Second-quarter earnings season starts next week with the quarterly kick-off ritual of reports from the major investment and money center banks.
The bullish FAS tries to deliver triple the daily returns of the Russell 1000® Financial Services Index while the bearish FAZ, which is higher by 9.16% over the past month, attempts to deliver triple the daily inverse performance of that benchmark.
Why It's Important
Banks faced an array of headwinds in the first half of 2020, including declining interest rates, rising loan loss reserves and the mandate from the Federal Reserve that buybacks be scuttled and dividend hikes be put on hold.
“Goldman analyst Richard Ramsden is more bearish, projecting earnings off 69% compared with last year. On the plus side, with the exception of Wells Fargo (NYSE: WFC), which he believes will report a quarterly loss, banks are apt to avoid dividend cuts,” reports Barron's. “Still, banks will be hurt by higher reserves, which he expects to hit $32 billion, 27% over last quarter.”
Reading through the tea leaves of that assessment, it would appear that the bearish FAZ has a chance to shine this earnings season. Potentially bolstering the case for FAZ is that bank stocks, though still inexpensive relative to the broader market, aren't quite the value plays they were 12 months ago.
“Even with the recent increase in stock prices, the median North American financial sector stock still trades at an 11% discount to its fair value estimate but below a 30% discount a quarter ago,” according to Morningstar. “With our assessment that many financial sector stocks are less undervalued than they were a quarter ago, investors should be much more discerning of which stocks they choose and cognizant of the risks they’re taking.”
Something else to consider when it comes to the FAS/FAZ decision is that the Russell 1000 Financial Services Index isn't a bank-specific benchmark. It includes insurance providers and asset managers, among others and some of those companies aren't all that inexpensive, either.
“Outside of banks, we see fewer bargains in the financial sector. The investment-management firms we considered undervalued at the end of the first quarter are mostly fairly valued after the run in the stock market,” notes Morningstar. “The median North American insurer we cover also trades at around an only 8% discount to its fair value estimate, which is a relatively small margin of safety, given the insurance industry’s exposure to interest rates, asset prices, and tail risk of large insurance claims from the pandemic.”
See more from Benzinga
- Good News For This Leveraged ETF: Bank Dividends Are Still At Risk
- Murky Dividend Picture Puts Bearish Bank ETF In The Spotlight
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.