Bank stocks remain out of favor. Here’s why we’re sticking with our 2
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Despite the Street’s sour view on the banking sector, we continue to own Wells Fargo (WFC) and Morgan Stanley (MS) as special situations that are making progress on internal transformations to boost their values. Wells Fargo is a multiyear turnaround story, encompassing cost-cutting strategies to please investors and improvements to risk-management operations to satisfy both regulators and investors. Morgan Stanley is a business evolution story, leaning into the fee-based revenues of asset management to diminish its dependence on the boom-and-bust cycles of investment banking. These distinct characteristics attracted us to these companies in the first place, and now give us relative comfort in owning their stocks in a market that’s eschewed the sector following the collapse of three U.S. lenders in March . Those bank failures have unleashed a cascade of worries on Wall Street, most of which are generally considered unfavorable for financials. This includes whether the U.S. economy is now more likely to fall into a recession as credit conditions tighten, and whether Washington would pursue a set of tougher regulations that erode the profitability of banks. The latter is particularly concerning for bank shareholders, so much so that JPMorgan Chase (JPM) CEO Jamie Dimon addressed it Tuesday in his closely followed annual shareholder letter. “We need banks to be attractive investments,” Dimon wrote. “It is in the interest of the financial system that banks not become ‘un-investable’ because of uncertainty around regulations that affect capital, profitability and long-term investing. Erratic stress test capital requirements and constant uncertainty around future regulations damage the banking system without making it safer.” Dimon gets to at an important truth in investing: Uncertainty is detested. Bad news for a company is eventually digested by the market and future expectations are readjusted to reflect the up-to-date reality. But uncertainty, especially around future regulatory burdens, can be more difficult to account for and deter investors from committing capital to a company or sector. Right now, the market also remains unsure on whether another domino will fall in the bank sector. Despite a perceived stabilization in recent weeks , Dimon said in Tuesday’s letter he believes “the current crisis is not yet over.” The S & P 500 is up more than 3% since the close on March 8, the last session before Silicon Valley Bank’s troubles began to dominate markets. But the index’s financial sector hasn’t participated in rally, falling 7.5% over the same stretch. Wells Fargo shares have dropped roughly 14%, while Morgan Stanley has dipped roughly 9%. Both stocks were firmly in the red Tuesday, with Wells Fargo sinking below $37 per share and Morgan Stanley below $85 per share. Bottom line Our rationale for investing in Wells Fargo and Morgan Stanley — two special situations within the banking cohort — hasn’t changed just because their stock prices have declined. Of course, we acknowledge the bigger picture has become more challenged, and Wall Street has largely lost its appetite for bank stocks. In the short run, that decreases the likelihood that shares of Wells Fargo and Morgan Stanley will rip higher. But at current levels, it is not prudent to let the stocks go. That’s especially true for Wells Fargo, knowing that CEO Charlie Scharf can execute additional restructurings to reduce expenses. “We’re not going to sell it down here,” Jim Cramer said during Tuesday’s “Morning Meeting.” “That’s just ridiculous. It’s just too cheap based on all the cuts they could make.” (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The logo of Morgan Stanley is seen in New York
Shannon Stapleton | Reuters
Despite the Street’s sour view on the banking sector, we continue to own Wells Fargo (WFC) and Morgan Stanley (MS) as special situations that are making progress on internal transformations to boost their values.
