Should You Buy Big Banks Before Profits?
We’re fast approaching one of my favorite times of the year: the third quarter earnings season.
The reason I’m so excited during results season is that this is when the the best of the best stocks have their chance to climb to the top. Every business needs to open their books and show Wall Street how they performed in the quarter and share their longer-term perspectives. Companies that show strong results and positive earnings and forecasts are usually rewarded by investors, while those with weak earnings and forecasts are punished. In my 40+ years of investing, I’ve found that income works 70% of the time.
Now, for the third quarter, FactSet expects S&P 500 average profit growth of 27.6% and revenue growth of 14.9%.
Yes, that’s down from the 91% average profit growth achieved in the second quarter, but the reality is that economic growth is slowing and year-over-year comparisons are now less favorable.
I should add that fourth quarter estimates remain strong, with FactSet anticipating average earnings growth of 21.5% and average revenue growth of 11.4%.
Personally, I anticipate my fundamentally superior Growth investor actions will show strong sales and profit results. My Growth investor stocks are characterized by average annual sales growth of 46.9% and average annual profit growth of 57.2%. The analyst community also revised its consensus earnings estimates up 14.9% in the past three months. So, I look forward to wave after wave of positive income surprises in the coming weeks to drop and drive my Growth investor higher stocks.
In fact, we got a taste of what solid profits can do with Fastenal Company (NASDAQ:QUICK), one of my Growth investor Elite dividend payers this morning. The company made $ 243.5 million, or 42 cents per share, on revenue of $ 1.55 billion, compared with earnings of $ 221.5 million, or 38 cents per share , and sales of $ 1.41 billion in the third quarter of 2020. The consensus estimate called for earnings of 42 cents per share on $ 1.54 billion in sales.
With continued demand for manufacturing and construction equipment, Fastenal Company achieved sales of $ 4.45 billion and profit of $ 693.8 million, or $ 1.20 per share over of the first nine months of the year. By comparison, the company reported revenue of $ 4.29 billion and profit of $ 663 million, or $ 1.15 per share, in the first nine months of 2020.
The action rose by more than 2% at the start of the session on the heels of its good results.
Now the big banks, including JPMorgan Chase & Co. (NYSE:JPM), Citigroup (NYSE:VS), Bank of America (NYSE:BAC) and Wells Fargo & Co. (NYSE:WFC), will publish their results this week, “officially” kicking off the results season.
FactSet expects banks in the S&P 500 to total around $ 31 billion in aggregate profits, up about 20% from a year ago, but down 20% from the second quarter. Analysts also expect earnings to remain stable in the fourth quarter.
Earnings estimates for financials have risen due to more favorable economic conditions and higher Treasury yields, which benefit banks’ results from their core lending activities.
Hopes that the big banks will release more loan loss provisions than they had set aside to prepare for loan losses in the aftermath of the pandemic is also helping to bolster analysts’ forecasts, albeit at a lower rate. to that of the first quarter of the year. . This, in turn, will help increase the financial results of banks.
In contrast, loan growth for large banks has been slow, increasing only 1% since the end of June.
JPMorgan Chase & Co.
- The first to report will be JPMorgan Chase & Co. on Wednesday morning. Analysts are forecasting earnings of $ 3.00 per share on sales of $ 29.7 billion. In the past 90 days, eight analysts have revised their estimates up, while two have revised their estimates down. The stock is up more than 31% since the start of the year and nearly 6% last month.
Wells Fargo & Co.
- Analysts expect Wells Fargo & Co. to report Thursday morning earnings of 94 cents a share on sales of $ 18.3 billion. In the past 90 days, eight analysts have revised their forecasts upward for the bank, while six have revised them down. Shares of the company have gained more than 56% so far this year and are up more than 6% last month.
Bank of America
- Analysts expect Bank of America, which reports Thursday morning, to report earnings of 70 cents a share on $ 21.6 billion in revenue. In the past 90 days, three analysts have revised their earnings estimates for the company upward, while nine have revised downward. Shares of Bank of America have climbed more than 44% since the start of the year and are up nearly 9% last month.
- Also reporting on Thursday, Citigroup is expected to post a profit of $ 1.79 per share on sales of $ 17 billion. Six Wall Street analysts have raised the estimates in the past 90 days, while six have lowered the company’s rating. Citigroup shares are up 16% year-to-date and are up 3% in the past month.
Currently, these banks get a B rating in Portfolio Grader, making them “buys” before their results. However, I don’t think they are good high growth buys and would not recommend them at this time.
This is for two reasons …
First, I am a former banking analyst who worked for a division of government that is now part of the Federal Reserve. During my time there, I saw how they “basically cook their books” and it marked me for life.
Second, rising Treasury yields can potentially derail value-sensitive interest-rate stocks. Instead, I like to focus on high-growth, high-quality stocks that have historically thrived in a rising interest rate environment, and financials just don’t fit this bill.
So while the steepening of the yield curve and strong housing markets bode well for bank profitability in the short term, they could be in trouble if inflation accelerates.
The bottom line: If you want to have a high growth portfolio, these bank stocks should not be on your shopping list.
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The Publisher hereby declares that as of the date of this e-mail, the Publisher owns, directly or indirectly, the following titles which are the subject of commentary, analysis, opinions, advice or recommendations in, or otherwise mentioned in, the essay presented below:
JPMorgan Chase & Co. (JPM), Bank of America (BAC), Fastenal Company (QUICK)
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