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For Investment Gurus, Banks Are the Winning Trade for 2020

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This could be a challenging year for investors as quite a few experts expect the stock market to fall prey to political uncertainty stemming from the upcoming presidential election. On the contrary, there is every reason to believe that the market’s performance will be promising driven by the U.S.-China trade truce and a healthy domestic economy.

Such contradicting views certainly make it difficult for investors. In such a scenario, it’s prudent to follow the world’s best investors and their strategies. They have got into the investment game pretty early and have made fortunes. And this year, they are predominantly feeling comfortable holding a portfolio of financial institutions. Legendary investors like Bill Nygren, Charlie Munger and Warren Buffett have allocated more than 30%, 90% and 45% portion of their respective portfolios to the financial sector, especially banks.

Now, the obvious question is, why banks? The Fed had trimmed interest rates three times last year following nine hikes in the previous three-year period. Drop in business investments and consistently low inflation were the reasons behind the rate cuts. At the same time, President Trump wanted the Fed to slash rates more aggressively, thanks to record-low unemployment levels. Lest we forget, decline in interest rates adversely impacts net interest margins. Needless to say, a bank’s profit margin depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.

However, not everything is gloomy when rates falls, as it fuels demand for loans. What’s more, lower rates haven’t stopped banks from increasing their net income. Per the Community Banking Connections, noninterest expenses are increasing at a slower rate than total assets, thereby boosting profits margins. Significant improvement in operation efficiency has helped banks bring down expenses.

Talking about non-interest income, banks continue to expand consumer lending businesses. Housing and car loans have increased considerably, thanks to lower interest rates. Lenders made $700 billion in mortgages in the third quarter of last year, thanks to customers’ rush to refinance. And such a hot streak is expected to have remained intact this year as well, especially due to low mortgage rates.

By the way, since last September, the yield curve has steepened, indicating that the economy is in solid shape and the fears of an imminent recession are overblown. It’s worth pointing out that yield curve inversion generally affects banks. This is because a bank fails to make more money from long-term loans than what they pay for short-term debts. However, if the gap between the two yield curves widens, it will lead to expanded profit margins for lenders like banks.

5 Top Banks Stocks to Buy in 2020

The aforesaid factors are sure to help banks gain traction this year. RBC analyst Gerard Cassidy rightly summed up by saying, “bank stocks need to be owned now. The current environment is similar to the monetary policy of 1994-98, when the Fed tightened and then cut interest rates, and bank stocks outperformed as rates fell.” We have thus selected five bank stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Citigroup Inc. (C - Free Report) provides various financial products and services for consumers, corporations, governments, and institutions. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 1.2% over the past 60 days. Citigroup’s expected earnings growth rate for the current quarter and year is 15% and 14.1%, respectively.

Capital City Bank Group, Inc. (CCBG - Free Report) provides a range of banking and banking-related services to individual and corporate clients in Florida, Georgia, and Alabama. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved north nearly 6% over the past 60 days. Capital City Bank Group’s expected earnings growth rate for the current quarter and year is 7.3% and 36.2%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Heartland BancCorp. (HLAN - Free Report) is a registered Ohio bank holding company and the parent of Heartland Bank. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 10% over the past 60 days. Heartland BancCorp’s expected earnings growth rate for the current year is 22.8%.

Eagle Bancorp Montana, Inc. (EBMT - Free Report) provides various retail banking products and services in Montana. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 1.1% over the past 60 days. Eagle Bancorp Montana’s expected earnings growth rate for the current quarter and year is 44.4% and 72.9%, respectively.

Investors Bancorp, Inc. provides various banking products and services to individuals and businesses in the United States. It operates as the bank holding company for Investors Bank. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 2.6% over the past 60 days. Investors Bancorp’s expected earnings growth rare for the next quarter is 22.2%.

Zacks Top 10 Stocks for 2020

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