The Q4 earnings season is underway. Banks dominate the first few sessions of earnings. When your entire business is predicated on your balance sheet you better be prepared to post results at the drop of a hat!
While these institutions are not great trading vehicles. It is important to review how they performed. The banking system is the lifeline of the economy and understanding a bank’s performance and fundamentals allow you to assess the economic environment and trade with the trend.
What can we infer from the start of the bank earnings season?
Sentiment remains negative. The rising-rate environment has investors spooked about valuations. The easy money has been made on the short side. However, the underlying fundamentals are strong. Loan Growth was positive and the consumer remains in great shape. The question is if we maintain this performance while supply chain issues peck away at economic strength.
Why are the banks being offered following earnings?
There are a few items at play:
• The Select SPDR Trust Financial ETF (XLF) rallied 64% from its November 6 lows ($24.96) to its 52-week high ($41.26) on December 30. The group was ripe for a sell-the-news/profit-taking action.
• The rate hike cycle has not started. There has been no impact on bank’s earnings power as evident by steady performance in net interest margins and net interest income.
• Investment Banking units underperformed and are still lapping tough comparisons.
• Expenses, particularly at J.P. Morgan (JPM) and Goldman Sachs (GS) outpaced expectations. This raises questions about profitability in 2022.
Some investors are banking their profits and heading to the exit. JPM posted its worst post-earnings performance since 2002. Goldman had its worst reaction to earnings since its April 2009 quarter when it issued $5 bln in shares to help facilitate the Warren Buffet cash infusion and pay off TARP loans.
Does this provide a buying opportunity?
Markets measure investors’ sentiment six months out. However, they are susceptible to short-term gyrations around headlines. Reading through the initial price reaction and comparing that to the backdrop we are operating in can help scoop up some bargains or lead us to trim overbought candidates.
GS jumps off the page as a buying opportunity. The primary concern- higher expenses- is due to higher compensation or what it pays its employees. This is a variable that can change from quarter to quarter. The bank is paying its employees to retain them. A move that will benefit its operations down the road.
The stock is 20% off its 52-week high and is at its lowest level since May 2021. There was damage done to the chart as it broke below key support. We want to see some repair. This sets up for an average down approach where we can start to nibble at the $350 area and slowly build up a position. At the end of the day, you have arguably the best IB bank at a relative discount.
JPM presents a buy-the-dip opportunity. The cautious commentary around expenses will hurt the 2022 earnings power. We will see this offset by higher rates. The chart endured plenty of technical damage with the 50- and 200-day moving averages broken on the aggressive selling. It is trading near the July lows of $145. Again, an average down approach is prudent when we see charts decimated.
The key in any average-down scenario is to remain patient and do not put all your capital to work at once. You are buying with the understanding that these names could slip further. However, you have the backdrop of a strong fundamental story behind your investment.
It can take a few sessions for sentiment to turn but, when it does, you will have secured two prime names- GS and JPM- at a cheaper cost basis.