Buried in the dour earnings reports from big banks last week are some surprising clues to investing opportunities in three sectors that are poised to move higher.
Earnings season is gearing up, but the nation’s biggest banks have already set a somber tone.
The likes of Citigroup (NYSE: C), Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) all missed earnings expectations. Studious investors will be interested in the fact that it wasn’t all bad news from the banks.
The conference calls of the big banks revealed some tell-tale signs that certain sectors are poised to move higher this year.
Here are three investment opportunities that are enticing, based on some surprising trends gleaned from the comments big banks made during their earnings calls.
Big Bank Outlook No. 1: Oil Crash is a Net Positive
As far as the oil crash, the banks don’t expect a material fallout. JPMorgan Chase disclosing that it doesn’t expect a significant amount of charge-offs. All in all, low oil prices should be a big positive for the U.S. consumer. Wells Fargo (NYSE: WFC) pointed out during their conference call that the U.S. is a net consumer of energy.
So, the best way to play lower energy costs? Via retailers, where consumers have more money to spend on consumer discretionary goods. Bank of America noted that spending on credit and debit cards for January was up 3% on a year-over-year basis.
SPDR S&P Retail ETF (NYSEArca: XRT) is the broadest way to play an increase in consumer spending. This ETF gives investors exposure to over 100 companies, from various industries. Its major holdings are CarMax (NYSE: KMX), Office Depot (NASDAQ: ODP) and Sprouts Farmers Market (NASDAQ: SFM).
Big Bank Outlook No. 2: There’s Still Upside in Housing
This is one of the more speculative plays that we found while digging through bank earnings, but it is worth digging deeper into. Bank of America noted that its mortgage pipeline at the end of 2014 was much stronger than the end of 2013.
But one of the big drivers for further growth this year is the changes in lending guidelines for government-sponsored enterprises (GSEs), which should make housing more affordable — something Wells Fargo was sure to point out on their call.
Yet, over the last few days the SPDR S&P Homebuilders ETF (NYSEArca: XHB) has fallen more than 5%. This comes as a couple of top homebuilding companies offered weak outlooks for the next few quarters — the SPDR S&P Homebuilders ETF focuses on homebuilders, like D.R. Horton (NYSE: DHI).
The recent issue with homebuilders is increasing competition and pricing pressure, which doesn’t signal a fundamental industry problem. The industrywide selloff could be presenting an enticing buying opportunity.
Alternatively, investors can take a more diversified approach to homebuilding —consider the iShares Dow Jones US Home Construction ETF (NYSEArca: ITB). This ETF focuses on all angles of homebuilding, a broader swath than just the companies building the houses. These holdings include Lumber Liquidators (NYSE: LL) and Whirlpool (NYSE: WHR), among others.
Big Bank Outlook No. 3: Lending on the Rise
Companies with exposure to consumer spending and the housing market are great ways to play the major trends (such as the benefits of low energy costs and increased consumer lending) that we spotted from bank earnings calls. But another way to play these trends is the banks themselves.
Wells Fargo is optimistic about the economy, pointing out that consumer confidence is at an all-time high. As a result, Wells Fargo also noted that its own sentiment about the U.S. economy over the next four quarters is stronger than the last four quarters. And with the banks more positive on the economy, look for lending to increase — which is a key revenue driver for banks.
The go-to ETF in the financial space is the Select Sector Financial SPDR ETF (NYSEArca: XLF). The Select Sector Financial SPDR ETF is down over 3% over the last week, with its major holdings dragging the stock down. The recent selloff from some of the big banks could be presenting a buying opportunity.
In closing, banks contend that low oil prices translate to a positive for consumer spending, homebuilding will gain strength and the positive economic outlook will be a boost for lending. Quite simply, I think retail stocks, homebuilders and the banks themselves are all great ways to play these trends.
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