Who likes to invest in financial stocks? Only people with a solid financial or accounting background, since they can reasonably understand the balance sheets and valuations of these stocks well enough to trade them successfully, or at least better than the average investor attempting to dabble in the sector.
Today, you don't need to be a CPA to understand why a particular set of bank stocks is about to become an attractive place to be in this coming market. You see, now that the FED is proposing interest rate cuts to come in 2024, there could be a pocket of volatility in stocks that persists while they adjust to the new norm.
Because banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) are more of a hybrid business model than people realize, the period of time between now and rate cuts could prove to be the best profit opportunity you could potentially find in the sector, but more on why in just a bit.
Time is of the essence
Because most of these bank's earnings depend on commercial activity, selling products like credit cards and mortgages, they rely heavily on the interest rate cycle. Considering that the cycle is about to turn to its bottom end soon, here is what you need to know moving forward.
Because the construction sector could see a boom in activity in the coming months, investors like Warren Buffett have become bullish on homebuilding stocks like Pulte Group (NYSE: PHM) and D.R. Horton (NYSE: DHI).
But the buck doesn't stop there; all these new homes to be built will more likely than not need a mortgage on top of them to be sold to coming buyers.
This is one side of the coin helping both banks increase their potential profit ceiling in the coming months, as the volume of mortgage lending could offset the lower profit per loan due to lower interest rates. The other side of the coin is just as cyclical, but just as strong if not more.
So, look, the VIX is now at its lowest level since 2019, which means that these banks' sales and trading departments are probably taking a vacation.
But now that bonds are beginning to move (as the ten-year rose back to 4.0%), and the VIX is slowly moving higher, trading can become a profit center that generates an earnings surprise in the second quarter of 2024. Maybe this is why their stocks have risen to flirt with their 52-week high prices.
What's the expectation?
This will not be a smooth road by any means; it will be full of bumps, but nobody gets in line for a roller coaster that doesn't spin you around, right? This is why it pays to be a contrarian, and while most analysts are not expecting much out of these bank stocks, some stand out in their bullish view.
You see, EPS projections are a bit mixed currently for both these banks. While Bank of America has analysts projecting an EPS contraction of 5.3% in the next twelve months, Citigroup projections come in at a slightly more optimistic expansion of 2.8% for 2024 as well.
However, the truth comes to light when other competitors come to admit that they see the bullish case for these banks, maybe following the same logic that mortgage lending activity and trading profits could come to save the day after all.
This is why analysts at competing bank Barclays (NYSE: BCS) have upgraded their price targets for both these banks. Starting with Bank of America, Barclays landed on a price target of $43.0 a share, shooting for a net upside of nearly 25.0% from where the stock trades today.
The trend doesn't stop there; Barclays analysts seem well aware of the train about to leave the station. They have considered a $63.0 share price target for Citigroup stock, similarly placing an upside of 16.0% from today's prices.
If that wasn't enough to identify a cycle, you should look at dividends paid out by both these banks today since their yields could tell you a lot about where the stock may be headed soon. Today, Bank of America offers shareholders a 2.8% yield, its highest since the third quarter sell-offs of 2023.
Likewise, Citigroup is paying a 3.9% dividend yield, its highest since the same selloff period in the market. Considering that the average dividend for both these stocks is much lower, some could confirm that Barclays is barking at the right tree in its call for higher valuations in both these banks today.
