Fundstrat analyst Tom Lee, who correctly called last year’s rally of the S&P 500 in the face of tremendous pessimism about U.S. equities, recently advised investors to overweight certain financial stocks. Specifically, Lee said on The Julia LaRoche Show that with interest rates are likely to fall meaningfully this year, and the most obvious beneficiaries will be banks. I agree that banks will do well in 2024, but for a slightly different reason. Although I believe that housing prices are likely to drop, I think that banks will benefit from large increases in interest income from mortgages next year. That’s because the number of homes bought with high-rate mortgages will rise.
Moreover, most banks will benefit from increases in the prices of the bonds that they hold on their balance sheets, since bond prices move in the opposite direction as interest rates. In accordance with Lee’s advice, here are three top financial stocks that are likely to outperform the stock market in 2024.
Western Alliance (WAL)
A regional bank based in Arizona, Western Alliance’s (NYSE:WAL) balance sheet will grow with interest rate cuts. That’s because, as of the end of 2022, it owned $1.98 billion of state and municipal securities, $3.2 billion of mortgage-backed securities and $3.3 billion of other securities. The value of state and municipal bonds and mortgage-backed securities rise when interest rates fall, and many of WAL’s other securities likely have the same characteristic.
Even more important is that the performance of WAL’s loans should be greatly helped by the drop of interest rates. That’s because lower rates will improve the financial outlook of the businesses and consumers that received loans from Western Alliance in the past. As a result, fewer of these loan recipients should default going forward. The company held $51.5 billion of net loans as of the end of 2022.
Additionally, I expect the bank to benefit from the fact that Arizona is becoming a manufacturing hub.
Also noteworthy is that the forward price-earnings ratio of WAL stock is a very low eight.
Comerica (CMA)
Last October, regional bank Comerica (NYSE:CMA) was identified by Morgan Stanley (NYSE:MS) as being one of the worst victims of bond losses. Therefore, as rates fall, causing bond prices to increase, CMA stock will be one of the biggest beneficiaries. Indeed, the phenomenon is already occurring as the shares jumped 34% in December.
Also importantly, as of November, Comerica’s deposit outflows had already stabilized, and that situation should improve further as interest rates fall, making money markets and Treasury notes less attractive.
Despite the shares’ recent rally, their forward price-earnings ratio of 10.4 is quite low.
Bank of America (BAC)
Bank of America’s (NYSE:BAC) shares have been held down by widespread worries about the large amount of bonds that it holds.
Last month, Barron’s reported it had unrealized losses in its held-to-maturity assets of $100 billion. The cause of these losses were declines in the value of the mortgage securities and government debt that it held. But as the Fed cuts rates, the opposite phenomenon will occur. That is, the value of BAC’s mortgage securities and government debt will increase, causing worries about the bank’s balance sheet to ease.
Also noteworthy is that Bank of America’s bottom line jumped 10% last quarter versus the same period a year earlier. Plus the forward price-earnings ratio of BAC stock is a tiny 10.3.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
