Paul Meeks has been following technology stocks since 1992 as an analyst or investment manager and has been noteworthy for his long term bullishness on the sector. He raised eyebrows in January, however, by advising investors to reduce their exposure to tech stocks, citing rampant overvaluation in tech. Meeks reiterated this view recently, telling CNBC, "the valuations are not pre-internet bubble popping valuations, but they are still extreme." By contrast, he said, "I do like banks because they've underperformed." Meeks is currently the chief investment officer (CIO) at Sloy, Dahl & Holst. (For more, see also: Long-Time Tech Analyst Advises Sector Overvalued.)
|Stock||Ticker||YTD Price Gain|
|JPMorgan Chase & Co.||JPM||0%|
|Bank of America Corp.||BAC||(2%)|
|Wells Fargo & Co.||WFC||(9%)|
|Goldman Sachs Group Inc.||GS||(10%)|
|S&P 500 Index (SPX)||3%|
Source: CNBC, data through 10 AM EDT on June 19.
What Meeks Recommends
"I would overweight the banks and I would neutral weight or maybe even underweight tech with its steep valuations at this point," Meeks told CNBC. While he believes that fundamentals remain strong for tech stocks, he said that they are not robust enough, in his opinion, to drive continued outperformance for the sector.
By contrast, Meeks noted that a continued upward trend in interest rates bodes well for bank earnings, as banks gain more leeway to increase their net interest spreads. Also, despite rising fears that an inverted yield curve is imminent, Meeks believes that the yield curve eventually will become steeper. This, in turn, will be positive for bank profits, he observed. His top choices among bank stocks are JPMorgan Chase and Morgan Stanley, both of which he holds right now.
In April, citing tech stock fundamentals that were about "as good as I've seen," Meeks backed off a bit from his January warning, per another CNBC report, at least regarding the big tech stocks in the FANG group. At that time, he suggested that investors who owned these stocks should continue to hold them, while also considering buying on the dips.
Another Bullish View on Big Banks
Tony Dwyer, the chief market strategist at Canaccord Genuity, is bullish on the big banks, saying that "now is the time you want to buy," for three reasons. These are strong earnings growth, deregulation, and a flattening yield curve, per a third CNBC report.
In the first quarter, earnings were up by 30%, beating the forecast of a 24% increase year over year (YOY). Dwyer noted that returns of capital to shareholders, including those made through share repurchases, were factors driving this positive earnings surprise.
Deregulation, including a loosening of capital requirements and of the restrictions on trading that were imposed by the Volcker Rule, are increasing banks' ability to make money. Smaller banks also are seeing benefits, he added, from reduced regulatory and compliance burdens.
A flat yield curve, in which there is little or no spread between short-term and long-term rates, results in lower bank profits than a steep yield curve, but Dwyer believes that investors would be premature to abandon bank stocks right now. Per a report from Dwyer cited by Barron's, during the 1990s and the 2000s, the relative performance of bank stocks bottomed out when the spread between short-term and long-term rates was around 35 basis points, similar to what it is now. When the yield curve flattened some more, but before it inverted, bank stocks outperformed. Indeed, he added, "expect significant gains even after the curve inverts."