Posted July 12, 2021
By Zach Scheidt
3 Stocks to Buy Ahead of Earnings This Week!
This is a big week for investors!
That's because this week kicks off an important earnings season, which will give us a much clearer picture of how the economy is doing through the reopening process.
I always love earnings season because of all the rich information we get from the stocks that we follow.
Of course, we always get the latest numbers covering what our companies did in the previous quarter.
But the most important information typically comes when the management teams start to talk about what's next!
That's when we get a clearer picture of the strengths and weaknesses of the stocks that we're following.
And we get a first-hand account of the opportunities our investments are pursuing.
This week, I've got my eye on a handful of very important upcoming earnings reports.
As you'll see in a moment, these reports have the potential to be giant catalysts for stock prices. And if you invest in the three stocks today, you could end the week with a new batch of profits!
Let's take a look at the best earnings plays for this week.
Welcome to "Bank Week"
As earnings season officially kicks off, several key bank stocks will report earnings this week.
It's important to pay attention to these earnings reports because big banks have their finger on the pulse of the overall economy.
When the economy is growing, bank profits tend to do well. And when the economy is slowing, we often hear comments from bank executives warning us of the issues they’re facing.
Here are a few of the biggest banks set to report earnings this week:
- Goldman Sachs (GS) — Tuesday before the open
- JPMorgan Chase (JPM) — Tuesday before the open
- Bank of America (BAC) — Wednesday before the open
- Citigroup (C) -- Wednesday before the open
- Wells Fargo (WFC) — Wednesday before the open
- Morgan Stanley (MS) — Thursday before the open
Each of these companies will also host a conference call following the earnings release. This is when bank executives will give us some color on what they are seeing in the economy.
Many of these calls will also feature a question-and-answer session for investors.
This quarter, I expect to hear a lot of positive news about the economic rebound in our country.
As more people get back to work, businesses reopen (or expand what they can offer to customers) and profits start to rise for companies across the country, banks will naturally benefit.
Many of the statistics that I follow are already showing that companies are borrowing more capital to help pay for growth opportunities.
New borrowing naturally helps bank stocks because these loans carry interest payments that add to a bank's bottom line.
And the new loans also come with underwriting fees, transaction fees and plenty of other ways for the banks to generate profits.
I can tell you this will be a busy week for me and my team as we pour through the reports.
But in addition to what the banks report this quarter, there's also another issue we need to be watching very closely.
In fact, this particular issue is often even more important than the earnings numbers that banks report.
Perception vs Reality
When I was getting started as a hedge fund manager, I picked up on some important nuances for why stocks trade higher and lower.
Bill was my boss and mentor at the time. And he would often pull me into his office to talk about trades that he was considering.
One of the most important questions he would ask himself (and me sitting across the desk) was this:
“What does the market currently think about this stock? And how will that perception change?”
You see, the stock market is essentially a collective group of buyers and sellers.
And the entire community of investors can either push a stock higher with new buy orders... or push a stock lower if the group decides to start selling their shares.
Bill only wanted to buy shares of a stock that other investors would soon want to buy.
And for a big group of investors to suddenly decide to start buying a stock, they must change their opinion of the stock and start buying.
If we use Bill's wisdom for the bank stocks heading into this week's earnings season, we'll need to ask the same questions...
"What are investors currently thinking about bank stocks? And what will change that perception?"
There’s an elephant in the room for bank stock investors that has caused them to pause when buying new shares.
A Temporary Pullback for Interest Rates
That elephant is interest rates. And over the last couple of weeks, interest rates have been moving lower.
Lower interest rates are typically a challenge for bank stocks. That's because when rates are lower, it means banks can't charge as much for new loans.
Lower interest rates also typically coincide with a weaker economy — which can be a challenge for bank customers.
Fortunately, the temporary pullback in interest rates actually works in our favor!
The pullback in rates has raised concerns for some investors and caused some to sell shares of bank stocks ahead of earnings season.
Meanwhile, the pullback in interest rates looks like a very temporary issue.
Treasury bond rates have recently been influenced by technical decisions from the U.S. Treasury along with purchases from the Fed.
The bond market is dealing with a shortage of new Treasury bonds which naturally drives prices for these bonds higher (and yields lower).
You don't have to study the specific mechanics of the Treasury bond market to understand the opportunity that's in front of us right now.
The key thing to realize is that bank stock investors are a bit cautious right now. But their perception will likely change during this important earnings week.
As executives host conference calls and tell investors about these treasury bond nuances...
And as they assure their investors that the economic recovery is still online — generating higher profits for U.S. banks...
We should see a major shift in perception for these stocks!
I expect optimism to return for this important sector of the market.
And if you buy shares of these banks ahead of their earnings announcements (or even shortly after the company's conference call) you should be able to profit from a rise in bank stock prices.
Let's take a look at three of the names I would consider adding this week.
My 3 Favorite Bank Stocks for This Earnings Season
Let's start with shares of Citigroup Inc. (C) which is set to announce earnings on Wednesday morning.
Wall Street analysts are expecting the company to report earnings of $1.91 per share. This is well above the $0.50 per share Citi earned last year during some of the worst days of the coronavirus crisis.
Over the coming year, Citigroup is expected to grow profits to an annual rate of $8.00 per share. That's a lot of profit, especially compared to the stock's price tag near $70.
Plus, Citi currently pays a dividend of about 3%. That gives investors a lot of income at a time when interest rates are historically low. And Citi should be able to increase its dividend over time.
For now, Citi is using its profit to buy back shares. This will ultimately lead to higher profit per share and give the company plenty of extra profit per share to use for higher future dividends.
Shares of Citi pulled back over the last month, which gives you a great entry point to buy this high-quality bank at a discount price.
I'd suggest buying before the company announces earnings so you can profit from a potential post-earnings spike higher.
Our second bank stock to buy for today is Bank of America (BAC). This bank will also report earnings on Wednesday morning.
Shares of BAC haven't pulled back as much as Citi. And the stock is a bit more expensive when compared to the company's earnings.
But one of the reasons I love BAC is because of the company's Merrill Lynch wealth management division.
As the stock market continues to trend higher, Merrill Lynch clients are seeing a steady increase in the value of their investment accounts.
This leads to higher fees for BAC resulting in bigger profits.
A strong stock market also boosts BAC's investment banking division. This part of the bank helps companies raise capital by selling bonds or new shares of stock.
The fees on these transactions can be incredibly lucrative, adding big profits to BAC's bottom line.
Use the recent pullback as an opportunity to buy some shares before the company's earnings come out on Wednesday.
Finally, consider adding shares of Morgan Stanley (MS) to your investment account.
The company reports earnings on Thursday morning and shares have already started moving higher after a mild pullback.
Morgan Stanly is another well known investment bank that generates profits when companies raise capital on Wall Street.
I expect the bank's conference call to help assure investors that MS is doing just fine in this environment.
Keep in mind, MS recently announced that it’s doubling its quarterly dividend. It's now paying investors $0.70 per share each quarter — which adds up to a 3% dividend yield.
That's another great reason for investors to dive into this stock, helping to drive the price higher in the second half of this year.
With earnings season off and running this week, there will be plenty of new opportunities for us to track.
Let's get started with the bank stocks this week and I'll have plenty more to say about other opportunities in different areas of the market as the season progresses.
Here's to living a Rich Retirement!
Editor, Rich Retirement Letter