The reactions to JPM and BAC earnings were tentative. So the opportunities there remain intact. The third hasn’t yet reported, so the SQ stock price continues to hold its own for the bulls.
So in light of the recent reports, are they still good to buy at these levels? The short answer is, yes.
So, today, I reiterate the reasons why and I also add Citigroup (NYSE:C) to the list of banks to own for the long term.
The first few days of the earnings season are muted and did not yet erase the predominant idea that bank stocks are boring and cannot rally. So the investment in them now should continue to be under the assumption that it’s for the long term.
So What About Their Environment?
Contrary to popular belief, banks stocks do perform in lockstep with the general equity markets. Year-to-date JPM and BAC are up just as much as the S&P 500 and Citigroup stock is up double that.
In addition, since all of them passed their stress test, they are all committed to defending their own stock prices with financial engineering.
They will increase dividends and buy back their own shares so the efforts from the sellers will have to go against a tremendous headwind of cash flow from the banks themselves.
The U.S. Federal reserve and other central banks have wreaked havoc with banks’ ability to conduct business. They keep manipulating the interest rates and this creates tremendous confusion, especially on Wall Street.
Most investors believe that banks need higher rates to profit, but that is not true. Money center banks need a wide spread between short- and long-term rates to profit.
So the recent commitment from the Federal reserve to lower short-term rates should invite more lending activity and at a wide spread. Banks borrow short term to lend us long term. So I am not worried about their business models this year.
With that in mind, let’s dive a bit deeper into what makes these three stocks to buy.
JP Morgan Chase (JPM)
Perception on Wall Street is that JPM is the best of the best. Fundamentally it’s cheap as it sells at a price-to-earnings ratio of 12x. The book value fluctuates from 1.2 to 1.6, so it’s not likely to be a financial debacle to own it here. In addition, JP Morgan stock pays a respectable 2.8% dividend.
The management team is a proven winner. They survived the worst financial crisis of the modern era, so they’ve seen a few hard days. The regulations that followed the 2008 financial crisis made it so that their balance sheets are bullet proof. Recently, JP Morgan recommitted to more capital return via buybacks and dividends.
In addition to the value below, JPM stock is trading inside a tight range. It has support at $112 and $110 per share and a neckline at $116.5, above. Technically, this makes for a breakout opportunity since the bulls have been setting an ascending trend of higher lows while knocking at a resistance zone. If they can break through the resistance zone above, then they can overshoot higher and mount a $9 rally.
I would own the shares here for this short-term opportunity and/or for the long-term equity investment. Either way, I think JPM stock is a winner.
For those who like to trade options there is also the possibility to sell put spreads at the support levels for August and/or buy calls just above the current price. The combination would be cost neutral thereby offering an opportunity to profit with no out-of-pocket expense.
The JPM earnings report did not add any new worries so the ongoing fundamentals still favor the long-term bullish thesis than the short.
Bank of America (BAC)
The fundamentals for BAC stock are very similar to those of JP Morgan. The stock on the other hand trades in a much tighter range. Case in point, in the last few weeks, the Bank of America stock price is ping-ponging inside a $1 wide box and this includes the reaction to an earnings event.
BAC sells at a 10.8 P/E and 1.1 times sales, so it’s even cheaper than JPM stock. Management is also beyond reproach since they not only survived the crisis but also saved a few banks along with it.
Since BAC trades in a tight bunch, I prefer to trade it via options. I like to sell puts into dips and what others fear. It’s a low-priced ticker, so I don’t mind being out of the stock if one of those trades temporarily fails. Over the long term it will work out. This way I generate income without any out-of-pocket expense.
For example, if I sold the Jan $25 puts before the earnings they now are almost 20% cheaper to close the position. The stock only moved up 2% in comparison. And in my scenario, I risked no money out of pocket.
It is important to note that I don’t sell naked puts unless I am willing and able to own the shares.
Since BAC stock is now tight, technically it too has an opportunity to breakout. The bulls need to overcome the current resistance level, so they can target $31.2, which was the fail of April 29.
Here too the Bank of America earnings report did not change the overall bullish thesis on the stock.
Citigroup’s reactions to earnings was negative. Since then, the C stock price has traded inside that earnings day candle. So, technically, I note the edges of it as short-term catalysts. Meaning that any breach of its sides would carry some momentum in that direction.
So if the bulls can beat $72, they can target $76 per share. Conversely, if the sellers can break below $70, they can target $68 per share.
Either way, it would be an exercise in short-term trading and won’t change the long-term bullish thesis on the stock. Citigroup stock, for the long term, remains a “BUY” in my book and the experts on Wall Street agree since it has very few HOLD and almost no SELL ratings.
So which one is best?
They are all quality stocks to buy, but from a 2019 perspective, C stock has the best score. Logic says to stick with the winner.
However, of the three banks today, C is my least personal favorite. This is nothing against its own fundamentals and more so my worry over its exposure to international situations. Specifically the chatter surrounding its exposure to entities like Deutsche Bank (NYSE:DB) for example. I don’t have anything concrete, but if there is a rumor, then there must be some truth to it, and I don’t want the surprise of finding out one day.
In summary, I can confidently state that the major U.S. banks are almost all stocks to own almost at any time, while they carry their current fundamentals. JPM, BAC and C stock have so much value below that they make the bearish scenario seem shallow at its worst.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.