The Crisis Is About to Boost Banks’ Profits
Throughout the pandemic, Ted and I have shown you how to make money.
Despite the uncertainty, at every point we have looked for opportunities to keep you profiting. And so far we’ve succeeded. At its simplest, our formula for success during this crisis can be distilled down to two themes.
Theme No. 1: Deep value.
We identify sectors and companies trading at a steep discount relative to earnings potential.
Back in early April, Ted told you how the sell-off in housing stocks was overdone, with many names trading at mid-single-digit price-to-earnings (P/E) ratios. Plenty of people said Ted was crazy at the time. But since then, the iShares US Home Construction ETF (NYSE: ITB), an exchange-traded fund (ETF) has gained nearly 38%.
Theme No. 2: Change.
This crisis has accelerated technology-driven changes that were already underway … and thus provided huge opportunities for investors.
Ted also highlighted how the pandemic is accelerating workplace automation, and how to leverage the trend with the Robo Global Robotics and Automation Index ETF (Nasdaq: ROBO). It’s up 17% since then.
Things have changed since we’ve made those recommendations. The stock market’s massive rebound has resulted in valuations even loftier than before the pandemic hit. Only during the technology bubble in the late ’90s have stocks collectively been more expensive based on expected earnings.
But there are still great opportunities to find value plays and companies that benefit from these trends — if you know where to look.
And I’ve spotted another opportunity that stands to gain from both of these themes … a value play set to see profits jump as the crisis speeds up change.
The Pandemic Is Changing How We Bank
In another recent recommendation, I highlighted how the pandemic would hasten the trend toward e-commerce. (That pick is up more than 15% since then … outperforming the S&P 500 Index by more than 50% in the same period.)
And now a similar story is playing out in the banking sector.
For years, the banking sector has been trying to get customers to utilize more mobile banking services and make fewer visits to physical branches.
Branch offices cost a lot of money to build and maintain. According to a report from ARCA, a company that specializes in bank teller automation, banks spend $2 to $4 million on average just to open one branch. They spend another $200,000 to $400,000 every year to operate the facility.
U.S. Bancorp alone operates around 3,000 of these branches.
But now, as The Wall Street Journal reported this week, the pandemic has pushed the shift toward mobile banking into overdrive. Logins to digital bank platforms are running 25% ahead of last year.
As a result, bank chiefs are using the opportunity to accelerate branch consolidation, which will save costs and boost bank profits.
Here’s another thing: banks are still cheap.
Sure, earnings will take a hit this year. But analysts are pricing in a swift recovery over the next one to two years … in part aided by shrinking costs.
And the SPDR S&P Regional Banking ETF (NYSE: KRE) still has 43% worth of gains ahead just to return to its prior high.
So take advantage of how the pandemic is changing the way we bank, while also grabbing shares in a cheap sector.
Research Analyst, The Bauman Letter