With earnings season in the financial sector in full swing, it’s not surprising that many major financial stocks were in the spotlight this week.
In this article, we will take a closer look at five big banks: Wells Fargo & Co (NYSE:WFC), Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), Goldman Sachs Group Inc (NYSE:GS), and JPMorgan Chase & Co. (NYSE:JPM) and we will see what the hedge funds and other smart money investors tracked by us think about them.
Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 745 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).
Wells Fargo & Co (NYSE:WFC) shares retreated by 1.3%, versus the S&P’s 1% decline this week. Although CEO John Stumpf retired due to the fake accounts scandal and the bank soundly beat estimates for its third quarter with EPS of $1.03 on revenue of $22.3 billion (versus estimates of $1.01 in EPS and sales of $22.22 billion), investors chose to focus on some of Wells Fargo’s negatives such as the number of new checking-account openings at the bank falling 25% year-over-year and credit card applications retreating by 20% year-over-year. Certain states have also refused to change their stances on doing business with Wells Fargo even after Stumpf resigned. At this point, bulls hope that time will heal the bank and send the stock higher as the political and media spotlight move to other companies. Warren Buffett’s Berkshire Hathaway held around 480 million shares of Wells Fargo & Co (NYSE:WFC) on June 30.
Given Wells Fargo’s sequential decline in mortgage referrals, many investors believe Bank of America Corp (NYSE:BAC) is in a prime position to benefit. Although Bank of America has had some mortgage-related scandals in the past, people have long since forgotten and/or forgiven the financial conglomerate. Bank of America is also in an optimal position to benefit from the rise of interest rates once November 8th is in the rear view mirror. Deutsche Bank AG (USA) (NYSE:DB)’s trevails could potentially lead to strong capital markets activity at Merrill Lynch. Shares of the bank inched down by 0.68% for the week as traders prepare for the earnings release release on October 17. A total of 102 funds tracked by us owned $5.28 billion worth of Bank of America Corp (NYSE:BAC)’s stock, which accounted for 3.90% of the float on June 30, versus 110 funds and $5.52 billion, respectively, on March 31.
On the next page, we examine Citigroup, Goldman Sachs Group, and JPMorgan Chase & Co.
The cheapest major bank, Citigroup Inc (NYSE:C), got a little bit cheaper this week, falling by 1.3% from Monday through Friday. Citigroup reported better-than-expected earnings for its third quarter, turning in a profit of $1.24 per share versus estimates of $1.16 per share. Revenue for the period came in at $17.76 billion, down by 4% year-over-year, and $420 million ahead of estimates. Tangible book value clocked in at $64.71 per share and the company’s net interest margin for the period was 2.86%. At the end of June, 97 funds followed by Insider Monkey had a bullish position in Citigroup Inc (NYSE:C) at the end of June, down by four funds from the previous quarter.
Goldman Sachs Group Inc (NYSE:GS) inched up higher by around 0.4% this week as peer earnings showed better-than-expected capital markets activity. Given that data point, traders are anticipating solid numbers from Goldman once it reports its quarterly results. On a separate note, Goldman made headlines this week after the investment bank launched Marcus.com, an online lending platform. Although online lending won’t make much of a difference for Goldman in the near term, it will improve Goldman’s relationship with Main Street, which will be very important on the Hill next time a financial crisis occurs. In addition, Goldman also scored a legal victory on Friday in a $1.2 billion dispute with the Libyan Investment Authority. The victory reaffirms Wall Street’s unwritten rule that sophisticated investors should not be required to be treated with kid gloves. The number of funds from our database with holdings in Goldman Sachs Group Inc (NYSE:GS) fell by one quarter-over-quarter to 68 at the end of June.
JPMorgan Chase & Co. (NYSE:JPM) has declined by 0.87% this week despite reporting strong third-quarter results. During the time period, JPMorgan earned $1.58 per share on sales of $25.51 billion, beating the consensus estimates by $0.19 and $1.52 billion, respectively. Sales rose 8.4% year-over-year and the bank returned $3.8 billion of capital back to shareholders during the three months. After conducting an investigation on its own cross-selling practices as a precautionary measure, the company did not find anything amiss systematically. Many investors expect JPMorgan earnings to improve as interest rates normalize and as commodity prices rise. A total of 99 funds tracked by us had a bullish position in JPMorgan Chase & Co. (NYSE:JPM) at the end of the second quarter.