Buying the Dip: Could These Bank Stocks Pack a Punch?

This week we're offering bank stock tips and finding out why there could be a major opportunity in the segment after a rocky start to 2023.

Happy Monday, and welcome to another edition of Investing Intel from the team at ValueTheMarkets! As always, the newsletter is packed with stock picks and investing insights we think you’ll enjoy, including:

👉 Three stock tips

👉 Investing signals

👉 Fear & Greed analysis

👉 Key dates for your diary

👉 Investment strategy insights

This week, we’re looking at bank stocks for our next investing idea. We’re looking at why the space could offer some exciting opportunities to investors despite challenging circumstances, as well as unpicking what the latest crisis in Washington might mean for investors.

So, without further ado, here are three stocks we think might be suited to your portfolio…

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The Big Fish - JPMorgan Chase & Co (NYSE: JPM)

• If you’re going to buy the dip, is an established major player the safest route to take? JPMorgan holds a powerful position as one of the planet’s foremost financial institutions with a huge diversity of services that allows it to capitalize on strength in different sectors of the economy.

• Additionally, JPMorgan consistently delivers robust financial results, showcasing its adeptness in cost management and the generation of stable revenues, even amidst challenging economic conditions. Recent earnings show growth in both revenue and net income.

• With an increasing focus on international markets, JPMorgan has been steadily expanding its footprint. This strategic move not only presents new revenue opportunities but also reduces reliance on domestic markets.

• The company has a solid track record of returning capital to shareholders through dividends and share buybacks, with a current dividend yield of 2.96%.

• It has also made substantial investments in digital banking, artificial intelligence (AI), and other fintech initiatives. It is hoped that this will enhance customer experiences, improve operational efficiency, and drive future growth.

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The Brexit Rebounder - Lloyds Banking Group PLC (NYSE: LYG)

• Lloyds is one of the "big four" British banks and holds a strong foothold in the UK market, particularly in mortgages, boasting the largest market share. This provides a loyal customer base and steady revenue streams.

• With a focus on the UK market, Lloyds stands to benefit from any economic recovery post-Brexit and post-COVID-19. As economic conditions improve, there is potential for increased loan demand and lower default rates, positively impacting the bank's profitability.

• According to the Bank of England, UK banks are well-capitalized and funded. It would therefore appear that the stock is well insulated against the kind of dramatic collapse seen in the US banking space.

• The bank is particularly well-placed to exploit improvement in economic conditions, having implemented substantial cost-cutting measures, including branch closures and digitalization efforts. These initiatives aim to enhance operational efficiency and boost the bank's overall profitability.

• Lloyds maintains a robust capital position, exceeding regulatory requirements. This positions the bank well to weather financial shocks and seize growth opportunities in the future.

• Like JPMorgan and other banking stocks, Lloyds offers investors dividend income. Its dividend yield is 5.19%, which is considerably above the UK average.

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The Offshore Player - Bank of Butterfield Ltd (NYSE: NTB)

• You might not have heard of Butterfield, but the bank is one of the most established offshore banks and has a large number of customers among the high-net-worth crowd.  

• By focusing on these monied individuals and their families, Butterfield Bank targets a niche market. This strategic approach may lead to higher profit margins compared to banks primarily serving retail customers.

• It’s also worth noting that the class of ‘global elite’ which Butterfield serves has continued to grow significantly despite the economic and social turmoil of the last few years.

• Butterfield Bank consistently achieves strong financial results, marked by stable revenue growth and solid profitability. Its robust balance sheet provides resilience in the face of economic downturns. The bank’s most recent earnings showed double-digit revenue and earnings growth.

• The bank prioritizes returning capital to shareholders through dividends, appealing to investors seeking income-oriented opportunities. Its dividend yield of 6.77% is certainly substantial.

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Investing Intel

The Bank Stock Opportunity

Bank stocks haven’t been far from the headlines in 2023 but, unless you’ve been dwelling under a rock, you might have noticed that not everything has been positive as rising interest rates caused difficulties in the space.

Silicon Valley Bank went into meltdown. The fallout was enough to take down Signature Bank. Then JPMorgan had to dive in as saviour after a run on First Republic Bank. There was a point where it seemed like just having the word ‘bank’ in your name was some kind of portent of looming disaster.  

But does this mean we can expect a ballooning financial crash akin to that seen in 2008? According to The Economist Intelligence Unit, we don’t need to worry about anything so monumental:

“Bank capital adequacy ratios are generally healthy across the world for major banks. The implementation of Basel III international rules for capital and liquidity, as well as national measures, such as ring-fencing of banks in Europe, have made banks more resilient. Stricter rules for systemically important banks have also helped to prevent system-wide failures.

“In addition, the deposit guarantees available in the US and EU will help to prevent mass withdrawals, with the partial exception of wealthier clients whose deposits are above guaranteed limits.”

That’s not to say there isn’t some vulnerability, with the economist offering the caveat that regional banks remain vulnerable and that further failures are likely.

However, turmoil brings opportunity and some are already buying into this. For example, star investor Michael Burry has been loading up on stock of at-risk regional banks like New York Community Bancorp (NYSE: NYCE). Meanwhile, analysis from Raymond James indicates that insiders are using the dip as an opportunity to hoover up bank stocks.

So it seems there are many around who smell the whiff of opportunity on the back of the banking sector dip. But there could be some trouble on the horizon…

Debt Ceiling

In the short term, a key issue facing bank stocks is the US debt ceiling, which is essentially the limit on the nation’s national debt.

The Biden administration and Republican leaders have been locked in negotiations to raise the ceiling for weeks and finally agreed on a deal in the last week. However, this deal still needs to be passed by the House of Representatives and the Senate before 5 June to avoid a scenario where the US defaults on its debt.

Leading members of both parties have expressed confidence that the deal will pass, with Republican House Speaker Kevin McCarthy stating that more than 95% of his party were “excited” by the agreement.

Even so, there are high-profile members of both parties who have criticized the deal. Florida Governor and Republican Presidential candidate Ron DeSantis told Fox & Friends that it left the US “careening toward bankruptcy” and said it permitted “a massive amount of spending”.

Things are going to the wire and Senate Majority Leader Chuck Schumer has indicated that lawmakers should prepare themselves for voting sessions next weekend as amendments may hold up proceedings.

But what consequences would a default have?

• Confidence shattered - Depositors could seek to withdraw their money from banks en masse due to worries about the state of the financial system, leading to a run on the banks.

• Market turmoil - The inability of the US to service its debt would likely result in severe market volatility, with the value of US Treasury bonds plummeting and creating significant losses for banks that hold these bonds.

• Credit freeze - In a crisis, banks often become more cautious and reduce their lending activities. This means businesses and individuals might have a harder time getting loans, slowing economic growth and potentially leading to a recession.

• More interest - Investors might demand a higher premium for the risk of lending to the US government, making it more expensive for banks to borrow and squeezing their profit margins.

• Global crisis – Huge amounts of US debt are held by foreign entities and the US dollar is effectively the planet’s reserve currency. As such, a US default would have ramifications spreading beyond its shores.

• Rising regulation – Ultimately, this kind of event could lead to increased regulatory scrutiny on banks. This might include more stringent capital requirements and other regulatory changes, which could affect banks' profitability and operations.

These kinds of consequences would be disastrous for bank stocks.

If you think this is going to happen, there are still investment opportunities. You might want to explore something like the MicroSectors U S Big Banks Index 3X Inverse (NYSEARCA: BNKD), which is a fund that tracks three times the inverse of the performance of an equal-weighted index of US large banks.

If US banks perform poorly, investors here could enjoy significant returns.

Trending Stocks

As usual, we’re also looking at the stocks which have generated the most interest online over the past seven days. This week’s top five are:

1. Marvell Technology (NASDAQ: MRVL)

2. Nvidia (NASDAQ: NVDA)

3. Palo Alto Networks Inc (NYSE: PANW)

4. Costco Wholesale Corporation (NASDAQ: COST)

5. Broadcom Inc (NASDAQ: AVGO)

Chipmaker Marvell Technology leads the way after a week that saw the business smash earnings expectations, with CEO Matthew Murphy touting AI as a “tremendous” opportunity for future gains. Next comes contemporary Nvidia, which similarly surged on the back of AI fever as demand saw it become the first chipmaker to breach the $1 trillion market cap.

Cybersecurity specialists Palo Alto saw its share price climb by more than 10% after beating revenue and earnings expectations. Earnings news wasn’t all rosy though, with Costco falling short as customers cut spending on non-essential goods.

Finally, the top five closes out with chipmaker Broadcom, which has netted a multi-billion-dollar deal with Apple ahead of a much-anticipated earnings update in the coming week.

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Fear & Greed

The Fear and Greed Index is a measure of stock market sentiment calculated by CNN Business using seven measures, including market momentum, market volatility, and safe haven demand. It’s meant to shed light on the emotions currently driving the market, giving you insight into how traders are making decisions. Remember, traders are humans, not robots.

As you can see from the graphic below, sentiment is continuing to swing further towards greed. The increase seen over the last week has been driven by increasing market momentum, which is measured by plotting the S&P500 against its rolling average from the prior 125 trading days.

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Dates in the Diary

• Monday 29^th – Markets Closed for Memorial Day

• Tuesday 30^th – US House Price Index (Mar) / Eurozone Sentiment data (May)

• Wednesday 31^st – US Job Openings Data (Apr)

• Thursday 1^st – US Manufacturing PMI Data (May) / Eurozone Unemployment (Apr) / Eurozone Inflation (May)

• Friday 2^nd – US Unemployment (May) / US Non-Farm Payrolls (May)

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Investing Strategy Ideas: Dividend Aristocrats

An income strategy for those of us who want to feel fancy…

Do you like income? Then this might be the strategy for you!

The dividend aristocrats strategy simply requires investors to back S&P500 members who have consistently increased their annual dividend payout over 25 years.

So, what does it offer?

For one thing, it ensures that investors are putting their money into a company which appears to be largely recession-proof, as it will have continued to increase the size of its dividend through times of economic hardship.

It also offers regular income.

On the downside, this strategy is unlikely to reward investors with stunning share price rises as most reliable dividend payers are large companies offering predictability instead of the stunning growth some start-ups achieve.

Indeed, companies which pay out excess profits to shareholders could be missing growth opportunities that reinvesting might yield.

Some examples of dividend aristocrats include:

• PepsiCo (NASDAQ: PEP)

• Exxon Mobil (NYSE: XOM)

• Walgreens Boots Alliance (NASDAQ: WBA)

• AbbVie (NYSE: ABBV)

• IBM (NYSE: IBM)

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Until Next Time

Many thanks for taking the time to read Investing Intel today. We hope you’ve enjoyed our insights and are looking forward to more in the week ahead.

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See you later!