Geopolitical tensions, especially the potential trade war brewing between the U.S. and China, triggered a sell-off in the market late last week, with the Dow Jones Industrial Average and the S&P 500 Index both ending the week down close to 6 percent. Against this backdrop, Buckingham Research Group identified some value buys among financial stocks.
The Analyst
Analyst James Mitchell has Buy ratings on the following banking stocks in his coverage universe:
Top Banks
- Citigroup Inc C: $101 price target
- State Street Corp STT: $131 PT
Top Broker Picks
- Morgan Stanley MS: $69 PT
- Raymond James Financial, Inc. RJF: $117 PT
Top Boutique Picks
- Evercore Inc EVR: $121 PT
- Moelis & Co MC: $60 PT
The financial stocks are at the top of Buckingham's shopping list, Mitchell said. (See the analyst's track record here.)
The Thesis
Many banking stocks in Buckingham's coverage universe are in correction territory — approaching their 200-moving averages — setting up attractive entry points, Mitchell said in a Monday note. Valuations are now supportive, he said.
Wells Fargo & Co WFC, Evercore, Citi and Lazard Ltd LAZ are among the worst sector performers, having retreated 21 percent, 15 percent, 13 percent and 13 percent, respectively, from their 2018 highs.
There is likely to be more than 25-percent upside in beaten-down money center banks, should they reclaim their recent average multiple, Mitchell said.
Buckingham sees no direct impact on the financial space from trade tariffs. Even if China resorts to retaliatory tactics, only $3 billion worth of goods, representing just 0.02 percent of GDP, will get hit, Mitchell said. If China matched the $60 billion in tariffs levied by the U.S., it would amount to only 0.3 percent of GDP, which might not be enough to offset the stimulative effect of tax cuts, the analyst said.
Earnings and revenue expectations for Buckingham's coverage universe remain low, with the consensus estimate pointing to decelerating revenue growth and significant worsening of credit over the next two years.
The companies are likely to meet the lowered bar, even if economic growth worsens, Mitchell said. Given looming deregulation, a rising rate environment and significant share buybacks, Buckingham is confident in its forward earnings expectations barring a recession, Mitchell said.
"Stocks still look cheap in a slower growth environment."
The Price Action
The Financial Select Sector SPDR Fund XLF is down about 2 percent year-to-date.
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