Bank stocks have been a tough trade this year. After surging in the first quarter of 2018, the group began a multi-month pullback as bank stocks continued to grind lower. However, the group was able to break out in July, surging higher into August. Those gains have petered out and financials have been a choppy scene since. So what do we do with bank stocks ahead of bank earnings?
Be it Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) — you name it — the group has some similarities. For one, they all benefit when the economy is strong, like it is right now. Most have a low valuation and pay a decent if not great dividend yield. Finally, all of them benefit from rising rates.
When they can borrow at a lower rate and lend at a higher rate, banks profit on the difference in between. That becomes an issue though when the yield curve begin to invert, such as when short-term yields rise and long-term rates fall or stay stagnant. Up until this week, that had been a big problem. However, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) tumbling this week, the spread is currently widening.
That’s all good news ahead of the quarterly results; banks begin reporting in mid-October. Goldman Sachs analyst Richard Ramsden is also optimistic on bank stocks, specifically on BAC, JPM and Morgan Stanley (NYSE:MS). He says negative macroeconomic views should be baked into the stock prices, while profitability may reach a post-crisis high. He believes the banks can top consensus expectations.
Wells Fargo, JPMorgan and Citigroup will all report earnings before the open on Friday October 12th. What should investors expect when it comes to bank earnings?
Bank Stocks to Watch: Wells Fargo
When it comes to Wells Fargo, analysts are looking for earnings of $1.18 per share on revenue of $21.8 billion. Those estimates call for growth of 23.7% and -0.5%, respectively.
From a trading perspective, WFC stock isn’t my favorite name. However, Thursday’s move allowed shares to break out of a steep falling wedge. Interested bulls can take a position in the name, with shares out of that channel and above rising support near $52. Below this level and some investors may consider stopping out.
Shares are currently below all three major moving averages, which is generally considered a bearish observation. However, a rally into the mid-$50s could happen in a pre-earnings rally or in a post-earnings reaction. See how WFC handles that $56 to $58 area should it rally.
Near the lower end of the range and WFC has a decent risk/reward. Wells Fargo stock also pays a solid dividend, yielding almost 3.3%.
Bank Stocks to Watch: JPMorgan
JPM stock has been choppy lately. After topping out near $117 in August, JPMorgan essentially put in a double top in that area. After surging several percent in one September session and then gapping above $117 in the ensuing session, it looked like JPM stock was going to break out. It didn’t though, and shares quickly retreated back to the $112 to $113 area. Now in between that range at $115 and JPM is questionable ahead of earnings.
Don’t get me wrong, the near-3% dividend yield, low valuation, strong growth and pristine brand all make owning JPMorgan a piece of cake. But new buyers may want to avoid taking on a full position right now.
Instead, consider a less-than-full position which can be added to on a decline. If JPM pulls back into earnings, back between $113 and the 200-day moving average, I would be a buyer. Up near $116 to $118 and it’s less attractive.
For the analysts’ part, they expect earnings of $2.26 per share on revenue of $27.6 billion. That represents growth of 26.7% and 5.5%, respectively.
Bank Stocks to Watch: Citigroup
Given how poorly the banks stocks have traded lately, I know a rally toward $76 seems unlikely before bank earnings next Friday. But consider that C stock got to $74 on Thursday before backing off as stocks were hammered and a run to $76 seems possible if the market cooperates.
If it does rally, I would wait for C to report before taking a position. I don’t like to buy names that run into their quarterly print. If it does run and then rallies even more after earnings, look to see how C stock handles $79.
Otherwise, I don’t mind C on the long side near current levels. It has all three major moving averages just below current prices as support, as well as uptrend support nearby. Below $71 and conservative investors may consider stopping out of the position. But the risk/reward isn’t bad here, especially with Citi’s low valuation.
For the report, analysts expect earnings of $1.65 per share on sales of $18.46 billion, representing growth of 26.6% and 1.6%, respectively. Further, shares pay a dividend yield of almost 2.5%.
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