported revenues and profits that topped expectations. Management commentary was broadly bullish. Underlying investment banking trends were robust. Retail banking trends showed signs of consistent improvement throughout the quarter.
Bank stocks mostly popped in response to the strong results.
This is the beginning of a much bigger, multi-month recovery in bank stocks.
Zooming out, as goes the U.S. economy, so go bank stocks. The U.S. economic outlook is going to improve over the next 6-plus months, as U.S. businesses, consumers and legislators alike all get better at the novel coronavirus balancing act, wherein we will stimulate economic activity while keeping people safe through things like social distancing, mask wearing and moving operations outside.
All the while, pharmaceutical giants like Moderna (NASDAQ:MRNA) will continue to report favorable progress on the Covid-19 vaccine front.
This combination of dynamics will increasingly lend credibility to the idea that 2020 economic activity won’t be as bad as feared, and that 2021 economic activity will be mostly normal.
As the U.S. economic outlook improves over the next 6 or so months, bank stocks will rally. And this rally won’t be small, because many bank stocks are very cheap today.
With that in mind, here’s a list of five bank stocks to buy today:
- JPMorgan (NYSE:JPM)
- Wells Fargo (NYSE:WFC)
- Citigroup (NYSE:C)
- Goldman Sachs (NYSE:GS)
- Bank of America (NYSE:BAC)
Let’s take a deeper look into what’s going on with each today.
Bank Stocks to Buy: JPMorgan (JPM)
In the big picture, JPMorgan is the best bank on Wall Street, and JPM stock is one of the best bank stocks buy for the next 6-plus months.
JPMorgan has long been considered the best bank out there, given its strong leadership team, impressive growth trajectory and relentless financial technology innovation.
The company’s second quarter earnings report underscored these strengths.
Revenues topped estimates, and rose 15% year-over-year to record highs, paced by rebounding consumer spending trends, rising mortgage and auto applications and huge fixed-income trading volumes. Profits topped estimates too, despite a huge increase to credit-loss reserves, mostly because the company’s operating efficiency continues to improve and profit margins are moving higher.
The company did all of this despite record low interest rates, which hampered net interest margins and pushed net interest income lower by 4% year-over-year. And despite the U.S. economy being in “crawl” mode.
Once the U.S. economy starts walking again — and running thereafter — JPMorgan will fire on all cylinders.
This robust operational strength will guide JPM stock to huge gains over the next several months.
Wells Fargo (WFC)
Wells Fargo has been the eyesore of the banking industry for several years.
That didn’t change in the second quarter of 2020.
Wells Fargo’s second quarter earnings report was awful. It was a double miss quarter with significant revenue declines. Huge profit margin compression. Record low net interest margins. A significant build in reserves. And a huge net loss.
For a bank, that’s about as bad of an earnings report as is possible.
And, to make matters worse, almost all of the bank’s peers reported good numbers. Clearly, then, Wells Fargo isn’t just getting hit by Covid-19. The bank is under-performing.
But, Wells Fargo is still one of a select few major consumer banks in the U.S. That reality won’t change anytime soon. If macro U.S. economic and banking sector fundamentals improve over the next 6 to 12 months, Wells Fargo’s numbers and growth trends will only get better.
Those improving growth trends will inevitably converge on what is a hugely discounted valuation on WFC stock. The stock is trading at around 80% of its tangible book value.
This convergence will ultimately spark huge gains in WFC stock over the next 6 or so months.
Next to Wells Fargo, Citigroup is another one of the best bank stocks to buy because of potential valuation upside as the U.S. economic outlook improves.
Citigroup stock is currently trading at around 77% tangible book value. That’s dirt cheap for a bank stock. Such a multiple only makes sense if Citigroup’s growth trends project to meaningfully deteriorate over the next new quarters.
They’ll actually improve. And as they do, Citigroup stock will rally in a big way.
By how much?
My numbers suggest upside to $65+ prices — which is, coincidentally, roughly in-line with the company’s tangible book value. That makes complete sense. In the event that the U.S. economic outlook does improve over the next several months, Citigroup stock should rebound to tangible book value.
Goldman Sachs (GS)
The bull thesis on Goldman Sachs is that this is the best bank stock to buy for continued strength in capital market activity.
Goldman Sachs isn’t a retail bank. It’s a capital markets bank. While retail banking has struggled over the past few months because consumers have lost their jobs and spending has fallen off a cliff, capital markets activity has actually burgeoned during that stretch.
Goldman’s Q2 numbers reflect that reality.
Investment banking net revenues rose 36% year-over-year in the quarter, paced by 122% growth in equity underwriting and 93% growth in debt underwriting. Fixed income revenues rose 149% year-over-year. Wealth management revenues rose 7% year-over-year.
As the U.S. economic outlook improves, already red-hot capital markets activity will only get hotter. You’ll get more IPOs. More acquisitions. More deal making in general.
All of that means Goldman Sachs will do a lot of business and make a lot of money over the next few quarters. Such robust business trends will help GS stock power higher.
Bank of America (BAC)
Bank of America just reported second quarter earnings, and the numbers weren’t pretty.
Sure, the bank topped top and bottom line estimates. But those estimates were severely depressed. And the underlying trends in the quarter weren’t great. Revenues dropped 3% year-over-year. The efficiency ratio rose 3 points. Pre-tax, pre-provision profits fell 9%. Net interest income fell 11%. Net profits plunged more than 50%.
Fortunately, the future is brighter than the past for Bank of America.
Going forward, macro-economic improvements will drive positive revenue growth at Bank of America, which will restart positive operating leverage and pull the efficiency ratio lower. Pre-tax, pre-provision profits will consequently start growing again. Interest rates will inch higher on the back of gradual economic improvements, powering renewed growth in net interest income. Net profits will charge higher on the back of all these favorable developments.
As all that happens, BAC stock — which is pretty cheap today, trading below its book value — should make a run towards $30.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.