The Best Year-End Big Bank Trade

By: Wayne Duggan

Second chances can be a rarity in the stock market, but the banking sector may be setting up for a repeat performance heading into the end of the year.

With the Federal Reserve’s December meeting now two months away, “Big 4” U.S. bank stocks Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co (NYSE: WFC) and Citigroup Inc (NYSE: C) now find themselves right back where they were a year ago.

December Rate Hike Likely

This week, a new Wall Street Journal poll of 59 economists found that 81.4% are predicting the next Federal Reserve interest rate hike will come in December. The consensus seems to be that the Fed will opt for another 0.25% rate hike, mirroring last year’s move.

Of course, that would be good news for banks; they’d get more wiggle room when it comes to net interest margins.

Last year, Bank of America, Wells Fargo and JPMorgan all gained between 4.2% and 7.6% between October 15 and December 15 in anticipation of a hike. Citigroup was the lone laggard, giving up 0.8%.

This year, bank stocks could be in for a repeat performance.

Key Differences From Last Year

While most of the circumstances for banks are nearly identical to last year, some things have certainly changed.

For starters, Wells Fargo is in the middle of a fraud scandal that has ushered in the departure of its CEO and waves of public backlash. The stock is already down 11.6% since the beginning of September.

Of course, the surprise Brexit vote has been another unsettling development in the financial world since last year. There is still a lot of uncertainty surrounding the long-term impact of the Brexit.

Finally, by the time December 2016 rolls around, the U.S. will have elected a new president. The campaign season has ushered in a new movement to break up the biggest U.S. banks. Wells Fargo’s scandal has only added fuel to that fire.

The Top Banking Stock

Wells Fargo’s issues are too much of an uncertainty for the time being, and traders should consider staying on the sidelines for now.

JPMorgan is trading 9.8% higher than it was a year ago and Bank of America is up about 2.9%.

Citigroup, on the other hand, is actually 5.1% cheaper than it was at this time in 2015. Citigroup now trades at a dirt-cheap price/book ratio of only 0.66, yet recently delivered a solid Q3 EPS and revenue beat.

After bottoming in February, Citigroup has been trending higher and doesn’t appear to have any major technical resistance up to the $56 level that represents last November’s high.

In addition, since the stock is trading significantly below book value, a forced Citigroup breakup might actually unlock value for shareholders.

Traders who missed out on last year’s pre-December bank rally last year should consider Citigroup as the best U.S. big bank stock to close out 2016.

Disclosure: the author is long C.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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