Some Analysts Warn on Bank Stocks After Rally -- WSJ

By Chris Dieterich 

Have bank stocks climbed too far, too fast?

Financial stocks have risen 17% since U.S. elections in November, making them the top-performing sector in the S&P 500 in that span, by far. The group has been buoyed by expectations for relaxed banking regulation under the new administration and greater lending profitability as a result of higher interest rates.

Investors turned bullish literally overnight, pumping $7.5 billion into the Financial Select Sector SPDR exchange-traded fund, ticker XLF, since Nov. 8 -- third-most among all ETFs, according to FactSet.

Strong gains prompted one analyst to recommend booking profits ahead of a wave of earnings announcements from the big banks starting this week. Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. all are due to report results on Friday.

Citigroup banking analyst Keith Horowitz in a note Tuesday told clients to sell shares of Goldman Sachs Group Inc.; the Wall Street firms is up 33% since Nov. 8.

Mr. Horowitz said the 23% climb for the KBW Nasdaq Banking index since the election leaves little room for error for banks.

"The bull case we are hearing on the banks is that they are broadly under-owned, they benefit from higher rates and better economic growth, and they are less risky now due to higher capital levels," he wrote. "While this is all true, we think this is mostly reflected in the recent performance of the group."

Mr. Horowitz likewise cut his rating of Comerica, which has climbed 34% since the election, for valuation reasons.

Shares of Goldman Sachs fell 0.1% on Tuesday while Comerica added 0.1%.

Separately, Julian Emanuel, strategist at UBS, noted a worrisome disconnect: While retail investors continue to pump money into bank and financial stocks, hedge funds and other professional managers already recently have been taking money out, according to the firm's in-house flow data on clients' behavior.

"The sharp rally in financials since Donald Trump's election, buoyed by higher interest rates and a steepening yield curve, may be due for a tactical pause," Mr. Emanuel wrote. "Retail flow, especially into ETF products, remains positive, further supporting the idea that the sector could pull back, especially if earnings don't surpass the 'high expectations bar' or if managements provide a less optimistic outlook for 2017."

Mr. Emanuel recommends buying protective put options in the Financial Select Sector SPDR ETF that expire next month. Buyers of puts generally profit from declines in the shares of the underlying asset.

(END) Dow Jones Newswires

January 11, 2017 02:48 ET (07:48 GMT)

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