After a dismal performance in Q1 2014 the Financial sector is projected to see significant earnings growth over the next several quarters. In Q1, the sector as a whole suffered a 7.1% decline in earnings due to weakness across the board. The big banks experienced weakness in their capital markets, particularly on the fixed income side, revenues, and furthered their issues with home mortgages. This caused many of the banks to miss consensus estimates on both EPS, and Revenues.
But some sectors bounce back much quicker than others, and the Finance sector is one of them.
We are early into the Q2 earnings season, but we have seen earnings reports from several of the bigger banks, and the signs are very positive. These major banks comprise about 40% of the Finance sectors total earnings, and they have posted better than expected earnings for the quarter.
From the early Q2 filings, earnings are better than the previous quarter, but with limited growth. Currently, 28 of the 80 companies have reported earnings for the sector with 82.1% beating earnings expectations, and 78.6% beating revenue expectations. These beats were not expected by the street due to previous quarter, and sustained negatives facing the industry.
As of this posting, the Financial sector is expected to show 3.4% year over year growth for Q2, and is expected to jump even further in the following quarters; +4.9% in Q3, +10.6% in Q4, and +13.7% in Q1 2015.
Yet there are still headwinds for the Financial sector, specifically, legal and compliance issues, net interest margins, and mortgages. While most companies have finalized their legal issues with the Justice Department, Bank of America still has yet to settle with the department. Both net interest margins and mortgages are negatively impacting most big banks, but this has been the story with banks for the past many quarters.
Despite these headwinds, the financial sector is ramping up for a sustained growth trend out through 2015. Given these expected growth numbers, it is worth looking at some heavily Finance weighted mutual funds to capture the gains from several of the financial players.
Financials Ultrasector Profund S ( FNPSX ), a Zacks Rank #1 (Strong Buy), is a financial equity mutual fund, managed by ProFund Advisors, that primarily invests in financial services with 81% of the fund is comprised of Large Value companies. The major parts of the portfolio breaks down to 67% Finance, 24% Other, and 4% Technology. This fund is heavy on the big banks (WFC, JPM, BAC, C,), and top credit providers Visa, Mastercard, and American Express.
This fund may invest in equity caps, collars and floors, swaps, ADR's, and options on securities and securities indices. Dividend and capital gains are distributed annually.
Past Performance: 1 year return, +24.42%, 3 year return +19.19%, 5 year return +19.45%.
Fidelity Select Banking Ptf ( FSRBX ), a Zacks Rank #1 (Strong Buy), invests at least 80% of assets in common stocks of companies principally engaging in accepting deposits and making commercial and principally non-mortgage consumer loans. This mutual fund has 93% of its portfolio in the finance sector, and 5% in Other. The fund is heavy Large Value companies (51%), but also has a quarter of their fund in Small Value companies as well (26%).
Fidelity Select Banking Ptf holds most of the major banks, and has some of the more regional banks as a balance. Moreover, this fund offers dividends and capital gains in the months of April and December.
Past Performance: 1 year return +21.77%, 3 year return +17.35%, 5 year return +17.68%.
Davis Financial Fund A ( RPFGX ), a Zacks Rank #1 (Strong Buy), primarily invests in common stock of Financial companies. The fund invests at least 80% of the fund's net assets, plus any borrowing for investment purposes, in securities issued by companies principally engaged in the financial sector.
This fund has 74% in Finance, 13% in Other, 8% in Technology, and 4% in Energy. The Davis Financial fund is much more diverse than our other Financial mutual funds picks, but it is designed to spread risk amongst several sectors. Finally, the fund pays out dividends and capital gains annually.
Past Performance: 1 year return, +21.12%, 3 year return +13.77, 5 year return +16.16%.
Vanguard Financial Index Fund; Admiral ( VFAIX ), a Zacks Rank #1 (Strong Buy), seeks to track the performance of a benchmark index that measures the investment return of financial stocks; specifically the MSCI U.S. Investable Market Financials Index. This Index is comprised of small, mid, and large U.S. stocks within the financial sector.
The Vanguard is very heavy financials, 91% of the fund, and has several other sectors representing 2% or less of the fund. Moreover, Large Value companies comprise 76% of the fund, while 13% are Small Value companies. This fund pays out dividends and capital gains annually.
This fund is heavy the big banks as well, (WFC, C, JPM, BAC), and other companies like American Express, and Goldman Sachs.
Past Performance: 1 year return +18.61%, 3 year return +15.44%, 5 year return +16.15%