|
|
January 14, 5:00 pm EST Meaningful fourth quarter earnings kick off this week with the big banks. We heard from Citigroup this morning. They beat on earnings but on lower than expected revenues. The stock finished UP over 4%. We get JPMorgan and Wells Fargo Q4 earnings tomorrow before the open. Bank of America and Goldman Sachs will report on Wednesday. Remember, the turning point for stocks in December started with a call-out to the major banks by the U.S. Treasury Secretary. Not surprisingly, the turn in stocks was led by the banks. |
 |
|
You can see the big reversal in this chart of the KBW bank index. The index is now up 16% since December 26th. With the above in mind, one of the best value investors of the past twenty years, Jeffrey Ubben, has thought the timing is finally right for major banks. He has said the U.S. banking system has the lowest risk profile “than any time in our investing lifetime.” In our Billionaire’s Portfolio, we followed him into Citigroup, the highest conviction position in his $16 billion portfolio. It’s the cheapest of the four biggest U.S.-based global money center banks. As for earnings, overall: Remember, we’re coming off of three consecutive quarters of corporate earnings that blew away very lofty Wall Street estimates — 20%+ yoy earnings growth for the first three quarters of 2018. But sliding stocks in the fourth quarter eroded sentiment, and down came earnings estimates for Q4. The market is looking for just 10% earnings growth for the fourth quarter. For 2019, they’re looking for just 7%. This all sets up for positive surprises. Positive surprises are fuel for stocks.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
|
January 13, 2017, 3:00pm EST
We’re getting into the heart of earnings season now, with Q4 earnings rolling in. Remember, earnings guidance is set by management to be beat. And estimates are set by Wall Street to be beat. That’s the way Wall Street works. And it’s a built-in bullish force for the stock market.
With that, for the better part of the second half of last year, I said “we were set up for a big run for stocks into the year end given that expectations had been ratcheted down on earnings and the economic data. That creates opportunities for positive surprises, which is fuel for higher stocks.”
The dynamic continues.
Last quarter, 71% of earnings beat estimates for the quarter. And despite the analyst expectations that there would be an overall decline in S&P 500 earnings, the overall earnings reported by companies grew by 3%. Sounds positive, right?
Still, management, on whole, was downbeat on their guidance for what the fourth quarter would bring. They set the bar low. And with that, the early Wall Street expectations for earnings growth on the quarter has been dialed back, setting up for positive surprises.
As I’ve said, historically, about 68% of S&P 500 companies earnings beat estimates. Let’s assume the positive surprises will be even higher for Q4 numbers, especially given the rise of optimism following the November election. That’s more fuel for stocks.
We’ve heard from some of the biggest banks in the country today. JP Morgan stole the show, beating on earnings by 20%. PNC beat by 6%. Bank of America beat by 5%. Wells Fargo earnings came in lower, but deposits and loans grew despite its PR nightmare.
This is all positive for the trajectory of banks. Especially when you consider that we are in the very early innings of one of the tailwinds (rising interest rates) and the first inning is coming for the second tailwind (de-DoddFranking the banking business).
Fed raising rates is a money printing recipe for banks. Bank of America has said that a point higher on Fed Funds will add more than $5 billion of core earnings for the bank.
But the story here for the bank stocks is even more exciting when you consider that many of the regulations, that have turned banks into utility companies since the financial crisis, will be reversed by the Trump administration. To what extent will banks return to the business of risk-taking? Probably not to pre-crisis levels. But will it be dramatically different than the business of the post-crisis era? Highly likely, given the contingent of Wall Street bankers entering government in the Trump administration. With this, banks still look cheap.
Even last year, the health of the banks was looking as good as it has been in a long time. Loan balances were growing at the fastest 12-month rate since 2008, the share of unprofitable banks had fallen to an 18-year low, and the number of ‘problem banks’ continued to decline.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.