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This early in the year, investors want to get behind a story that has legs. That is to say something with a lot of positive near term and long term catalysts. With this in mind, I wanted to highlight one of my top picks for the year as well as a few other similar names.
As I look out across the market, one sector in particular looks to have a number of catalysts working in its favor. The banking sector has Fed rate hikes coming, a lot of them. There is also talk of less regulation from the new administration as well. The second idea there is a little more nebulous, but the rate hikes, they are much more predictable.
Let’s take a look at the Fed Calendar:
Over the past few years, we only say rate hikes at meetings with a press conference. This is not to say that it is a requirement for a rate hike, it has just worked out that way in this prolonged low rate environment.
At the most recent Fed meeting, we learned that there are several rate hikes coming. The exact number is not known, but the indication was that we should expect at least 2, if not 3 and there is an outside chance that we get as many as 4 this year. That checks the box for a long term catalyst.
Rate hikes generally help bank stocks. This allows for expansion in the net interest margin which is basically the difference between the rate they borrow at and the rate that a commercial enterprise or person would get. The industry has seen net interest margin rates held in check for a very long time so as they increase we should see a lot of that show up in EPS.
Analysts have taken note of this and many of them have highlighted banking stocks among their best ideas for the year. Count me in that group as well, as I think one of the bigger bank stocks will be among the best in the entire market.
Bank of America (BAC – Free Report) is a Zacks Rank #1 (Strong Buy) and has recently seen several upgrades and higher revisions to target prices. What gives it the #1 (Strong Buy) Rank is the fact that earnings estimates keep moving up. The best way to see this is the Price and Consensus chart shown below.
I like to also layer in the EPS surprises as well to the chart to show how the company has been in terms of its earnings history. We can see from the chart that BAC has beaten the Zacks Consensus Estimate in five of the last six quarters.
Pay close attention the beige line that denotes the estimates for 2017. They have recently moved higher and with that move the stock has followed. If we continue to see rate hikes, estimates are very likely to move higher and that should help support a higher stock price for BAC.
More Solid Banking Names
The thesis that led me to Bank of America also works for several other bank stocks. Here are a few other names that have a solid Zacks Rank and should continue to benefit from the longer term trends.
Comerica (CMA – Free Report) is a Zacks Rank #1 (Strong Buy) just like BAC and will report earnings soon. BAC reports on Friday 1/13/17, so investors that don’t fully share my belief about this sector can use that date as the canary in the coal mine. CMA is expected to report the morning of January 17.
Not A #1, But Still A Buy
Right now, Key Corp KEY) is not a Zacks Rank #1 (Strong Buy), but it is the next best thing. KEY is a Zacks Rank #2 (Buy) and trades at only 14x forward earnings which is just a little above the industry average of 11.6x. For a comparison CMA trades at 17x forward earnings.
KEY is my second favorite banking name for 2017 and is reporting earnings on January 19 before the open. At the time of publication, KEY has a 6.9% Earnings ESP, which is a proprietary measure developed at Zacks to help predict a potential earnings surprise.
Two Other #2’s
To round out my list, I wanted to give a two more stocks that have a Zacks Rank #2 (Buy).
PNC Bank (PNC – Free Report) is a Zacks Rank #2 (Buy) and is slated to report earnings on Friday. This Midwest based bank will give us some excellent insight into what KEY saw in the quarter. PNC trades at 15.5x forward earnings so it is a little more expensive than KEY.
Finally, my fifth stock for this article is Fifth Third (FITB – Free Report) . The stock is a Zacks Rank #2 (Buy) and trades at just about 16x forward earnings. The ESP for this stock is 2.3% and we are looking for earnings to come from the bank based on the corner of Fifth and Third streets on January 24.