Buckingham Previews Big Bank Earnings: 4 Stocks With The Most Long-Term Upside

Shares of banks and brokers are oversold, and given a solid macroeconomic backdrop, Buckingham Research said it would be buyers of the group in front of strong earnings results.

The Analyst

Analyst James Mitchell has Buy ratings on the shares of Bank of America Corp BAC, Citigroup Inc C, JPMorgan Chase & Co. JPM, Morgan Stanley MS, Raymond James Financial, Inc. RJF, State Street Corp STT and Wells Fargo & Co WFC.

The analyst is Neutral on the shares of Bank of New York Mellon Corp BK, Goldman Sachs Group Inc GS and Northern Trust Corporation NTRS.

Buckingham's price targets in the sector are as follows: 

• Bank of America: $37
• Bank of New York Mellon: $64
• Citi: $101
• Goldman: $285
• JP Morgan: $135
• Morgan Stanley: $69
• Northern Trust: $116
• Raymond James: $117
• State Street: $131
• Wells Fargo: $75

The Thesis

Buckingham's first-quarter estimates are modestly above consensus across the board, with a bias to the upside due to favorable backdrop across capital markets, net interest income and credit, Mitchell said in a Monday note. (See the analyst's track record here.) 

The banking names with the shortest-duration balance sheets and a high percentage of earnings assets in AFS portfolios — namely the trust banks — could see material upside in net interest margins over the next two quarters, according to Buckingham.

The analyst said he sees upside to trading business thanks to persistent volatility and a spike in volumes in March. With much of the strength in Q1 being found in equities and through the more volatile investor class, Mitchell said Goldman and Morgan Stanley could enjoy more upside.

The overall trading guidance could prove conservative, as volatility picked up in the second half of March, the analyst said.

"Master trust data point to slowing growth in card NCOs and stable early stage delinquencies. In corporate credit, significantly higher cash flows from the tax cut should also improve the outlook (and potentially drive reserve releases." 

Due to lower credit costs relative to conservative Street expectations, Buckingham forecast potential earnings per share upside both this year and in 2019. 

Buckingham is above consensus on every name, with the highest projected upside in JPMorgan and Morgan Stanley. 

In the long run, the stocks with the most upside to the firm's targets are Citi, Raymond James, State Street and Wells Fargo, Mitchell said. 

The Price Action

The Financial Select Sector SPDR Fund XLF gained over 16 percent over the past year but has shed about 2 percent year-to-date.

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