With many of the major financial institutions posting strong numbers for the third quarter, bank stocks appear poised as the investment class to jump into. Recent fundamentals, such as a temporary thaw in the U.S.-China trade war, gives credence to this argument. However, I’m going to take a contrarian approach, suggesting that they’re instead stocks to sell.
While the notion may sound ridiculous in the face of better-than-expected earnings results, I have my reasons for skepticism. First, the broader indices like the Dow Jones or the S&P 500 remain relatively muted. Since July of this year, the markets have encountered strong upside resistance. If everyone thinks the big bank stocks are easy buys, Wall Street is doing a terrible job of confirming this.
Second, the positive fundamentals risk only being a temporary circumstance. While the respite from trade tensions — what President Trump terms a “phase one” agreement — is a political victory, much work remains before the two sides can ink something substantive. Plus, we all know how Trump can swing from one position to the next; thus, eyeballing bank stocks to sell isn’t such a crazy idea.
Finally, I think you have to read between the lines. Aggressive monetary policy is much like surgery: if you can avoid it, all the better. However, the mere fact that the Federal Reserve has artificially pushed interest rates lower suggests a poorer-than-assumed economy. In this case, it’s safer to consider bank stocks to sell than the other way around.
With that, here are seven bank stocks I’d look to trim or avoid:
Bank Stocks to Sell: JPMorgan Chase (JPM)
For the moment, I was wrong to doubt JPMorgan Chase (NYSE:JPM). The biggest of the American bank stocks, all eyes zeroed in on JPMorgan’s Q3 earnings report. If you are a bull, the news didn’t disappoint.
For per-share profitability, the company delivered earnings of $2.68 per share, above estimates calling for $2.45. Further, JPMorgan rang up $30.1 billion, which exceeded the consensus target of $28.5 billion. This was a record revenue haul. Therefore, it wasn’t surprising when JPM stock closed up 3% on the day.
More impressively, management reported growth in home and auto loans, as well as credit cards. During the release, JPMorgan CEO Jamie Dimon commented that “The consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels.”
So, is it time to buy JPM stock? Not so fast! Dimon also gave the other side of the argument, recognizing “weakening business sentiment and capital expenditures mostly driven by increasingly complex geopolitical risks, including tensions in global trade.”
Here’s the thing: if businesses continue to weaken, both consumer sentiment and unemployment turns negative in a hurry. Thus, I still believe JPM stock is a name you should either avoid or trim down.
Citigroup (C)
Another one of the big bank stocks which I wasn’t convinced on, Citigroup (NYSE:C) proved me wrong too. Against a consensus target for earnings-per-share of $1.95, the financial institution delivered $1.99. This performance extends Citigroup’s consecutive EPS beats to at least Q1 2016.
Furthermore, the total revenue picture was just as optimistic for C stock. Against a consensus forecast of $18.54 billion, the company rang up $18.6 billion. Notably, Citigroup CEO Michael Corbat seconded JPMorgan’s assessment of a strong U.S. consumer. According to CNBC’s Fred Imbert, “branded-cards revenue expanded by 11% in North America during the third quarter.”
Again, this sounds great for C stock. And on paper, shares did close up 1.4% on the day. However, it wasn’t an easy road. Immediately following the earnings disclosure, the equity actually dropped 2% in premarket trading.
One of the reasons for the uncertainty behind C stock was that Citigroup’s lending business posted softer-than-expected results. Without saying anything, that result confirms Jamie Dimon’s caveat: business sentiment is likely weakening broadly. And if that weakens, you can kiss all the consumer-related positives goodbye.
Wells Fargo (WFC)
Also among the Q3 disclosures for big bank stocks on Oct. 15 was Wells Fargo (NYSE:WFC). Over the years, Wells Fargo’s reputation shifted from one of the most trusted brands to among the least. Creating millions of false customer accounts at the expense of real clients can do that to you.
Thus, I should put an asterisk on WFC stock: this name was already flirting with the designation of bank stocks to sell.
But even with that handicap, I felt that Wells Fargo put in a particularly bad performance in Q3. While covering analysts anticipated EPS of $1.15, Wells choked, putting up only 92 cents per share. This represented a nearly 20% negative surprise.
For net income, the situation was even worse. The company reported a haul of $4.6 billion, which was down 23% year-over-year. Despite some obvious vulnerabilities, WFC stock closed up nearly 2% for the day.
Apparently, investors found management’s restructuring plan convincing. After all, Wells Fargo announced a new CEO and president last month. That said, I see financial weakness resulting not from Wells’ reputation, but from the negative business environment. Therefore, I’m cautious against WFC stock.
Goldman Sachs (GS)
With Goldman Sachs (NYSE:GS), you’re not necessarily playing the contrarian card of bank stocks to sell. On the front face, the financial firm is almost telling you to avoid it.
For Q3, the consensus estimate was pegged EPS at $4.82. However, Goldman Sachs disappointed the Street, driving home only $4.79. This was especially an eyesore because in the earnings releases of this calendar year, Goldman delivered double-digit positive surprises. Unsurprisingly, GS stock printed some red ink during premarket trading.
To be fair, GS stock did manage to close the day in the black. However, it was a very small gain. A contributing factor to the negativity was the revenue picture. Although top-line sales of $8.32 billion were above the $8.31 billion consensus target, they were also down 6% YOY.
More critically, though, the company’s investing, lending and investment banking divisions disappointed analysts. True, much of this can be explained because of Goldman Sachs’ investments in Uber Technologies (NYSE:UBER) and the embattled WeWork.
Still, Goldman’s results suggest a weakening business environment in the U.S. Additionally, you have a flat chart in GS stock for most of this year. As such, it’s time to put GS in your list of bank stocks to sell.
First Republic Bank (FRC)
At first glance, listing First Republic Bank (NYSE:FRC) as one of the bank stocks to sell appears nonsensical. For Q3, the financial institution enjoyed a stellar performance, beating both earnings and revenue expectations.
Specifically, First Republic rang up revenue of $837.2 million, which was up 8.9% against the year-ago quarter. Additionally, net income was $234.8 million, which represented a 10% lift YOY. And loan originations totaled $11.1 billion, which was the company’s strongest quarter ever. Unsurprisingly, FRC stock skyrocketed nearly 7% for the day.
With this move, FRC blew past both its 50-day and 200-day moving averages, which are common barometers for technical strength. Also, shares are now near their closing high of 2019. So, why would I put First Republic in a list of stocks to sell?
Frankly, it has nothing to do with the earnings performance, which was outstanding. But a key reason why FRC outperformed its peers among bank stocks is its core clientele. Specializing in key metropolitan areas, First Republic caters toward low-risk, higher net worth individuals.
But I’m not sure how long sentiment will keep up given the broader fundamental pressures facing most bank stocks. Thus, with FRC making such a strong move, tactically, it makes sense to sell into strength.
Hancock Whitney (HWC)
On the surface, dumping Hancock Whitney (NASDAQ:HWC) in a list of bank stocks to sell also defies logic. A regional bank focusing on the Gulf South economy, Hancock Whitney delivered solid results for Q3. Adjusted for non-recurring costs, earnings came in at $1.03 per share. This exceeded the consensus target calling for $1.01.
Moreover, total deposits for the quarter hit $24.2 billion, which was up sequentially from Q2 by $965 million. The Q3 haul was benefited to the tune of $1.3 billion, thanks to Hancock Whitney’s acquisition of MidSouth Bancorp. As a result of the generally positive news, HWC stock closed up more than 2% on the Oct. 15 session.
So, why am I doubting HWC stock? As with First Republic, it has nothing to do with Hancock Whitney’s Q3 performance. Instead, it’s a factor that’s outside the company’s control.
While being levered to the Gulf South economy is an asset in a bull market, it’s a problem in the present environment. That’s because the region is heavily levered to a robust business relationship with China. In 2018, exports to China from Texas, Louisiana, Mississippi, Alabama, Georgia and Florida totaled $28.4 billion.
If this trade war worsens, it’s a huge risk to HWC stock. It’s no wonder why shares have stalled for much of this year.
Ally Financial (ALLY)
Anytime you have a trade war with the world’s second-largest economy, you’re bound to have problems. Moreover, a consensus of economists agree that the U.S. has borne significant costs associated with the conflict. Therefore, this is one key reason to avoid lesser resourced names like Ally Financial (NYSE:ALLY) and ALLY stock.
Of course, the counterargument supporting ALLY stock — and the U.S. economy in general — is a trade war resolution. Despite angry rhetoric from both sides, the reality is that the trade war has hurt the U.S. and China. Easing tensions would be a welcome development for citizens of the two nations.
However, which side will blink first? President Trump appears to have a fragile ego, and probably won’t back down. His counterpart, Chinese President Xi Jinping, is a Communist Party strongman who deeply cares about his image too.
Even more startling, Moody’s Analytics predicts that Trump will have an easy road to victory in 2020. That means whatever politically motivated economic challenges we have today may remain for years to come. Under that specter, I think lessening your exposure to ALLY stock is a prudent choice.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.