At a time when the economy is doing well and interest rates are rising, about half of the banks labeled as systemically important by the financial stability board are trading down in a bear market year-to-date (YTD), noted CNBC in a segment preceding Thursday's banking stress test results. (See also: 10 Financial Stocks Poised to Outperform.)
According to analyst Dick Bove of Hilton Capital Management, focusing on the largest six banks is a failure to see the bigger picture and gain on high-flying mid-cap financial stocks. He sees America's largest financial institutions as losing out to smaller competitors, expecting mid-cap banks to continue their "extraordinary run" in 2018. As for Thursday's stress tests, Bove indicated that given that banks in the U.S. are in good condition from a balance sheet perspective, it would only be a market-moving event if some bank failed to pass, but he does not envision that happening.
The Hilton Capital strategist indicated that stock repurchase programs by banks have a net negative impact in the long run, despite boosting stocks in the short term. Bove said that he hopes Goldman Sachs Group Inc. (GS) never re-instates its buyback program. What actually drives stocks in the long run is what the companies do in terms of selling products through their business, stated the analyst. Since they have not been great at selling products through their business in 2018, their stocks have taken a beating.
Outperforming Apple in 2018
Goldman stock is down nearly 11% as of Tuesday morning, compared to the S&P 500's 3.1% gain over the same period. Bank of America Corp. (BAC), Wells Fargo Corp. (WFC), Citigroup Inc. (C) and Morgan Stanley (MS) are also down YTD.
Such a narrow focus in the banking industry has led investors to "miss the whole ballgame," said Bove, arguing that the banking industry is not made up of just six companies but 400, many of which have outperformed even Apple Inc. (AAPL) this year.
Offering an opposing view, Chris Whalen from Global Advisors chimed in on the interview with CNBC, indicating that big bank stocks are fully valued. He views the stress tests as containing "no value analytically" and said that they contribute to a "media circus." Whalen added that it is "unreasonable" to expect the big bank stocks to still go up given their valuations. (See also: 4 Bank Stocks to Outperform in 2018: Oppenheimer.)