Marc Faber is a legendary investment advisor and fund manager. He publishes a monthly market commentary, which carries his view on different investments and asset classes, including bank stocks.
In his September issue, Faber opines that “at some point, the Awesome 8 will turn down and that investors will move funds into value type of stocks including resource stocks and banks.”
The “Awesome 8” here refers to Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL,NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA).
I am bullish on the Awesome 8 for the long term. However, I do believe that bank stocks can outperform these names in the coming quarters as investors look for value.
Reuters points out that banks sector’s forward price-book ratio is significantly below historical average. Valuations have not changed in the last few months with most bank stocks remaining sideways.
The Federal Open Market Committee expects U.S. GDP growth to decline by 6.55% for 2020. However, GDP growth is likely to bounce back to 5.25% in the coming year. The banking sector is the backbone of the economy and if GDP growth accelerates, bank stocks are likely to outperform.
With these factors in consideration, let’s take a look at the following bank stocks. These three bank stocks are attractive for the coming quarters as the economy gradually crawls back to normalcy.
- Bank of America (NYSE:BAC)
- Citigroup (NYSE:C)
- JPMorgan Chase (NYSE:JPM)
Bank Stocks To Buy: Bank of America (BAC)
Warren Buffett has the knack of finding value in the markets. Last month, the legendary investor bought $2.1 billion in stake in BAC stock over 12 trading days. With negative returns of 13.4% in the last one year, I believe that BAC stock remains attractive for fresh exposure.
Even if we look at analyst estimates, 23 analysts have a median price target of $28 for the stock. This implies an upside of 9.8% from current levels. In addition, the stock has an attractive dividend yield of 2.8%. Furthermore, if GDP growth gains traction in the coming years, potential returns can be higher.
The second quarter of 2020 was the worst in terms of impact of the novel coronavirus shutdown. Bank of America still managed to deliver net income of $3.5 billion. Additionally, the company also increased the provision for credit losses to $5.1 billion.
The unemployment rate has already declined from 14.7% in April 2020 to 8.4% in August 2020. The stress for the banking system is likely to decline and I expect better quarters ahead.
Bank of America’s net interest income for the second quarter declined by 11% to $10.8 billion. However, for the same period, non-interest income increased by 5% to $11.5 billion. This was driven by strong capital markets. I believe that as long as expansionary monetary policies continue, financial institutions will benefit from capital market trading.
Considering these factors, I believe that BAC stock is attractive. In the coming quarters, I would not be surprised if the stock outperforms the index.
Source: TungCheung / Shutterstock.com
C stock has been another underperformer among bank stocks. While BAC stock had negative returns of 13.4% in one year, C stock delivered negative returns of 25.9%. However, I do see value in the stock that currently has a dividend payout of $2 and a dividend yield of 4%.
From a valuation perspective, C stock is trading at a price-book-value of 0.61. This is attractive as compared to BAC stock that trades at a P/B of 0.91. Further, JPMorgan Chase trades at a P/B of 1.31. Therefore, C stock might have underperformed in the last year. However, I would not be surprised if the stock is an outperformer once credit growth increases.
In terms of financial performance, Citigroup did deliver 5% top-line growth for the second quarter even amidst the pandemic. I also like the fact that the bank’s revenue is diversified across North America, Asia, Latin America and in Europe, the Middle East and Africa (EMEA).
Going forward, I expect regions Asia, EMEA and Latin America to be earnings growth drivers. For the next five years, analysts expect the bank’s annual earnings growth at 10.5%. This is attractive for a stock trading at a P/B of 0.61.
Overall, Citigroup is well positioned to navigate the crisis period with $28.5 billion in allowance for credit losses. Currently, fixed income markets and investment banking is supporting growth. In the coming year, core banking business is likely to accelerate and take C stock higher.
JPMorgan Chase (JPM)
Source: Roman Tiraspolsky / Shutterstock.com
Deutsche Bank analyst Matthew O’Connor recently upgraded JPMorgan Chase with a price target of $115. This would imply a 12.2% upside from current levels of $102.5.
O’Connor believes that improving macro-economic conditions and attractive absolute valuations are JPM stock upside catalysts. In addition, lower credit risk than feared a couple of months ago adds to the positive trigger.
In its recent newsletter, Vltava, a global equity fund, talked about the reason to be positive on JPMorgan. According to Vltava:
“Among all the world’s large banks, this one is the best managed and financially strongest. It did very well already in the recession of 2008, when it remained profitable and did not require government help. This made it exceptional among large banks.”
I am completely in sync with this view and I believe that JPM stock is a core portfolio stock from the banking sector. With negative returns of 13.8% in the last one year, the stock is a “screaming buy.”
To further back this view, I want to mention that for Q2 2020, the bank reported $4.7 billion in net income even after building $8.9 billion of credit reserves. The highest quarterly revenue for the bank was backed by a diversified global business model.
Therefore, JPM stock is certainly attractive at current levels and is likely to deliver healthy returns in the coming quarters.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.