Bank Investors Raking Profits in Thanks to Growth and Deregulation! Consider These Names for YOUR Portfolio
The broad stock market has had a solid run in the first year of the Trump administration. But bank stocks have left the averages in the dust thanks to stronger economic growth, promises of deregulation, and healthy earnings gains.
Indeed, while a bill to weaken banking restrictions put in place after the 2008 financial crisis remains stuck in a Senate committee, bank stock buyers aren’t in the mood to wait around. They believe it’s only a matter of time before regulatory rollbacks occur, and that the future will bring with it increased earnings potential for all manner of financial firms.
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That’s why the KBW Bank Index overtook the S&P 500 Index right around Election Day 2016, and hasn’t looked back since. This chart shows how banks have surged more than 110% in the past half-decade, well ahead of the 91% rise in the S&P 500.
When any sector outruns the broader market, it’s normal and natural to expect lower returns in the future. But if the Dodd-Frank bill is overturned or significantly weakened, the outperformance could continue. That’s especially true given the bank-friendly $1.5 trillion tax cut plan that’s being enacted, a topic I’ll have more to say about down the road.
But if you’re going to invest in banks, it’s always a smart move to be more selective, and seek out some margin of safety. To that end, our Weiss Ratings Stock Screeners can be tremendously helpful. You can gain access to them, as well as other benefits, by signing up as a Weiss Ratings Platinum member here.
Here’s an example: I wanted to create a list of bank stocks that could deliver solid gains for you in 2018, based on their strong track records and superior safety profiles. So I started by screening for stocks whose underlying banks scored highly on the Weiss Bank Safety Ratings scale. Then I zeroed in on bank stocks that A) Are less volatile than the market, B) Pay a generous dividend, and C) Booked solid profits over the past year.
First, I used a screening criteria called beta. It’s a volatility measure that shows how much more or less a stock’s price will move relative to the broad market. By way of example, a stock with a beta of 1.2 is 20% more volatile than the market while a stock with a beta of 0.50 is half as volatile. A “good” beta is one that is less than 1 and closer to zero, since “1” is the market itself.
Second, I considered income. The stock market overall is returning about 2% in dividend yield, so I screened for banks paying 2% or more. Why? Yield is a great indicator of management comfort with margins and future earnings. No bank executive wants to pay out cash to shareholders unless the firm’s outlook is positive and it has plenty of financial flexibility.
Finally, I sorted by 12-month trailing operating margin. This metric shows a bank’s ability to generate profits after paying for the costs of doing business. Higher is better, of course.
The resulting screen looked like this:
|Data Date: 12/21/2017|
A couple of standouts here are instructive of the value of a quality+income+profitability screen like this.
The Bank of N.T. Butterfield & Son Limited (NTB, Rated “A”) immediately stands out with a beta of 0.4. A Bermuda-based bank, it does business with locals on the island, from daily banking to wealth management. A 3.45% dividend yield is pretty nice, and a nearly 36% operating margin suggests the bank has plenty of room to maintain that yield. On top of that, the bank has recorded a one-year total return of close to 18%.
Profitability matters, too. In that vein, a good pick might be Camden National Corporation (CAC, Rated “A-”). This small Maine bank runs 61 branches and pays a solid enough 2.14% yield. It’s trailing 12-month operating margin is a very healthy 45%, which suggests a safe dividend for the foreseeable future. While not a basement-level beta, a ratio of 0.52 also means CAC is only half as volatile as the overall market.
Bottom line: Bank stocks have been, and should continue to be, big winners given the policies of the Trump administration. Just make sure you focus on solid, safe bank investments — the ones you can entrust with your investment capital for the medium-to-long-term.