Daily Gains Letter

Banks a Better Play Than Market-Leading Tech Picks?

By for Daily Gains Letter |

Bank Stocks Are Now Looking Good for InvestorsWhile it’s well known that technology has led the broader stock market higher, there is a safer and more conservative play for investors at this time, according to my stock analysis. Where? Investors may want to take a glance at the banking sector.

Banks have dug themselves out of the financial crater that was imposed on the group by the sub-prime debt crisis back in 2007, which sent the global economy and banks into a massive tailspin, as is well represented in my stock analysis.

But that was then. As my stock analysis indicates, the banking sector has been rallying over the past seven years, beefing up their balance sheets, cutting risk, and creating a much stronger overall structure.

The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2009 and 2011 bottoms. Bank stocks staged a nice rally, but retrenched from March to May 2012 on the European bank concerns and Moody’s downgrade of the sector. However, the group has since staged a rally back to above the index’s 50- and 200-day moving averages (MAs), as my technical stock analysis indicates.

Bank Index Chart

Chart courtesy of www.StockCharts.com

What has helped to drive the banks upward on the charts, based on my stock analysis, has been the recovering global economy and the rules set in place to help prevent excessive risk among bank stocks. At the core of the changes was the establishment of the “Volcker Rule,” which was economist and ex-Fed chairman Paul Volcker’s move to cap the speculative trades and risk banks are allowed to assume. Since these changes were put in place, banks have altered the way they do business and have shown positive strides, according to my stock analysis.

My stock analysis suggests that the operating results for bank stocks have been fairly good, which indicates the banks are able to grow their business volume across the board within an economic recovery in the U.S.

The banking sector is also monitored each year by the Federal Reserve’s stress test, which attempts to evaluate how banks would fare under bad economic conditions. The test is carried out on all major bank stocks with assets of more than $50.0 billion.

The banks are tested based on a worst-case scenario to see the impact a financial crisis may have on the banks and their ability to handle it. The key factors include the unemployment rate rising to 11.2%, stock market prices declining by 50%, and home prices plummeting to 2001 levels.

As my stock analysis notes, the findings in March 2014 indicated that 29 of the 30 biggest financial institutions would be able to lend money given the scenario lasting into 2015.

According to Moody’s, the highest risk in banks is Bank of America Corporation (NYSE/BAC), Citigroup Inc. (NYSE/C), Morgan Stanley (NYSE/MS), and The Royal Bank of Scotland Group plc (NYSE/RBS).

The second riskiest group of bank stocks comprises The Goldman Sachs Group, Inc. (NYSE/GS), Deutsche Bank AG (NYSE/DB), and Credit Suisse Group AG (NYSE/CS).

The most stable bank stocks—and those that may be worth a look as a safe, conservative play—include JPMorgan Chase & Co. (NYSE/JPM), HSBC Holdings plc (NYSE/HSBC), and Royal Bank of Canada (NYSE/RY).

And as dividends are allowed to rise, I expect a nice rally in the share price, based on my stock analysis.

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