Get on the Financials Bandwagon

 | Jan 21, 2014 | 3:00 PM EST
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We have been very upbeat on financials and have recommended the group a number of times over the past two years. We have also recommended and discussed numerous bank stocks multiple times during this period.

In our 2014 outlook piece, we identified financial stocks again as an area of the market that we think will excel this year. One reason for this was an expected return to top-line growth as a result of higher loan balances, a more normal yield curve, accelerating transaction processing trends and rising asset values. The companies are already benefiting from declining expenses because of multi-year cost reduction initiatives and falling credit costs, which are providing a nice lift to earnings.

In addition to improving business fundamentals, a number of companies in the group are close to putting their legal and regulatory problems behind them. The vast majority of the new rules and compliance requirements have been fully outlined. Furthermore, the various state and federal legal bodies are also close to finalizing their investigations and fines. While there are still some legal and regulatory issues outstanding, most of the risks have dramatically receded, which has allowed managements, employees and shareholders to focus on getting back to business and making money again. This should result in rising valuations.  

Based on the first week of earnings season, we remain confident in that call.

Here's a quick update on a number of names that we have discussed over the past year.

JPMorgan Chase (JPM) reported better-than-expected earnings of $1.40 a share vs. $1.32 for the consensus, driven by balance sheet growth, modest net interest margin (NIM) expansion and falling credit costs. We expect top-line loan and revenue growth combined with continued cost restraints and credit reductions to lead to upside earnings gains for 2014. The stock is still reasonably priced at slightly less than 10x earnings.  

Wells Fargo (WFC) reported better-than-expected earnings of $1.00 a share vs. 98 cents for the consensus, driven by above-average loan growth, fee income growth (ex-mortgage), strong expense controls and falling credit costs. We expect continued market share gains and top-line revenues to lead to upside earnings gains for 2014. The stock is still reasonably priced at slightly above 11x earnings.

BB&T (BBT) reported better-than-expected earnings of 73 cents a share vs. 72 cents for the consensus, driven by improving cost controls and falling credit expenses. Management guided to better-than-expected loan growth and expense reductions for the upcoming year, which should lead to an upside earnings surprise for 2014. The stock is still reasonably priced at 13x depressed earnings.  

Morgan Stanley (MS) reported better-than-expected earnings of 50 cents vs. 44 cents for the consensus, driven by strong wealth management results (revenues and margins), strong equity sales/trading and continued improving expense trends. We expect improving revenue trends combined with disciplined expense management strategies to lead to strong earnings for 2014. The stock is still reasonably priced and should continue to move higher with these improving earnings.

American Express (AXP) reported in line, but very solid earnings of $1.25, driven by strong customer spending patterns. Management reiterzated continued healthy growth for the upcoming year. The high-end consumer continues to spend. A stock of this quality is still reasonably priced at just over 16x earnings. 

If you are in the group or in the stocks discussed above, enjoy as we continue to experience a profitable ride this year. If you are underweighted in financials, we would use any market pullback or weakness in the group to start or add to positions. Our favorites from here are BBT, JPM and WFC.

One final note, the only rare disappointment from the financials last week in terms of earnings and 2014 outlook was Capital One (COF). We still like COF here and after the dust settles would suggest starting or adding to the position. We will discuss more on COF either later this week or in Columnist Conversation shortly.

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