Financial Stocks Killing the Market: and Here’s the Bank That Kills its Competitors

The dogs are clearly having their day. The bailed out financial sector is the top-performing segment in the S&P 500 so far this year. According to S&P Capital IQ the financials within the benchmark index have had a 19% average price gain through early November, about double the return of the overall index. Three of the doggiest stocks to emerge from the financial crisis -- Bank of America (BAC), Citigroup (C) and AIG (AIG) -- have had even bigger pops, as seen in a stock chart.

BAC Chart

BAC data by YCharts

Oakmark’s Bill Nygren has recently taken large stakes in Bank of America and AIG, on the premise that their current valuations have way over-shot to the downside.

And Schwab’s sector-analysis team has just raised the near-term outlook (out to six months) for the financial sector from Market Perform to Outperform.

Schwab’s Brad Sorensen surmises that, “There are still risks for the group, but we believe the sector's fundamentals and broader macroeconomic developments provide enough potential benefits to outweigh those concerns.”

That said, Sorensen was also clear that the financial sector is not exactly operating in clear skies. “Regulations that limit trading financial institutions can do for themselves, which has been a major profit driver for some companies, remain a concern for us. And already-instituted new capital requirements restrict the amount of money banks can lend, limiting profit potential for many of them.”

That’s not exactly a glowing endorsement for the likes of JP Morgan Chase (JPM), which even before being slammed by the bad Whale trade, has long feasted on its prop desk.

That’s not the case at Wells Fargo (WFC), which practically has a Jimmy Stewart business plan: grow by building its retail and small business client base—and generate income off of those accounts through loans and account fees. In the third quarter, Wells Fargo reported that it was cross-selling the average retail household on more than six different types of Wells Fargo products such as deposit accounts, credit cards, loans, and investment management services.

On two key metrics, Wells Fargo is clearly outperforming JPMorgan.

WFC Return on Assets Chart

WFC Return on Assets data by YCharts

WFC Return on Equity Chart

WFC Return on Equity data by YCharts

And after the recent post-election bank hammering, Wells Fargo is trading back close to the 10x PE ratio it started the year at, despite the fact that free cash flow has nearly doubled. In a sector riff with doggy stocks, Wells Fargo is a top contender for best in breed.

Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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