Breakout

Big Bank Stocks Have Another 10-15% Upside: Cannon

Jeff Macke
Breakout

One of the most surprising things about the latest leg of the stock market rally is that bank stocks have been leading the charge. Normally a group at the core of any financial catastrophe is left for dead years after the crisis. In this case, the financial sector that created the trash funding that fueled the housing bubble, has been outperforming the broader market year-to-date, over the last 12 months, and since the start of 2012.

Fred Cannon, chief equity strategist at KBW, says one of the best things the sector has going for it is just how far the stocks had been beaten down in the first place. "While the market is making new highs, banks and financials are not," he notes. Measured by the Financial Sector SPDR ETF (XLF) or the KBW Bank Index (^BKX), financials are still almost 50% below their high water marks despite more than doubling from March 2009 lows.

Coming off what Cannon describes as a low base can only take a stock sector so far. Every tick higher moves the big bank stocks closer to levels where the fundamentals will need to justify continued buying. Taking excessive leverage out of an industry makes for a more solid footing, but also makes for less profitable operations.

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As for picks, Cannon wants to focus on the Big Boys. "Citigroup (C) we think has legs at least to get back to book value, so you have at least 10 - 15% upside for some of these big banks." On the one hand holding book value as an upside target seems a modest want for a group of stocks. On the other, unlike 2007, book value might actually mean something today.

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