By now, most of my readers can see that I am a conservative contrarian in my investing approach. Heavy on the dividends and lighter on the risks.
It might come as a surprise to you that my bullish opinion of 2012 market returns will be led by financials. Then again, is it really that far fetched to embrace this opinion?
Financial stocks have led the way out of the stock market doldrums, along with consumer spending and confidence just about forever. Why wouldn't they have a repeat performance now?
In my opinion, Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JP Morgan Chase (NYSE:JPM) will outperform the markets in general in 2012, and should be considered for value investors to add to their portfolios.
Earning season is here and these banks will be among the first to report 4th quarter results as well as 2011 full year ending results. Like just about everyone else I expect to see lackluster results and probably lower earnings guidance for 2012. So why am I quite bullish now?
The Financials' Road Map to Lead
1) Almost everyone still hates the financial sector and individual investors have mostly shied away from buying shares. This bearish sentiment alone is enough for me as a contrarian to look at these stocks and go against the grain.
2) Lending has been dismal by the big banks yet they were still profitable and they do have cash reserves to deploy at some point. With interest rates so low, what was the incentive for banks to take on lending risks? The tide might be in the infancy stage of turning. With the economy showing signs of life the Fed might not need to buy bonds in 2012 so quickly. At least until the economy shows weakness again, which I do not see occurring, I see the opposite.
3) The 2012 Election Year could be a major catalyst for continued improvement in the economy which could lead to higher long term interest rates and higher long term lending rates. If that occurs, and I believe it will, then the banks will have more of an incentive to lend once again. The risk/reward will be compelling and profitable once again.
4) The latest rumors of the Government buying mortgage backed securities to launch yet another "new" refinance program (all of them have failed anyway) were denied by the White House (unnamed sources as usual) and in my opinion had strong opposition from the banks themselves (just a hunch), even though the rumors led to an uptick in share prices of the banks. Why would the banks want even LESS incentive to lend? It just does not make sense to me.
5) The recent housing numbers have shown some improvement as evidenced by the rising share prices of many of the new home builders, an encouraging sign in my opinion. Equally interesting is that the back log of resale inventories has dropped and foreclosures have sped up. Maybe, just maybe, we are at the turning point of a real estate revival which will lead to higher borrowing costs which of course will loosen the purse strings of the banks to make more mortgage loans. Another revenue and earning stream that has not been there for several years and when they return, the big banks will benefit the most.
6) Various brokerage firms have been adding shares of Citigroup of late with several making them "Top Picks" for 2012 (Sandler, Nomura Securities, Buckingham, and Deutsche Bank to name a few), and we are well aware of the large bets that Paulson has made on BAC. From what I have read, hedge funds have been quietly accumulating shares of these banks since late 2009. If that is accurate they are well ahead of the herd.
I am more optimistic about the economy of late and obviously I am more optimistic about the financial sector. Maybe I am too optimistic or a bit too early stating my opinion, but with everything I have just listed, a compelling case could be made for value investors, seeking strong capital appreciation, to take a good look at the big dogs in the financial sector.
BAC, C, JPM just might be big winners in 2012. Will YOU bank on it?
* Please remember to do your own research before making any investment decision. The opinions here are not recommendations to buy or sell any security mentioned.
Disclosure: I am long BAC.