Over the past few months, investors have seen the nine-year bull market come to an abrupt end as a surge in volatility has dragged some of Wall Street's most beloved stock picks into correction territory. While things looked promising for financial stocks at the end of 2017, thanks to improving fundamentals driven by higher interest rates and a sharp reduction in the corporate tax rate following the GOP tax overhaul passed in December, they did not prove immune to a larger market sell-off. Some analysts on the Street see this disconnect as an opportunity to buy particular insurers and banks at attractive valuations, indicating that they are set to once again outperform the broader market, as outlined in a recent Barron's story. (See also: Buy Tech, Financial Stocks for Late Bull Market: BofA.)
JPM, BofA and BBT Among Favorites
Keefe, Bruyette & Woods analyst Frederick Cannon issued a report in which he noted that many highlight financials' solid performance during the tech bubble of 2000 as a sign that the sector will continue to gain amid tech's current crisis. Despite this week's modest recovery, the tech space is now viewed by some as the most risky sector amid a period of heightened government regulation and public scrutiny. Cannon suggests that financials may have already experienced most of their outperformance as compared to tech, indicating that gains came early in the cycle, as noted in the Barron's story published on April 9. As a result, the analyst has become more selective on financial plays.
As for top insurers, Cannon expects American International Group (AIG), Hartford Financial Services Group (HIG) and MetLife (MET) to outperform. He recommends universal banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Morgan Stanley (MS) and State Street (STT). Terry McEvoy at Stephens also likes large regional banks, which he sees as positioned to post solid quarterly results this earnings season, which is slated to start next week. He recommends buying "super-regional" banks BB&T Corp. (BBT), Citizens Financial (CFG) and KeyCorp (KEY), as reported in a Barron's story posted April 3.
As for Bank of America and JPMorgan, Street bulls such as Keefe, Bruyette & Wood's Brian Kleinhanzl expect the firms to use the mounds of cash on their balance sheets to execute M&A to spur "growth or to fill in functionality." As Wells Fargo Corp. (WFC) struggles with a series of scandals and now faces a potential $1 billion fine regarding various investigations into consumer abuses, its peers are seen as preying on their weakened rival. Both BofA and JPM have pushed into new territories with hundreds of branch locations. In general, America's biggest banks are seen as benefiting from strong capital levels, higher interest rates and looser regulation as the focus in D.C. shifts toward tech names such as Facebook Inc. (FB) and Alphabet Inc. (GOOGL).
JPMorgan, the first of many banks to report earnings on April 13, has seen its shares gain 3.4% year-to-date (YTD) as of Wednesday close, compared to the S&P 500's 1.2% loss over the same period. Bank of America, which has increased 1.3% in 2018 after posting mixed results in January, is slated to report earnings on April 16.
BBT, which McEvoy dubbed a high-quality bank trading at a reasonable valuation, is positioned to gain alongside its regional bank peers, aided by a spike in commercial loan volume toward the end of the quarter, according to the Stephens analyst. While the bank's deposit betas, a measurement of how much it raises as a percentage of the Federal Reserve's rate increase, are expected to have grown in the quarter, McEvoy sees the increase as likely meeting forecasts, spelling good news for net interest margin expectations. BBT is up 5.1% YTD, as the company readies to post its most recent quarterly results on April 19. (See also: 4 Bank Stocks to Outperform in 2018: Oppenheimer.)