I can't believe I'm about to say this, but there are some bullish-looking charts in the financial sector, particularly in the small-cap space.
Financials came back to life last week as the Financial Select Sector SPDR (XLF) jumped 9.6%. It easily outperformed the S&P 500, which logged a 7.4% gain. Weekly volume rose to 466 million shares, well above the prior week's level, but still below average. It's too early to say if the financials are ready to carry the leadership baton again, but I'm seeing some bullish price and volume in some subgroups in the sector.
It's been months -- maybe years -- since I looked inside the financial sector for long opportunities. I generally don't like to buy stocks with zero earnings visibility, beaten down mercilessly by institutional selling in recent months. As a result, I'm still not paying attention to widely known names, such as J.P. Morgan (JPM), Goldman Sachs (GS) and Wells Fargo (WFC). My focus is on stocks with top fundamentals showing relative price strength.
Some small-cap banks are starting to pop up again on my growth screens. In particular, two commercial banks with good track records of earnings and sales growth that look like they're on the verge of technical breakouts from solid bases.
Volume expanded nicely in Texas Capital BancShares (TCBI) on Friday. Shares rose 4.3% to $29.08. The company has a market capitalization of $1.1 billion, but don't let its small size be a deterrent because it has a lot of positive qualities; namely, consistent earnings and sales growth in recent quarters.
TCBI is the parent company of Texas Capital Bank, which provides various banking products and services to commercial and private clients.
In October, the company reported third-quarter earnings per share (EPS) of $0.56, up 124% from a year ago and $0.06 above the consensus estimate. Sales growth accelerated for the second quarter in a row, rising 13% to $90.9 million.
Provisions for credit losses were $7 million, down from $8 million in the prior quarter and $13.5 million in the year-ago quarter. Meanwhile, net charge-offs decreased to $6.3 million from $10.5 million in the second quarter and $12.1 million in the year-ago quarter.
In terms of its chart, I'm encouraged by the recent signs of accumulation in the stock. This is important to see as a stock preps for a possible upside breakout. Despite its small-cap status, TCBI has solid institutional backing. T. Rowe Price, Lord Abbett & Co. and The Vanguard Group have significant positions in the stock.
Meanwhile New York-based Signature Bank (SBNY) also has top fundamentals and continues to show relative price strength. It has a market capitalization of $2.7 billion and also has solid institutional sponsorship. It also could be in the early stages of a price move here.
It, too, is a commercial bank that targets privately held businesses. The company shows a consistent record of strong bottom-line and top-line growth in recent quarters. In October, its third-quarter profit rose 26% from a year ago to $0.83 a share. Sales rose 20% to $157.6 million. The results were driven by an increase in net interest income, helped by core deposit and loan growth.
Net interest income rose 32.3% in the quarter to $117.9 million. Provision for loan losses rose 16.2% year-over year to $12.1 million, up $1.7 million due to growth in its loan portfolio.
In early November, Signature Bank made a move to the S&P MidCap 400 from the S&P SmallCap 600, replacing Kinetic Concepts.
Its chart is pretty much a mirror image of Texas Bancshares. It's been consolidating gains since late July as it is in a bullish technical setup, poised to clear its recent high of $58.74. I'd like to see good volume expansion if the stock eventually breaks out. It normally trades about 575,000 shares a day. On a good heavy-volume breakout, a stock will normally trade at least half its average daily trading volume during the first hour of trading.