Three Multi-Regional Banks To Beat the Drop
There are three ways of looking at yesterday’s action in the markets; the optimist, the pessimist and the engineer. To the optimist the glass is half full, to the pessimist the glass is half empty and to the engineer the glass is twice as big as it needs to be. I am on record as saying that what we are seeing in the stock market at the moment is a correction, not the beginning of a collapse. I stand by that view…at least for now. My opinion is based more on the engineer’s view, taking a step back and looking at the bigger picture. Yesterday’s action sent mixed messages. The fact that we came off of the lows around lunchtime indicates that there are still plenty of buyers around, but we still closed lower. Of greater concern to those of us with a bullish bent was the first sign of demand for Treasuries. My belief in stocks is based largely on the fact that there is still an awful lot of cash looking for a home. If we see sustained flows into US Treasuries, despite the knowledge that the biggest buyer (The Fed) will soon be scaling down purchases, then that cash has found a home and we could be in for a rough summer.
To guard against that possibility, it may pay to look for sectors and individual stocks that will benefit should markets recover quickly, but suffer less should the drop continue. The first instinct of most investors would be to look at the traditional defensive sectors; healthcare, consumer staples and utilities, for example, but leveraged sectors such as utilities and healthcare could be in trouble in an environment of rising interest rates. The last place one would normally look for defense in a questionable market would be financials, but I believe that some regional banks may outperform in a bear market, yet still give access to the upside when we turn.
Regions Financial (RF):
As you can see from the chart above, RF (blue line) has significantly outperformed the S&P 500 (red line) over the last month. Regional banks in general have come through the worst of the lag from the recession and RF is no exception. Clearing repossessed properties and lowering loan loss provisions has enabled them to increase new loan rates with a focus on indirect auto and new home mortgage lending. First Quarter 2013 EPS of $0.23 was more than double that of last year and a forward P/E under 11 would indicate that there is room for expansion even if earnings only meet expectations.
Huntington Bancshares (HBAN):
HBAN is another stock that has outperformed the market recently, with a forward P/E below 11 and the possibility of better than forecast earnings growth. The story amongst these regional banks is usually very similar. They have survived the worst of the credit crisis and their balance sheets are gradually improving, as non-performing assets are either sold or written off. The common perception is that they are over exposed to the mortgage market, but earnings growth for many, including HBAN, is being driven by an increase in commercial and industrial loans, along with retail consumer banking. As interest rates rise, their large amount of CD exposure also becomes a valuable asset. The return of traditional profit sources is welcome.
BB&T Corporation (BBT):
BBT, like RF, is a multi regional bank, but with a focus on the Southeastern United States. The recent demographic trends, therefore, are providing growth in their core market; growth which, in large part, is coming from fairly stable, relatively wealthy retirees. CDs, high quality consumer loans and other profits from retail banking are increasing at BBT as well as the other banks mentioned, and they have also beaten the S&P this month.
BBT has a forward P/E of 11.38 and a decent yield of 2.77%. They are a fairly conservative bank, so may not have the upside potential of HBAN or RF but could be less prone to follow the market down in the event that the selling continues.
All three of these multi regional banks have shown over the last month that they are capable of retaining value in a falling market. I don’t expect that to be a necessity in the coming months, but they also have enough potential in a rising market to be worthwhile investments. If you are one of those people that always see the glass half empty and believe that every silver lining has a great big black cloud in front of it, then you have probably already moved to cash. If you are more optimistic or practical, however, moving some assets to these stocks with proven resilience in the current downtrend can give some peace of mind without sacrificing potential.