Markets have rung in 2022 on a positive note as both Large Cap indices, the S&P and now the Dow Jones Industrial Average, are trading at or near all-time highs. The COVID-stoked rally has delivered a maximum gain of 114% in the S&P, 145% in the Russell 2000 and 134% in the Nasdaq since the March 2020 low. While it's difficult to see this trend continue, any change in this rally likely won't occur until there is a shift in the COVID story; i.e. when we start to see a weakening in the infection rate of the disease (at least in the U.S.).
Given that, what can we look too for 2022?
If we look at the relative strength change of sectors (as measured by the S&P SPDRs) from March 2020 we have a general outperformance from Consumer Discretionary (dark blue bar) Technology (pink bar), and Materials (black bar), and underperformance from Staples (purple bar), Health Care (orange bar) and Utilities (red bar). The sectors coming into strength, and looking good for 2022, are Financials (light blue bar) and Energy (teal bar).
The Energy sector is one in flux, and the ETF (XLE) is too heavily influenced by the fossil fuel sector to make it interesting as a long term investment.
However, Financials (XLF) offer a more interesting play for this year.
If we dig into the individual stocks within the S&P Financials SPDR, we want to look for stocks breaking to new highs; in particular, stocks which may have been stuck in a period of sideways trading over the course of the COVID outbreak. That is, stocks which generated little interest from the investment community until recently.
Going through the list of member stocks I have come up with a group of 24 potential candidates based on their point-n-figure charts which are great for filtering breakout stocks; I have displayed these as 1-year historic price charts:
I like stocks which pay a dividend and there is no better sector than Financials to deliver. With a dividend payment we get the benefits of compounding with dividend re-investment; in essence, getting paid to hold the stock. If we take the 24 stocks - rank them by Payout Ratio - and look at stocks with which are considered to have a healthy ratio of between 35% to 55% (ref), we are then left with four stocks.
- Northern Trust Corporation (NTRS)
- CBOE Global Markets (CBOE)
- Arthur J. Gallagher & Co (AJG)
- The PNC Financial Services Group (PNC)
The good thing about this short list is that each stock comes from a different industry within the financial sector.
Northern Trust Corporation
A very solid technical picture. We have a price break of $126 as the stock accelerates its outperformance against the S&P. Buyers were happy to defend the 200-day MA in September and December, thus marking it as solid support. In addition we have momentum just touching an overbought level, but this is not bearish and is instead one of the requirements for a sustained rally. Combine this with an On-Balance-Volume indicator trading above its 20-day MA - marking buyer accumulation - and an improving MACD following a 'buy' trigger in late December, means the groundwork is there for further gains in both the near and long term.
Earnings (green line) for Northern Trust Corp has generally come ahead of average forecasts for both Estimize (blue line) and Wall Street (grey line). The outlook for 2022 looks particularly bright with EPS forecasts to break above $1.8 a share. A historic 5 year EPS growth of 6.5% and a 5 year EPS growth forecast of 18.7% (source: Finviz) is one of the strongest in the basket of financial stocks from the XLF ETF.
Arthur J. Gallagher & Co.
For breakout traders, this is a stock to keep on the radar. Long term investors don't need to concern themselves with technical patterns on daily time frames and can take the stock on its immediate merits. However, for those looking for a trade, this is a stock which is making its way back to ascending support marked by the three previous shallow swing lows in November and December; traders could look for value on the next test of this level. Aside from momentum, supporting technicals are bearish, most notably, the relative performance against the S&P, but a break above $170 would quickly reverse those negative signals. While the MACD may be in decline, it's well above the bullish zero line. So while the immediate signal is a bearish 'sell', it's not a particularly strong bearish signal.
Earnings (green line) for Arthur J. Gallagher & Co. has consistently come ahead of both Estimize (blue line) and Wall Street (grey line) estimates despite strong coverage in Estimize - as noted by the narrow range in the light blue bars. The stock has a consistent earnings pattern with continued growth forecast for 2022 with a $2 EPS expected to be broken in 2022. The stock has enjoyed strong historic 5 year EPS growth of 15.3%, with a slightly lower forecast of 12.2% for the next five years (source: Finviz).
CBOE Global Markets
This is a stock where the technical picture over the last five months does not look particularly great. However, one only has to look at the narrow price range it has traded over this period ($120-135) to see that the ebbs and flow in price reflect more noise than any great underlying weakness. Those looking for value may wait to see what happens if it makes its way to the fast approaching 200-day MA currently at $119.
CBOE Global Markets has a more conservative earnings forecast outlook for 2022 that the previous two companies. Despite this, the 5 year EPS growth forecast is 13.1% (source: Finviz). CBOE Global Markets has tended to come in ahead of estimates in Q1 (green line) versus Wall Street (grey line) or Estimize (blue line) forecasts. An opportunity is there to surprise for Q1 and this could offer a welcome boost to its lagging price action.
The PNC Financial Services Group
Similar to Northern Trust Corporation, this is a stock which has enjoyed strong gains on the advent of 2022, after a successful test of its 200-day MA. There has been a sharp rise in relative performance against the S&P and a key uptick in On-Balance-Volume buying after a period of volume selling over the course of November and December. It sits on the cusp of new all-time highs and could be one of the early high flyers for 2022. Note the 'buy' trigger in the MACD, which led to a surge above the zero line - and thus a move into bullish territory. An excellent technical scenario.
Of the four stocks, this has perhaps the most difficult earnings forecast to track despite strong coverage in Estimize with between 14-25 estimates offered per quarter. PNC Financial Services Group's Q2 2020 earnings were a bit of an outlier, but it has outperformed estimates throughout the pandemic. Of the four stocks it holds a negative 5 year historic (-3.0%) and forecast (-3.8%) EPS growth (source: Finviz), but this weakness hasn't been reflected in recent quarters.
If there was one stock to go for it would probably be Arthur J. Gallagher & Co. It has the perfect balance in price and earnings action as we move into 2022.