Should You Buy the Big Banks Before Earnings?

Corporate earnings reports trickle in at all times of year. But there’s a reason we talk about “earnings season” — and that’s because we tend to get flooded with most of the earnings reports around the same time.

That time is now. And the impact on stocks will be real.

Starting Monday, we’re going to find out whether some very major companies met their targets…or fell short. The particulars will be overanalyzed on TV. And even before the report is released, all kinds of Wall Street “hotshots” will be placing their bets.

Most of what you’ll hear on TV will be pure conjecture. I’m a numbers guy, so I prefer to deal in facts. So today, we’ll be previewing some of the biggest names reporting next week. Then if you own them — or want to buy them — or are looking to sell them…you can do so with the right information.

You can do this yourself for the stocks you’d like to watch – at earnings, or any other time – by creating a watchlist in my Portfolio Grader. Because the big banks are up to the earnings bat next week, I’m going to use them as an example. Everyone on Wall Street will be watching these closely. You might own some of them in your stock portfolio — and I can almost guarantee you’ve got some in your mutual funds.

As for the dates: I keep an earnings calendar for my investing services, like Growth Investor, so subscribers can find out when our stocks will report. It also includes the earnings estimates. But if you’re not a subscriber, you can find some reporting information on any number of investing sites.

 

Once you’ve figured out which stocks to check, you can see how they stack up by plugging in their ticker symbols, just as I have above.

Here’s what we get on those big banks:

Ten years ago, who’d have ever thought than an all-online bank, Ally Financial (ALLY), would be a “Buy” — while Wells Fargo (WFC), one of the few banks to come out of the financial crisis a winner, is now a “Sell”?

Well, a lot has  happened since then.

Let’s dig into my Report Card on those two banks in particular because there’s some interesting things we’ll discover.

Here’s how ALLY measures up:

ALLY’s earnings momentum — in other words, how rapidly its earnings have been accelerating over the past four quarters — leaves something to be desired at the moment, as does its cash flow. But ALLY has a lot going for it: It’s got good operating margins; it’s growing sales and earnings year-over-year, and it’s delivering a good return on equity.

Overall, ALLY’s “B” rating makes it a “Buy” in my system.

Then there’s Wells Fargo…

What WFC’s Report Card basically tells us is that the stock is none too popular on Wall Street ahead of earnings. Analysts are lowering their expectations for the stock. And according to my Quantitative Grade — my proprietary measure of money flow — WFC is bleeding investor cash right now.

WFC’s fundamentals look okay.. It’s growing sales, its operating margins looks good, and so does its cash flow. But there is clearly something the “smart money” doesn’t like here. And that’s a red flag going into its earnings report on Tuesday.

If there’s one thing I’ve learned in 40 years investing, it’s to “follow the money.” ALLY might not have earned a perfect Report Card — but its Quant Grade of “B” indicates that major players are accumulating shares. Wells Fargo, which had pretty comparable fundamentals overall, has a Quant Grade of “D.” That indicates an outflow of investing cash. And ultimately, this momentum is a big determiner of whether your investment succeeds or fails.

One Final Note Ahead of Earnings

While Portfolio Grader is always full of valuable information, I have to admit — I’m not too excited about the big bank stocks.

Remember, interest rates are still pretty low…and could be going lower soon! The Federal Reserve has not only stopped hiking rates, it is openly considering CUTTING them. While it’s good news for those of us who want, say, a small business loan, it’s detrimental to the banks. Cutting rates means cutting into their profits — i.e., their “earnings.”

So, even if the banks post good numbers now, they might have to lower their profit forecasts. And that’s a poor position to be in.

On the flip side, I like tech stocks right now. And I’m excited about one investment in particular. It reminds me of the 1980s, when Intel (INTC) was powering the PC revolution — and investors just couldn’t get enough of its stock.

Those days are gone. But one little-known company is playing a similar role now. I’ve got a full presentation for you at this link that gives you all the details. Check it out here now.

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