What are we looking for?
Major U.S. banks poised to benefit from a more relaxed regulatory climate.
This week, hedge fund manager Steve Eisman, famous for his bets against mortgage-backed securities in Michael Lewis's book The Big Short, forecast that a "gilded era" for banks was about to get underway. In addition to the tailwinds created by rising interest rates, Mr. Eisman also predicts that U.S. president-elect Donald Trump will begin rolling back many financial regulations that have slowed the growth of U.S. banks in recent years. In spite of this sector moving higher by approximately 18 per cent since the election, U.S. banks have underperformed the broader market for the past eight years. Based on this thinking, this sector could still have considerable room to run.
We will be using Recognia Strategy Builder to search for U.S. bank stocks offering reasonable valuations and efficient operations. We will exclude Canadian banks trading on a U.S. exchange from our consideration since they do most of their business outside of the United States.
We begin by setting a minimum market cap threshold of $10-billion (U.S.). This creates a list of "too big to fail" banks that are subject to the most government regulation.
Next, we will look for efficient operations as measured by operating margin. We will screen for banks with operating margins of 20 per cent or more. Operating margin is a measure of the profit a company makes on each dollar of revenue – higher operating margins are preferred.
To ensure we don't overpay for our investments, we will filter on forward P/E ratios of 20 or less. Last, we will impose a dividend yield threshold of 1.5 per cent or more.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trade ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Wells Fargo & Co. is the largest bank on our list with a market cap in excess of $280-billion. With a low forward P/E ratio of just 13.9 and a dividend yield of 2.7 per cent, this is a stock that will appeal to many long-term investors. Wells was hit with an account-opening scandal earlier this year. However, investors seem to have shrugged off this news and have driven the stock higher by almost 22 per cent since the U.S. election.
The highest operating margin on our list belongs to Minneapolis-based U.S. Bancorp. This stock is up 15 per cent since the election and up 22 per cent year-to-date. Through aggressive cost control and efficiency initiatives, U.S. Bancorp has managed to grow operating margins significantly since the spring of 2016.
Bank of New York Mellon also makes our list with a market cap of more than $50-billion and a low 15.7 forward P/E ratio. On Oct. 20, the company announced third-quarter results that beat analyst expectations on both earnings and revenue. The stock is now up 15 per cent year-to-date and is trading very close to a 52-week high.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.
Select U.S. banks
|Rank||Company||Symbol||Market Cap. (US $Bil.)||P/E (This Year's Estimate)||Operating Margin||Div. Yield|
|1||Wells Fargo & Co.||WFC-N||$281.8||13.9||34.7%||2.7%|
|4||PNC Financial Services Group Inc.||PNC-N||$57.4||16.6||33.5%||1.8%|
|5||Bank of New York Mellon Corp.||BK-N||$50.4||15.7||28.6%||1.6%|
|6||Regions Financial Corp.||RF-N||$17.9||17.4||28.3%||1.8%|
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