(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Short data sourced from Yahoo! Finance)
Warren Buffett recently invested $5 billion in Bank of America, highlighting a common assumption among investors that the financial-services sector is currently undervalued and ready for a rebound. But if that’s true, how should the casual investor go about investing?
Most would consider two routes: directly buying stocks in a banking company, or buying into an ETF or sector fund.
According to Chuck Jaffe of MarketWatch, investors with diversified portfolios likely already have more exposure to financials than they think. After all, most portfolios are tilted towards financials anyway, and roughly 13% of the Standard & Poor’s 500 Index is in the sector to begin with. What’s more, what’s good for financials tend to be good for the rest of the market too.
In short, financials are heavily interconnected with the majority of stocks and funds, although buying directly into financials may be riskier than buying into stocks that are simply affected by financials.
Pure Financial-Stock ETFs vs. a Diversified ETF
“Investors who see the potential in financial stocks typically are talking about a few names, issues with solid balance sheets and prospects where the stock price was hurt simply because they get lumped in with the headline makers like Goldman Sachs (GS), Citigroup (C), or Bank of America (BAC). If it is just a few financial stocks that pique your interest, buying them directly may make more sense than diversifying further with a fund.”
As a warning of buying into financial funds, Jaffe says to “consider the 25 financial-sector ETFs which range in their holdings from a low of 24 securities to a high of nearly 500.” Investing in these funds may seem like a good way to get into the financial-services mix, but New Constructs Inc., a Nashville-based research firm, gives the financial-services sector a “dangerous” rating and ranks it 9th out of the 10 sectors it follows that make up the economy.
So, should you be buying banking stocks?
The jury is still out on that question, but in the meantime it could be instructive to see what short sellers think of the industry’s outlook.
To explore the idea, we started with a universe of about 170 banking stocks. We collected data on short seller trends, and identified the names that have seen a significant decrease in shares shorted over the last month.
In other words, short sellers have reduced bets that these names will see continued losses. Do you agree with their bullish sentiments?
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1. BankUnited, Inc. (BKU): Operates as the holding company for BankUnited that provides various banking products and services to consumers, and commercial and middle-market businesses. Shares shorted have decreased from 1.47M to 1.03M over the last month, a decrease which represents about 1.28% of the company's float of 34.29M shares.
2. Susquehanna Bancshares, Inc. (SUSQ): Provides retail and commercial banking, and financial services in the mid-Atlantic region. Shares shorted have decreased from 20.55M to 15.36M over the last month, a decrease which represents about 4.06% of the company's float of 127.82M shares.
3. BancorpSouth, Inc. (BXS): Operates as the holding company for BancorpSouth Bank that provides commercial banking and financial services to individuals, and small-to-medium sized businesses in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri, and Illinois. Shares shorted have decreased from 10.77M to 9.62M over the last month, a decrease which represents about 1.59% of the company's float of 72.18M shares.
4. IberiaBank Corp. (IBKC): Operates as a holding company for IBERIABANK that provides commercial and retail banking products and services in the United States. Shares shorted have decreased from 2.98M to 2.64M over the last month, a decrease which represents about 1.16% of the company's float of 29.43M shares.