- Bank stocks are oversold and could be beneficiaries of interest rate hikes. There are a few “best-in-class” bank stocks out there that are set to surge.
- Goldman Sachs (GS) – Diversified offerings smooths Goldman’s top line. Additionally, GS stock is trading at a normalized discount after beating earnings.
- Citigroup (C) – Restructuring dented Citi stock’s progress. However, its services segment is picking up, and the stock’s a deep value play.
- JPMorgan Chase & Co. (JPM) – Elevated operating costs are a transitory issue. The stock’s recent drawdown exceeds quantitative reality, making it a lucrative “buy the dip” opportunity.
I’ve been saying it for a while now; I’d rather buy oversold bank stocks at a discount than invest in overhyped growth stocks. With the Federal Reserve set to revise its interest rate policy, there’s no better time to buy bank stocks. In fact, Harvard professor Kenneth Rogoff thinks the Federal Reserve needs to hike rates by as much as 5% to hit its inflation target of 2% to 3%.
Most stocks might crumble in a higher interest rate environment. However, bank stocks usually spike whenever interest rates rise as their interest-bearing activities gather momentum. Additionally, the market is dialed in on cyclicality, and any hint of an interest rate hike usually sends investors flooding toward banking exposure.
All of the above aligns well with a “buy the dip” opportunity in the banking space. For instance, Invesco’s KBWB Banking ETF (NYSEARCA:KBWB), which tracks big bank stocks, is trading at a relative strength of only 38.2. Thus, I see lucrative buying opportunities in the industry. Here are three bank stocks to consider.
|GS||The Goldman Sachs Group||$312.96|
|JPM||JPMorgan Chase & Co.||$123.72|
Bank Stocks: Goldman Sachs (GS)
Goldman Sachs’ (NYSE:GS) sell-off has been odd. Sure, slashing its Russia credit exposure by 60% at assumed losses will play a role. However, you’ve got a firm here that recently beat analysts’ earnings target by $1.78 per share. Even more impressive is that Goldman achieved its earnings beat in a down market for the banks amid bearish equity markets and slower than anticipated interest rate hikes.
The company’s well-diversified with solid global offerings in a variety of financial activities, allowing it to smooth its earnings volatility. Additionally, GS stock is undervalued at its current price, with its price-book value trading at a 13.4% discount to its normalized average.
Citigroup (NYSE:C) has been through a period of restructuring under its new CEO, Jane Fraser. Subsequently, its stock hasn’t traded well during the past year, drawing down by nearly 30%. Yet, I’m bullish on the stock as the company’s trade loans and security services segments are providing support with 18% and 6% year-over-year revenue growth, respectively.
I think Citi stock is a deep value play. First off, the stock’s trading at a 1.85x discount to its book value, suggesting that its asset base is undervalued. Furthermore, Citi’s dividend yield of 4.1% doesn’t just provide investors with income-generating prospects but also indicates that the management has faith in the firm’s future profitability.
Bank Stocks: JPMorgan Chase & Co. (JPM)
JPMorgan (NYSE:JPM) is the largest bank by market capitalization with a beta coefficient of only 1.09x. Thus, it makes little sense that the stock’s traded down by roughly 20% since the turn of the year. Furthermore, JPM stock has a monthly value-at-risk (5%) of 12.71%, meaning it’s unusual to see its stock perform as poorly as it has in 2022.
The bank beat its first-quarter revenue estimate by $318.51 million but missed its earnings target by 8 cents per share. I think once wage growth slows down; we’ll see JPM produce stellar earnings, which could see its stock regain momentum. Lastly, JPM stock is trading at a normalized price-earnings discount of 26.4%, indicating that its earnings growth is underappreciated by market participants.
On the date of publication, Steve Booyens held long positions in GS, C, KBWB and JPM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.