Did Bank Stock Buy Ratings Just Hit Bottom?

Analysts have grown extremely bearish on the financial sector over the past year, even as bank stocks gain

by Josh Selway

Published on Apr 6, 2017 at 11:19 AM
Updated on Apr 7, 2017 at 10:36 AM

Few sectors have benefited from President Donald Trump's election win like the financial group, with bank stocks in particular getting a boost amid hopes of deregulation. While many might feel this "Trump trade" has come and gone, it would seem the rally in financial stocks still has legs. This is based on our internal sector scorecard, compiled by Senior Quantitative Analyst Rocky White. In fact, the 39 stocks we track in our "Banks" sector has the most bullish setup of all the sectors we cover, based on our Expectational Analysis® methodology. 

Analyst Buy Ratings on Bank Stocks Revisit 2013 Lows

One standout sentiment analysis factor for bank stocks has been the steep decline in the number of "buy" ratings among analysts. For example, the percentage of "buy" recommendations for stocks that fall under our "Banks" umbrella currently sits at just 36% -- tied for the lowest among all of the 36 sectors we track. This is a sharp decline from 54% "buy" ratings at this time last year. 

From a broader view, here's a look at combined "buy" ratings for all of the stocks included in our Banks, Wall Street, and Finance sectors, mapped against the performance of the Financial Select Sector SPDR Fund (XLF), since 2011. The chart below illustrates the sharp drop in analyst "buy" ratings on Wall Street stocks over the past year. As you can see, the measure of composite "buys" is now moving higher off the $40 region -- the same low from which this metric rebounded back in 2013. 

If analyst sentiment on bank stocks, as measured by "buy" ratings, is once again in the process of moving higher from this extreme low, it stands to reason that future upgrades could be a positive catalyst for the group.

xlf etf

JPM Stock Could Benefit From Upgrades 

In fact, some analysts are already coming around. On Wednesday, Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC) were both upgraded to "outperform" at KBW, which also raised its price targets on JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of New York Mellon Corp (NYSE:BK), and State Street Corp (NYSE:STT). And just this morning, Citigroup upped its price target on JPM stock to $90 from $85. 

Among this group, JPM stock is a particular favorite of ours, from a contrarian trading perspective. The shares have gained 50.8% year-over-year, and peaked last month just shy of $94. More recently, JPM has pulled back into support around the mid-80s, home to its 100-day moving average (currently at $86.26) and the level marking a 10% correction from the March high ($84.58). With 57% "hold" and "sell" ratings from analysts, JPMorgan Chase & Co. looks primed to benefit from additional bullish brokerage notes going forward.

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