Big Upside Is Possible in Bank Stocks
Other than the Great Recession, this may turn out to be one of the best times for aggressive long-term investors to consider buying the big banks on weakness. The banking sector is down this year, though it has rallied since the February 11 sell-off, when investors in the big and regional bank stocks unjustifiably ran for the exits.
Now pundits will say the current environment for the banking sector is not conducive to buying bank stocks. That’s true but investors could consider taking a pre-emptive strike and potentially buy on the weakness, rather than add when the banking sector is recovering.
Under a similar strategy, investors can accumulate dividends while they make some capital gains when bank stocks rally.
Just look at what happened in February when the masses were selling the bank stocks. For instance, Citigroup Inc (NYSE:C) collapsed to $34.52 on February 11. If you bought the stock then, your position would be up 30% in two months.
Chart courtesy of www.StockCharts.com
The same thing occurred with the other big banks and bank stocks. It happened in 2008 and is occurring once again. These kinds of chaos opportunities do not occur that often but they do happen. Instead of running for the exits, I look at these sell-offs as a potential buying opportunity.
These Opportunities to Pick up Bank Stocks Are Rare
The reality is that the banking sector has been under pressure due to the low interest rate environment, which pressures banking margins, along with a lackluster lending business due to the fragile economy, negative rate fears, and exposure to the battered oil sector.
These are all valid reasons to be concerned about bank stocks, but I would rather take the longer-term view and accumulate a position on weakness.
Of course there is also the Bernie Sanders effect and his “political revolution” slogan on how he will break up the banks if he is elected president. Maybe some of his ideas are hot air but until it goes away, there will be this risk for the banking sector.
Then there was the news from the Federal Reserve last week after the central bank rejected the plans put forward by five of the eight big banks regarding their ability to wind down operations during a crisis without government help.
So far in the first-quarter earnings season, JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) both beat on revenues and earnings. The results indicated weakness in both consumer and commercial banking but that was widely expected.
The fact is that the big banks trade below their tangible book values, which in my view suggests a potentially good risk-to-reward investment opportunity for those with a longer-term view. You can accumulate in several tranches on price weakness as a strategy.
Smaller investment accounts could take a diversified approach and look at the numerous exchange-traded funds (ETFs), such as the large-cap Financial Select Sector SPDR Fund (NYSEArca:XLF) and the SPDR (KBW) Regional Banking (ETF) (NYSEArca:KRE), both of which have ratcheted higher since I previously looked at the banking sector in February.