Bank Stocks: A Play on the Economy

By Monday, April 16, 2012

economic growthAs the economic recovery continues, the key benefactors will be the big and regional bank stocks, which benefit from growing businesses, real estate activity, and consumer credit. Banks represent the fuel driving the economic growth—a reason why I’m positive on the bank stocks.

The reality is that the nation’s banks have steadily charted a recovery since the collapse of Lehman Brothers in late 2008 that drove bank stocks in a downward spiral that inevitably required hundreds of billions in bailout infusion from government bailouts in order to survive.

In my view, this chaotic event in bank stocks was an opportunity that only appears once in a while. It was clear in my mind that the U.S. government could not afford to let the major banks fail, as it would have likely triggered a mass selloff in the U.S. For example, there was absolutely no way the government would allow the Bank of America Corporation (NYSE/BAC) or Citigroup Inc. (NYSE/C) to fail, as this would drive down banking competition nationwide, which would not be good for competition and for confidence in the U.S. bank sector.

A look at the KBW Bank Index (BKX) chart shows the steady upward move in the index, up over 43% since October 2011. Money was made and I feel there will be more gains coming.

Chart courtesy of www.StockCharts.com

I continue to like the progress of the bank stocks, but remain concerned with some of the bad stuff on the balance sheets and the government’s new restrictions on banking activities as set by the Volcker Rule to restrict some speculative activities.

The progress of bank stocks has been evident in the fourth-quarter and first-quarter earnings season. Banks are a good barometer of the country’s economy.

JP Morgan Chase & Co. (NYSE/JPM), the top bank based on assets, beat on earnings per share (EPS) estimates after reporting $5.4 billion, or $1.31 per diluted share, well above the consensus estimate of $1.16 per diluted share. JP Morgan raised its quarterly dividends and announced a $15.0-billion share repurchase program. The rise in dividends will help to attract institutional and retail investors are looking to add to dividend income from bank stocks.

Wells Fargo & Company (NYSE/WFC) beat on both revenues and EPS after reporting $0.75 per diluted share. $0.03 above estimates on five percent year-over-year revenue growth.

Both of the banks attributed part of the results to a stronger business, which I think will only strengthen further as the housing market improves. The same goes for jobs. More jobs mean increased spending and consumer banking demands.

My favorites are the big bank stocks over the smaller regional banks, which are tied to the health of a specific region of the country instead of the entire country. For instance, regional banks in California, Arizona, and Florida may continue to hurt.

I view pullbacks as an opportunity to accumulate bank stocks, because I remain longer-term positive on the big banks to drive higher as the economy recovers and expands.

The technology sector also continues to be a favorite, which you can read in Look at Small-Cap Tech for the Biggest Potential. (PC032112)

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »