With the Federal Reserve having moved to end their quantitative easing via bond buying, it is now time to look at moving into the financials. In fact, with some of our clients in recent weeks we have positioned portfolios to be overweight financials as we anticipated an announcement on tapering beginning in 2014, although we did not expect the move to take place in January.
Our focus thus far has been upon the actual banks, with some attention paid to certain insurers where we see the possibility of rising dividend payouts and growth for years to come. With the 10-year moving back towards 3% and the yield curve set to move even more in banks' favor we think that now is the time to move portfolios towards overweight financials, with particular attention paid to the large money center banks and the big regional players. We are not yet ready to become bullish of the small community banks at this time as their future remains uncertain.
Chart of the Day:
Even with the 30%+ rise in the Financial Select Sector SPDR this year we think that banks are headed higher. With the litigation issue being cleared up by many names, an improving economy and yield curve and higher dividends on the horizon we think that many of these names head higher. We like the big money center banks as well as well run regional players.
Source: Yahoo Finance
We have economic news today and it is as follows:
- GDP - Third Est (8:30 a.m. EST): Est: 3.6% Actual: 4.1%
- GDP Deflator- Third Est (8:30 a.m. EST): Est: 2.0% Actual: 2.0%
Asian markets finished mostly higher today:
- All Ordinaries -- up 1.21%
- Shanghai Composite -- down 2.02%
- Nikkei 225 -- up 0.07%
- NZSE 50 -- down 0.55%
- Seoul Composite -- up 0.39%
In Europe, markets are trading higher this morning:
- CAC 40 -- up 0.00%
- DAX -- up 0.47%
- FTSE 100 -- up 0.22%
- OSE -- up 0.26%
It has been our view all along that the US economy was improving and that certain financials would be big winners along the way. Initially we sought out only the best run names in the industry, but later we ventured out into the names which were heavily involved in mortgage lending or exposed to areas of the country where the economic recovery was really strong.
JP Morgan (NYSE:JPM) is hands down the best run bank in the industry, with revenues that are quite diversified and a footprint that now spans the country. The stock has been a strong performer since the financial crisis, but has faced some headwinds due to Jamie Dimon making the financial institution somewhat of a lightning rod. These problems seem to be going away and as JP Morgan settles many of their litigation issues the company's outlook gets brighter and much more certain for shareholders. With the company's main banking franchise continuing to see improvement, along with the general economy improving we think that the stock price continues to trend higher from here, but maybe even more importantly we see dividends increasing dramatically over the next few years.
Look for Bank of America shares to outperform in 2014 as the company continues to see improvements in operations, settles outstanding litigation and works towards paying a higher dividend.
Source: Yahoo Finance
Warren Buffett, arguably the world's greatest investor, has chosen to play the financial recovery via Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). Both companies have a lot of exposure to the US housing market and have had to digest bad business units that were part of acquisitions the banks did, but business is improving and both names are looking to put their litigation issues behind them as well. These two banks are geared towards the consumer more so than JP Morgan and with their brokerage businesses should be able to grow dividends much quicker than their regional counterparts moving forward. For investors looking for capital gains and dividend growth down the road Bank of America is the play, but for more conservative investors Wells Fargo is the name to focus on.
Among the regionals our attention is focused upon BB&T (NYSE:BBT) and US Bancorp (NYSE:USB) which are among the best run regionals in the country. Both have a history of looking to bolt-on acquisitions that either expand their territory by a moderate amount or shore up their market positions within the areas that they already operate. The two companies' ability to avoid the transformational merger has kept them out of trouble by bringing in shareholders who do not subscribe to their model while also avoiding having to bring in large groups of outside employees in and training them to comply with the values and practices which have built these franchises.
After some sideways movement over the past few months, BB&T shares are moving higher into the close of the year. We think that this will be one of the top performers among the big regional players.
Source: Yahoo Finance
Right now our belief is that BB&T will sport higher growth than US Bancorp moving forward while also seeing better growth rates on its dividend. BB&T is still working on saturating certain markets it has entered in recent years and we think that it will continue to focus on that internal growth, but we would not be surprised to see US Bancorp begin to expand its branch network, either by smart acquisitions or organically, to increase its territory served and open new markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.