Time to unwind one of the biggest trades I have seen in some time: buy the big banks and sell the small ones. For the longest time, the large mutual funds and hedge funds have been buying up Bank of America (BAC) and Citigroup (C) and selling the regional banks, like BB&T (BBT), First Horizon (FHN), Huntington Bancshares (HBAN) and KeyCorp (KEY).
The thought? The big banks have many levers and are extremely undervalued compared with where they have traded in the past, while the regionals are just hostage to the mortgage market and to how little they can make by lending for homes because of how low interest rates are.
This earnings season, we have seen the unwinding of that big trade. First, today we got some real ho-hum numbers from Bank of America and from Citigroup. Bank of America, despite settling a ton of lawsuits and redoing a huge number of mortgages, is still, after all of that, litigating all over the place. Had to laugh today when the third bullet point in the Bank of America release was "total litigation expense, 0.9 billion or 5 cents a share." Holy cow! That's a real highlight.
Citigroup? It still has a ton of dicey loans it is still not unlocking its reserves for because it is very conservative, and it still doesn't seem ready to return a lot of capital to shareholders. Meanwhile, who knows how the new management feels about the aggressive expansion into emerging markets that the former CEO, Vikram Pandit, pushed? That's what made Citigroup special for me, but when you sack the chief proponent of the go-global strategy and you put in a conventional banker, what does that say about the entire foundation of the investing thesis?
These two come on the heels of numbers from JPMorgan (JPM) and Wells Fargo (WFC) that, while really very good, have failed to inspire any excitement in the marketplace. I believe that both JPMorgan and Wells Fargo are excellent institutions. That whole "London whale" flap is now behind JPMorgan. Wells owns 30% of the mortgage market and is getting stronger every day.
But the action, so to speak, in the stock market, is all about the regionals. Today, two quintessential regionals, BB&T and PNC (PNC), reported, and while the numbers weren't all that much better than those of the big boys, it's pretty clear that they are being rewarded instantly with higher prices. That's because these banks are perceived as excellent, clean ways to play the housing recovery that we are seeing. Plus, they seem to be in better shape when it comes to the regulators and when it comes to the legal wranglings. They will clearly be able to make more money than the money-centers as a percentage of growth when things get better, and they are getting better.
How strongly do I feel about this? I am confident that, at long last, a company like First Horizon, a terrific regional bank in Tennessee that has consistently delivered good numbers and has not been rewarded at all with a higher stock price at a time when Bank of America's stock doubled, will at last be given the credit it deserves. My Action Alerts PLUS charitable trust is now selling some Wells Fargo, because that position feels played out, and moving into a large position in KeyCorp, a Cleveland based bank that reports next week.
I am even considering telling you that Synovus (SNV), a $2.62 stock that I have disdained because the bank still owes TARP money, makes sense to buy, not because I love those guys but because the unwinding of the love affair with large banks and the beginning of a steamy affair with the little guys will take Synovus along with it.
This move is real and is still in its infancy. Unlike so many other sectors that have had gigantic moves, this one is not too late to start participating in. And all I can say is it is about time.