After posting strong earnings results for the second quarter, investors “sold the news” with bank stocks. Fearful of these results being the product of a booming financial economy on the wane, it makes sense why the market decided to take profit with this sector, which has rallied tremendously since the start of the Covid-19 vaccine recovery.
But what if now isn’t the time to sell? Instead, what if it’s the right time to dive into banks and buy the pullback? Despite worries that last quarter’s blowout results won’t repeat themselves, things are still looking up for the space.
First, there’s the fact that dividends and buybacks among banks are getting back to “normal.” After clearing the Federal Reserve’s “stress tests,” the largest financial institutions now have the ability to return excess capital to shareholders. Second, there’s also the potential for higher interest rates sooner rather than later, given that more experts are now saying the inflation we’re seeing today isn’t going to be “transitory.”
So, with much still in their corner, which bank stocks could make for solid “buy the dip” opportunities? Consider these seven — a mix of investment banks, money center banks and regional banks:
- Bank of America (NYSE:BAC)
- Citigroup (NYSE:C)
- Goldman Sachs (NYSE:GS)
- JPMorgan Chase (NYSE:JPM)
- Morgan Stanley (NYSE:MS)
- U.S. Bancorp (NYSE:USB)
- Wells Fargo (NYSE:WFC)
Bank Stocks to Buy: Bank of America (BAC)
First up on this list is BAC stock. Admittedly, earnings for Bank of America last quarter weren’t exactly a blowout. On an earnings-per-share (EPS) basis, the financial services giant beat expectations. However, falling short on revenue due to lower-than-expected net interest income, its earnings results were the product of changes in its provision for credit losses.
So, if its results left some to be desired, why consider BAC stock a buy? Well, there are two factors at play for bank stocks that could continue to move its needle: increased return of capital and the specter of rising interest rates.
With regards to return of capital (i.e., dividends and buybacks), BAC has increased its quarterly payout by 17%. And buybacks? Expect the bank to ramp things up, as it has the ability to repurchase as much as $25 billion worth of shares.
This rising dividend and buyback factor alone could boost the stock, from around $38 today to around $52 per share (as InvestorPlace’s Mark Hake recently estimated). As for the positive impact of rising interest rates? Sell-side analysts have already factored these into their future-year projections. But as one Seeking Alpha commentator broke it down earlier this year, they may be underestimating the impact of rising rates to the tune of several billion dollars.
Short-term, things could remain choppy for BAC stock. Investors weren’t happy with its quarterly results. Yet, much remains in its corner. With the potential for its earnings to see major improvement, this may be a pullback you want to pounce on.
Low interest rates may have impacted Bank of America’s results last quarter. Yet, despite these challenges, Citigroup managed to beat on earnings as well as its top-line numbers, which came in above sell-side projections.
Granted, looking at the details, it makes sense why investors decided to take profit with C stock after these numbers hit the street on Jul. 14. Much of the bank’s strong performance last quarter was due to the boom times for its equities trading and investment banking units. Additionally, it saw a $1.1 billion benefit from its loan-loss reserves. If an overheated Wall Street cools down in the second half of 2021, though, Citi may not be able to lean on this segment in the quarters ahead.
That said, with C stock having fallen back toward $60 per share, you may want to scoop some up. Why? Again, the factors that could boost Bank of America down the road could boost this big bank’s stock price as well. Despite passing the Fed’s stress test, it’s decided not to raise its quarterly payout just yet. However, Citi could more than make up the difference as it resumes its share repurchase plan.
Given the size of prior buybacks, we could see another big reduction in its share count — and a corresponding rise in the C stock price. Plus, Citi is cheaper than many of its peers at a forward price-to-earnings (P/E) ratio of around 6.57 times. Overall, there’s a lot pointing to investor sentiment around Citigroup swinging back to positive.
Bank Stocks to Buy: Goldman Sachs (GS)
Primarily an investment bank, concerns about Goldman Sachs’ recent better-than-expected results being short-lived may be correct.
True, a hot stock market and a booming economy have boosted the performance of its asset management and merger advisory businesses. Yet, these boom times have already started to slow. This slowdown could also continue, given not just inflation and interest rate concerns, but concerns about the Covid-19 Delta variant as well. So, considering this, why buy GS stock today?
That’s a good question. On one hand, the party may not be over for major Wall Street institutions like this one. As Wells Fargo analyst Mike Mayo recently argued, the capital markets space could last “stronger for longer.” That is, trading and advisory could remain strong in the quarters ahead.
On the other hand, though, it’s tough to say that a possible rise in interest rates is good news or bad news for this pick of the bank stocks. An increase in net interest income may not be enough to offset continued declines in trading and advisory revenue (which could happen if higher rates slows down the economy).
So, what’s the best move with GS stock? You may want to wait for this one to pull back a bit. However, if shares start falling below their recent trading range, this may be another one of the financial services names to snap up for your portfolio.
JPMorgan Chase (JPM)
Better-than-expected loan losses helped JPM beat expectations with its Q2 results. Similar to the situation with BAC and Citi, investors are having concerns with this hybrid money-center and investment bank. Numbers for its equities and fixed income trading operations were down, but merger advisory remained strong.
And for its traditional banking units? With rates still historically low, net interest income came in below expectations. The short-term selloff makes sense, but it also may be a signal that now’s the time to dive into JPM stock. Again, this is for the same factors mentioned above (rising interest rates and return of capital).
But there’s another catalyst that could help put points into shares down the road: JPM’s big move into fintech. As InvestorPlace’s David Moadel discussed on Jul. 8, this name’s recent purchases of the robo-advisors 55ip and Nutmeg — along with its deal to buy OpenInvest, a platform focused on ESG (environmental, social and governance) investing — mean this “old dog” financial institution is learning some “new tricks.”
Consensus today has its earnings slipping between 2021 and 2022. But, if the “faster than expected rate hikes” thesis plays out, JPM stock may have room to rebound once its pullback eases up.
Bank Stocks to Buy: Morgan Stanley (MS)
Just like with its peers, the earnings story has been the same for MS stock. Trading revenue for the investment bank was down quarter-over-quarter. Yet, this was more than made up for, thanks to increases for its merger advisory, underwriting and wealth management segments.
Shares have sold off a little since announcing earnings. But MS has been at a lower level relative to the names mentioned above. Can this resilient performance continue? Maybe, maybe not. Further short-term declines for Morgan Stanley shares could be in the cards — especially if markets are further spooked by the Delta variant and rising inflation.
On the other hand, as the Wall Street Journal laid out on Jul. 15, “room to run” could be an accurate take on MS stock. Why? For one, its boosted dividend now yields 3.13%. Plus, there’s also the possibility of continued strong results as well as the potential for multiple expansion.
This may not result in Morgan Stanley shares nearly doubling. Yet, it may mean this name holds relatively steady (or even gradually heads higher). That could make this more retail investor-focused pick of the bank stocks one of the better investment banking names to buy and hold.
U.S. Bancorp (USB)
We’ve taken a look at investment banks and money-center banks, so now let’s take a look a more regional name: U.S. Bancorp. For the preceding quarter, both USB’s revenue and earnings results came in ahead of analyst expectations. EPS was $1.28 versus the consensus of $1.12. Additionally, revenue came in at $5.78 billion, versus consensus of $5.62 billion.
Unlike others on this list, USB stock has stayed relatively flat instead of selling off post-earnings. So, could the aforementioned market headwinds cause shares to follow the lead of other bank stocks and start pulling back? Not necessarily. Like with money-center focused banks, future interest rate increases may mean this bank could continue to deliver strong results.
But that’s not all — U.S. Bancorp has other positives. Yielding 3.08% at today’s prices, consider this one of the best opportunities in bank stocks for investors focused on income generation. Its current valuation is also in line with regional banking peers like PNC Financial (NYSE:PNC) and Truist Financial (NYSE:TFC).
Put it all together and it’s clear why Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A), is holding onto its large position in USB stock. Shares in this more prosaic financial name may not be heading “to the moon” anytime soon. Yet, this makes for a great “safe harbor” stock to ride out possible market-wide storms in the months ahead.
Bank Stocks to Buy: Wells Fargo (WFC)
Last up on this list of bank stocks, Wells Fargo has the same factors on its side as the others right now. Yet, there’s another catalyst that’s been at play here: the turnaround story. As seen from its recent strong quarterly results, it’s clear that CEO Charles Scharf’s cost-reduction strategy is paying off.
Still tarnished by the fake-accounts scandal from a few years back, this bank is working it’s way out the Fed’s “dog house” and hoping to get out from under its asset cap. Wells Fargo’s improvements to its own operation, coupled with the post-Covid “reopening” trade and booming economy, have enabled WFC stock to see an epic recovery. Specifically, WFC has gone from as low as $21 this past year to nearly $45 today.
Of course, folks like InvestorPlace’s Dana Blankenhorn have argued that there’s little reason to buy WFC at today’s prices with the turnaround priced-in. This may be true — the stock may have some room to pull back.
But if it pulls back far enough? There may be another factor that could make Wells Fargo a buy at lower prices: the return of its stock buyback program. Being able to repurchase up to $18 billion worth of its outstanding shares (which is roughly 10% of its market capitalization today) may be a booster for shares in the months ahead.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.