Sterne Agee has issued a different take on its weekly coverage of bank stocks and is issuing its new list of top picks as banking stocks to buy. While the favorites are named generally as mega-caps, the actual list only has one under that group. These are Sterne Agee's favorite ideas for the remainder of 2013 and going into 2014 because of regional trends and otherwise undervalued quality companies.
We would point out that this research call is not just one analyst. The call is a compilation from seven different analysts at the firm, which implies that each analyst is presenting his best case scenario for upside in each of these banking stocks.
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These banks include the following names: Bancorp Inc. (TBBK), Citigroup Inc. (NYSE:C), EverBank Financial Corp. (EVER), Investors Bancorp Inc. (ISBC), Northfield Bancorp Inc. (NFBK), PacWest Bancorp (PACW), Signature Bank (SBNY), Texas Capital BancShares Inc. (TCBI), TFS Financial Corp. (TFSL) and Western Alliance Bancorporation (WAL). Most of these are not exactly household names, but the banks are either into the billions in market cap or they are somewhat active in average daily trading volume on the NYSE or on Nasdaq.
Sterne Agee pointed out that its last set of favorite picks from December 2012 performed comparably with the Nasdaq Bank Index so far in 2013. The team here sees what is called "multiple expansion" continuing to drive the banking stocks. Quite simply, this is where investors are willing to pay a higher earnings multiple than they were previously.
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Bank stocks are up on average 24.1% so far in 2013, compared to the S&P 500 Index being up by 18.1% and the Nasdaq Bank Index up 24.9%. As measured by forward price-to-earnings multiples, bank stocks now trade at 15.4 times 2014 earnings, compared to 12.6 times at year-end 2012. The firm also pointed out that despite a recent steepening of the yield curve, these same 2014 earnings estimates have only increased by about 2%.
Leading the way was Western Alliance Bancorporation (WAL) as the top performer of the firm's picks in 2013, with gains so far of 45.5%. The report says:
In aggregate, our new favorites provide a way to play a number of different themes and trends we believe will lead to outperformance versus the broader group over the next year. As implied in our fundamental price targets, we believe these names will increase an average 13.2% over the next 12 months.
Signature Bank (SBNY) and Citigroup Inc. (NYSE:C) are considered to be the new top picks for high-quality regional and multinational banks. The firm's banks with stronger growth prospects in specific regions are PacWest Bancorp (PACW), Texas Capital BancShares Inc. (TCBI) and Western Alliance Bancorporation (WAL).