Bearish Bank Stock Analyst Turns Bullish; Should You Follow?
Ever since the financial crisis several years ago, market sentiment has been quite negative on bank stocks. While the initial pessimism was well warranted, bank stocks today are radically different than they were in 2008. Clearly, from the massive gains in the share price of most, if not all, bank stocks, the market sentiment has shifted dramatically. The question: is the bull market over for bank stocks?
One of the most critical analysts against bank stocks has been Meredith Whitney. However, on December 18 in an interview with CNBC, following her extensive research, she has now become bullish on bank stocks.
As she stated in the interview on CNBC, “There’s an incredible growth opportunity within the financials… I think the underlying support is housing is close to bottom, so that is a great headwind relief for banks… They’ve come a long way.” (Source: CNBC, December 18, 2012.)
One of her main calls is for the bull market in Bank of America Corporation (NYSE/BAC) to continue, as she believes the Federal Reserve will approve their dividend increase request. Whitney believes Bank of America could quadruple its dividend.
It is expected that the Federal Reserve will release the results of stress tests on the bank stocks in January. In March, it will state whether or not increases in dividends and share buybacks can resume. Considering how much the bank stocks have changed over the years in terms of improving their balance sheets, I do not expect there to be any problems for most of the bank stocks. Market sentiment might still be underweighting this sector ahead of these key releases.
Of course, this is not news to my readers, as I’ve been bullish on bank stocks for most of this year, including a recommendation for JPMorgan Chase & Co. (NYSE/JPM) back in June of 2012, when it was trading just over $35.00. While some bank stocks were hit with negative market sentiment, including JPMorgan, I stated this was a great entry point.
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In the article “Is This the Time to Buy JPMorgan?,” I made the case that the decline in JPMorgan’s share price, due to a trading loss by the now infamous “London Whale,” was just a blip for this giant among bank stocks. Over the long term, everyone will forget this one-time loss and look at the massive amounts of revenue and earnings generated, leading to even higher market sentiment.
Chart courtesy of www.StockCharts.com
Since that article, JPMorgan, like many other bank stocks, has seen nothing but strong gains. This 25% gain in JPMorgan shares in the six months since my recommendation is in addition to the substantial dividend yield.
Now that Meredith Whitney, one of the most bearish and pessimistic analysts on bank stocks, is becoming bullish, this is starting to worry me. When market sentiment becomes too optimistic, that’s when people should be taking profits. When market sentiment becomes too pessimistic, especially with a one-time occurrence such as the JPMorgan selloff this past summer, these are great long-term entry points.
Clearly, the housing market is in recovery, and this will help all bank stocks. Bank stocks that have more leverage in the housing market, like Bank of America, will certainly do well. The question isn’t whether bank stocks will do well but when to accumulate them. Again, with market sentiment so strong, I would urge caution and look for pullbacks for a more attractive entry point.