Opportunity Knocks: Buy These Banks Before Earnings

Includes: BAC, C, GS, JPM, MS
by: David Alton Clark

The Gist

Wells Fargo & Co. (NYSE:WFC) is down slightly after reporting earnings Friday. The bank beat expectations yet some concerning statistics caused the stock to slump. Loan growth was lower than expected and the net interest margin came in 2% below last year. This may have created a buying opportunity in the following five banks which are all reporting earnings next week. In the following sections I will lay out my bull case for the banks in question.

Big Banks To Buy Reporting Next Week

Morgan Stanley (NYSE:MS) starts it off reporting earnings on the 14th followed by The Goldman Sachs Group, Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) on the 16th. Finally, Bank of America Corporation (NYSE:BAC) and Citigroup, Inc. (NYSE:C) report on the 17th. These are the banks I posit are buys next week based on the following analysis.

Bank Sector Fundamentals Appear Solid

Well-known analyst Dick Bove told CNBC's "Closing Bell" recently,

"Bank earnings could hit a record $38 billion in the fourth quarter, while the industry is poised to have a solid 2013."

Major bank investor Warren Buffett stated,

"The banks will not get this country in trouble, I guarantee it. The capital ratios are huge; the excesses on the asset side have been largely cleared out."

There are certain experts in the investing field that I listen to when it comes to the banks. Bove and Buffett. These experts have been in the business for a long time. I respect their commentary. These are fairly strong statements from them. I agree and feel this is a definite positive. The banks are still trading at historical lows. If you have a long term-time horizon this is a definite buying opportunity.

The Future Looks Bright

Currently, several indicators are flashing that global growth is for real and 2013 could be another great year for banking stocks. For instance, Alcoa (NYSE:AA) stated on its recent earnings conference call that the outlook for Chinese growth is much improved. Furthermore, global growth bellwether Danaher Corp. (NYSE:DHR) predicts higher than expected core revenue growth.

This is good news for global money center banks as they are the source of funding for the growth. This is why you always hear you can't have a real bull market rally without the financials starting off the party. The uptick in the housing market and the steepening of the yield curve due to demand for long-term capital are strong buy indicators for the banking sector as well.

Banks Provide Plenty Of Bang For The Buck

Banks offers the big discounts to book value, trade for some of the lowest price to free cash flow ratios and have decent 2013 EPS growth estimates.

BAC trades for 53% of book value while Morgan Stanley trades for 65%, Citigroup for 67%, JPMorgan Chase and Goldman Sachs both trade for 88% of book.

Fed Stress Test Should Be A Positive Catalyst

These banks all have fortress balance sheets with billions in cash and current assets. I posit this year's stress test will be a buying opportunity just like in 2012 was for most of the banks.

News of the banks passing coupled with announcements of new dividend increases and stock buyback programs being approved should propel the bank stocks higher yet again.

The Bottom Line

I posit this is the calm before the storm. The pullback Friday in these bank stocks is a buying opportunity in my book. These banks still have considerable upside potential, strong fundamentals and catalysts for growth. They all have fortress balance sheets and strong cash flow providing the opportunities for a share buyback programs and/or a dividend increase to be implemented when they pass the stress tests.

If the U.S. housing market continues to improve, these banks seem poised for solid growth. If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM, C, BAC, MS, GS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.