There's no doubt about it, the Financials (XLF) are the darlings of the market, having easily outpaced all nine other sectors on a 1, 3, 6, and 12 month basis. For some, that might be a warning sign that this 80-stock basket of lenders, insurers, REITs, asset managers and investment banks could be getting a little ahead of itself. If you add in today's mixed earnings results which saw Goldman Sachs (GS) nearly tripling profits and easily topping expectations but JPMorgan Chase (JPM) clearing the bar thanks in part to a $900 million reduction in loss reserves, and the outlook for the group as a whole starts to get a little muddled. And then there's the fast-approaching debt ceiling showdown, and the dilemma starts to look worse given the sector's unique vulnerabilities.
"Financials are the most levered to the economy and anything that threatens the economy is certainly going to effect these stocks in the short-term," says bank analyst Anton Schutz, president and CIO of Mendon Capital. Even so, he plans to ''take advantage of the choppiness" in the coming weeks and look past the short-term turbulence.
In the attached video Schutz explains that, for a number of reasons, he is much more confident in long term outlook, pointing out that the sector is valued at "absurdly low multiples."
Still, there are concerns and risks surrounding interest rates, housing, and regulation, the latter of which Schutz describes as still being "incredibly heavy and very costly." But when you eliminate or simply ease that regulatory burden, he and many other bank investors see great opportunity.
Additionally, he predicts that the housing market could have a very good year as long as homeowners feel secure about their jobs and "Washington gets its act together."
Assuming it eventually does, after another spate of torturous public ineptitude, then Schutz is left with a sector filled with very cheap stocks that have a lot more upside and can be bought for a fraction of their tangible book value. Specifically, he names Citigroup (C), Regions Financial (RF) and Fifth Third Bancorp (FITB) as favorites, as well as JPMorgan (JPM) as the best banks to hideout in.