Six good reasons for investors to consider buying bank stocks

Six good reasons for investors to consider buying bank stocks

Stock market volatility presents opportunities to buy stocks or ETFs on a dip in prices.


Many investors have been focused on buying popular technology stocks such as Amazon AMZN, -0.47% Facebook FB, +0.41%  and Netflix NFLX, +1.28% In our analysis at The Arora Report, banks are likely one of the leaders in the next up leg and present lower risk than technology stocks.


There are six good reasons for investors to consider buying bank stocks now. Let’s explore that idea, starting with a chart.


Read about bank earnings: Expect a strong first quarter, but more questions lie ahead


Chart

Please click here for an annotated chart of Bank of America BAC, -3.38% stock. Similar observations can be drawn from the charts of J.P. Morgan JPM, -2.83% Citigroup C, -2.98% and Wells Fargo WFC, -3.54%


Please observe the following from the chart:


• During the recent stock market volatility, the relative strength index (RSI) on the chart shows that the stock never got oversold. This is a mark of strength.


• The foregoing came after a big rally in which the stock almost doubled. This is very positive.


• The Arora Report is holding shares of Bank of America from an average price of $7.69, as shown on the chart, and is still holding the position. The stock has quadrupled. The Arora Report has given numerous buy signals for newer subscribers along the way.


• The stock market has moved significantly above 2008 pre-crash levels. Those looking for bargains, take note that Bank of America is still way below the pre-crash level.


• Volume in the stock has stayed above pre-crash levels. This indicates higher investor interest.


• The last up leg was on low volume. This indicates a fair probability of a pullback.


• On the positive side, the low volume during the rally indicates that the stock is not over-owned and should be bought on a pullback. The Arora Report provides to subscribers precise buy zones to buy several bank stocks.


Overall, the technical picture presents a good reason to buy bank stocks in the buy zones.


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Net interest margins

Interest rates are rising. Banks are quick to raise interest rates for borrowers. However, banks are slow to raise interest rates for savers. This increases net interest margins and earnings.


Less regulation

Irrespective of your opinion of President Trump, as an investor, you have to acknowledge that he has reduced the onerous regulatory burden on banks. This reduces banks’ costs and increases earnings.


Good economy

The U.S. economy is doing well. This increases business for banks.


Valuations

In this expensive stock market, bank valuations are relatively reasonable.


M&A

As regulations are eased, The Arora Report expects a significant increase in buyouts of smaller banks. This presents a major opportunity for investors in the 2018 to 2021 period. To date, 133 of The Arora Report portfolio companies have been bought out, producing large gains for investors.


What to do now

Most investors should consider buying a combination of large banks, regional banks, small banks and bank ETFs on dips in prices. In our portfolios, we are holding a number of bank and bank-like stocks as well as bank ETFs. We plan to add several small banks on dips. Most investors would be better off to buy these on pullbacks into the buy zones.


Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report. Nigam can be reached at Nigam@TheAroraReport.com.