Is It Time to Buy Big Banks?

As you may recall, I gave the “all-clear signal” to buy dividend stocks last month after they rebounded nicely off their lows in early March. However, I wanted to hold off on growth stocks until I had a better idea on where the analyst community stood.

Now that the first-quarter earnings season is underway, it’s clear that Wall Street is reacting as it should: rejecting weak results – and rewarding strong results! I also like the mechanics of the market: volume is heavier on up days, and lighter on down days.

This is the “all-clear signal” I was looking for to buy the best growth stocks the market has to offer.

I specifically called yesterday as the time to buy, as I knew the stock market would pull back on the weak retail sales report. It was the perfect time to go bargain-hunting and buy strong stocks on significant discounts.

Of course, some stocks were down for a reason and actually deserved to be sold off!

Let me give you an example of how to tell the difference…

One silver lining in this stormy market has been the federal government racing to the rescue of American companies – and banks, in particular. As such, readers have been asking me: “What do you think about big banks now?”

Well, you’ve come to the right place. If you’ve been with me awhile, you may know that I’m an ex-banking analyst. I previously worked for a division of the government that is now part of the Federal Reserve.

Something you’ll notice with banks is their “creative accounting” practices. Based on my time as an analyst, I frankly do not trust the accounting in that sector. And that was even before the 2008 financial crisis – and before Wells Fargo (WFC) crossed the line from creative to fraudulent by secretly saddling customers with extra, unauthorized accounts to juice their sales numbers (as it turned out in their 2016 scandal).

This week, we’re starting to get earnings reports from the big banks. And in the first quarter, something appeared on the balance sheets that’s legitimate…but still muddies the waters. Namely, several billion dollars’ worth of “credit reserve build,” also known as “provision for credit losses.”

We have the coronavirus to thank for that. The bank CEOs are less than cheerful about the economy right now: Citigroup’s (C) talked about a “deteriorating economic outlook” in Wednesday’s earnings report, while Wells Fargo’s CEO felt “there is more downside than there is upside at this point” for the economy – after JPMorgan Chase (JPM) warned of a “fairly severe recession” on Tuesday.

With that in mind, banks are basically betting that an unusually high amount of loan payments will not actually come in from their customers. Think of this as a “buffer” on the balance sheet for defaults. If banks didn’t boost that “provision for credit losses,” their profits would look nicer…but it could come back to haunt them later.

Since this is an estimate – and we don’t know for sure what the figure would have been, if not for COVID-19 – it’s hard to say whether these banks had a good quarter or not!

Here’s what we can say for sure:

  1. Revenues are more cut-and-dry…and, of the five major banks that just reported first-quarter earnings, four of them beat expectations there. (Wells Fargo was the exception, with revenues of $17.7 billion, while Wall Street had expected more like $19 billion.)
  2. Wall Street reacted poorly to these bank earnings. The broad indexes were down about 2% Wednesday, while most big-bank stocks were down 5% or 6% in response, and they fell even further today.
  3. The Federal Reserve is doing everything it can to fix all of this. Propping up banks (and our economic system) was a major reason for its huge emergency rate cuts and quantitative easing. Early in this bear market, the Fed acted fast to “un-invert” the yield curve by slashing short-term rates to nearly 0%. The economists there know very well that an inverted yield curve is bad news for banks. Remember: Banks work by paying interest on your deposits and collecting interest on your loans. Those loans are based on bonds with longer durations, so when the yield curve inverts, it hurts the big banks’ profitability.

The bottom line is, many banks’ bottom lines will improve, going forward…but I still do not recommend owning big-bank stocks now.

At the end of the day, I don’t trust them – and, anyway, the big banks are value stocks. I only recommend growth stocks in my services, where I just recommended two very different companies for Accelerated ProfitsGo here if you’d like more information.

So, if you’re tempted to buy the dip in the bank stocks, take a look at this table first. You’ll see the earnings results (after the impact of “provision for credit losses”), plus how the stock rated in my Portfolio Grader ahead of the first-quarter report:

Setting aside my personal feelings and impressions, not one of the big banks is an A-rated “Strong Buy” now.

At Accelerated Profits, a stock only gets onto the buy list when it earns an A-rating, among other requirements, like at least 15% sales or earnings growth.

Click here if you’re interested in my latest Weekly Profit Guide for Accelerated Profits, including two new growth trades.

Note: As growth investors adapt to the current climate, it can be easy to overweight your portfolio in certain stocks. That would be a mistake – but it can happen naturally…especially in a narrow market like this, when a select few stocks can grow much faster than the rest.

At Accelerated Profitswhere we generally aim for double- or triple-digit profits in weeks or months (not years), we are keenly aware of this phenomenon. I have a How-To Guide for Accelerated Profits waiting for you there.

For more on the topic, as well as my newly adjusted trade line-up, give Accelerated Profits a try now.

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