Financial ETF Breaks Out to 52-Week High: Stocks to Watch

“The time to buy is when there’s blood in the streets.” – Baron Rothschild

Last year’s regional bank scare created some incredible opportunities in the financial sector, as a long-feared fallout failed to materialize. Stocks in this space are now on the rise as the market eclipses its former highs.

Recent fourth-quarter earnings results out of the megabanks have helped to paint a sturdy and resilient picture for these stocks moving forward. One-time charges obscured how the banks really performed during Q4. Though several banks struggled to beat consensus revenue estimates, most continued to enjoy strong net interest earnings.

As we know, the stock market its forward-looking. And it’s telling us right now to expect positive things moving forward, as the Financial Select Sector SPDR ETF XLF is hitting 52-week highs on increasing volume. The XLF ETF provides an effective representation of the financial sector of the S&P 500 index. XLF offers exposure to companies across a broad range of financial services including banks, insurance, capital markets, and consumer finance.

Image Source: StockCharts

New highs are bullish and a sign of strength. A closer look at the Finance sector reveals several intriguing prospects.

Zacks Sector Rank: Improve Your Stock-Picking Success

The Zacks Sector Rank is a great top-down method that puts the odds of investment success in your favor. It is calculated by determining the average Zacks Rank (based on positive earnings estimate revisions) for all of the individual stocks in a given sector; the Sector Rank is calculated each and every trading day.

According to our 10-year backtest, stocks within the top 50% of Zacks Sectors beat the bottom half by nearly twice as much. This serves as clear evidence that stocks trading within the top Zacks Sectors can give your stock-picking a decisive advantage.

The Zacks Finance sector is currently ranked in the top 50%, providing stocks in this sector with a durable backing. Also note that stocks in this sector are relatively undervalued:

Zacks Investment Research
Image Source: Zacks Investment Research

Zacks Industry Rank: Locate Stocks with the Best Profit Potential

Historical research studies have consistently shown that approximately half of a stock’s price appreciation is due to its sector and industry group combination. Investing in stocks within leading industry groups provides a constant ‘tailwind’ to our success. We can use the Zacks Industry Rank to locate stocks with the most potential to outperform in the future.

Within the Finance sector, the Zacks Banks – Major Regional industry is currently ranked in the top 11% out of approximately 250 total industry groups. As such, we expect this group to outperform the market over the next 3 to 6 months, just as it has over the past several months:

Zacks Investment Research
Image Source: Zacks Investment Research

Once the top industry groups are identified, we can peel back the curtain to find stocks that are primed for a period of outperformance.

Stocks to Watch

A few notable stocks have separated themselves from the herd and are breaking out in the New Year. J.P. Morgan Chase JPM is a Zacks Rank #2 (Buy) that continues to stand above the competition. Higher interest rates, the First Republic Bank deal, and a modest improvement in its investment banking business drove fourth-quarter adjusted earnings to $3.97/share, handily outpacing the $3.73 Zacks Consensus Estimate.

The adjusted ESP figure represented a 6.43% improvement versus the year-ago period and marked the 6th consecutive earnings beat for this financial powerhouse. JPM stock is breaking out, hitting 52-week highs and trades at just a 10.82 forward-earnings multiple.

Image Source: StockCharts

It’s a similar story for rival Goldman Sachs GS, currently a Zacks Rank #3 (Hold). Goldman managed to deliver fourth-quarter earnings of $5.48/share, crushing the $3.47 consensus estimate by 57.9%. GS stock has been on a tear since late October, advancing more than 30% in the past three months.

Analysts covering GS are bullish this year and have been raising 2024 EPS estimates recently. Full-year earnings projections have increased 0.22% in the past 60 days. The Zacks Consensus Estimate now stands at $32.50/share, reflecting a stellar growth rate of 42.1% relative to last year.

Zacks Investment Research
Image Source: Zacks Investment Research

Outside of financials, the Q4 earnings season will heat up this week with a number of major companies set to report results. Make sure you’re taking advantage of all that Zacks has to offer to uncover leading stocks.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report

JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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