One solution that’s overlooked right now is to invest in stocks. While this might sound like a strange and risky strategy, it could pay off. But the question remains as to which stocks are best to invest in right now.
In this article, I want to hone in specifically on bank stocks and explore whether or not they’re a safe investment during COVID-19. Let’s get started.
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The Financial Health of America Has Been in Better Shape
When COVID-19 began its highly-infectious tour of the world, it caused catastrophic consequences and–to use a tired phrase–unprecedented times. That hasn’t stopped analysts and financial experts from comparing our situation to the financial crisis of 2008 or even the crash of 1929.
While we aren’t able to determine the full effects of COVID-19 and its impact on the financial sector long-term, it isn’t hard to see the short-term, immediate influence on our lives. Many of us are struggling due to losing income. Countless people now have to reconsider their situation and ways of bouncing back.
But Is This the Right Time to Invest?
Investing, or making any bold financial move, can seem like a big gamble right now. There is so much talk of the doom and gloom surrounding the economy and business. This is understandable when everyone, from major corporations to small independent businesses, are struggling.
It might seem like the safest bet right now is to wait until things have settled and then figure out your next move. However, this might not be the most profitable decision. Times of crisis can actually offer some pretty nice bargains in the world of stocks–you just have to know which ones to choose.
But this is where it gets tricky. With so many companies struggling and at risk of losing business (or having to lay people off), you could easily make the wrong investment decision. That’s why some industry experts are looking at big banks–yes, the same big banks that struggled during the Great Recession–as a potentially viable investment now.
Why Choose a Big Bank Over Another Company?
Right now, it’s a LOT harder to predict which companies will make it through this.
There were 560 commercial Chapter 11 filings in April. At the time, Hertz car rental and JC Penney were in trouble, while Neiman Marcus and J.Crew filed for bankruptcy. And as this situation continues, other big names could fall.
So, you need to place your investment somewhere where there is a better chance of a pay-off. While NOTHING is guaranteed (as we saw from 2008), there’d have to be an even bigger catastrophe for the major banks to completely fall.
So why banks?
Simply put, the big-name banks have a better chance of weathering the storm because this isn’t their first rodeo. Many are in a stronger position than other companies with assets to fall back on, and the chance to make something of this situation.
While other businesses face bankruptcy, redundancies, and significant declines, many of the big banks are expected to be profitable. Some, such as Wells Fargo, have even been hiring during the pandemic.
That isn’t to say that business is incredibly strong right now, though. Many big banks have seen their stock values plummet.
Some of these banking stocks appear undervalued because of a different way of determining that value. Instead of measuring value based on price-to-earnings, as is customary for these banks, analysts have now been looking at price-to-tangible-book value.
This is where you see the sharp decline in value around the time that the pandemic began. CIT Group declined 62% between January 31st and April 7th. Citigroup Inc saw a drop of 45% in this period. Bank of America was down 35%, with J.P. Morgan Chase & Co close behind at 32%.
See This as an Opportunity for Investment
They don’t have the mentality to see this scale of loss in this kind of situation in a positive light. What’s positive about this? Well, eventually analysts predict these stock prices will recover and all will be well again.
In fact, Bank of America is up over 24% in the past month alone. CIT Group jumped about 63%. And others are following suit.
So have you missed the best part? Possibly, but that doesn’t mean there aren’t still opportunities to be had here. You just need to know where to look (more on this below).
Some Banks Are Forecasted to Do a Lot Better Than Others
One thing to remember when choosing the right option for your investment is that the Federal Reserve has scenarios in place to predict the likely outcomes and performances of top institutions.
They have a severely adverse scenario–which seems like a fair term considering the stress we are all under right now. This means there is a 50% decline in stocks, a contraction of GDP of 8%, and an unemployment figure of 10%.
After applying this stress test on the largest banks in the U.S., Bank of New York Mellon, Bank of America, and State Street were seen to be the least at risk. However, there are strong hopes that all the major banks will still be profitable in 2020 and 2021.
What Are Your Best Options?
You’ll still need to do your research and time the purchase correctly, but here are a few stocks you may want to look at right now in the banking sector.
J.P. Morgan (JPM)
This is an obvious choice if you want to bet on a winner. J.P. Morgan is a survivor with an experienced CEO at the helm. CEO Jamie Dion saw them through the recession of 2008 and seems confident he can do the same again.
In fact, he expects to have to do so. But, their stock prices will rise again and you can capitalize on that. J.P. Morgan continues to pay a dividend, their EPS has increased, and their Tangible Book Value Per Share (TBVPS) sits at 58.69 as of this writing.
Bank of New York Mellon (BK)
This is another group seen as a great option and the safest bet for a return by Gabelli Global Financial Services Fund. They view their role as asset managers and custodians as a great advantage for getting through this crisis unscathed.
They’re still paying a dividend, but their EPS has dipped recently. Their Tangible Book Value Per Share (TBVPS) sits at 17.61 as of this writing, which might make it a ripe opportunity for investment. I’m not crazy about their $28 billion in long-term debt considering their size, but they still have significant assets to help offset this.
Bank of America (BAC)
Bank of America was trading at 72% of its book value in April. Go check out their current market summary, and you can follow the rollercoaster of stock values. After crashing around the time the pandemic was announced, it has made gains.
Earnings growth for Bank of America has gone up and they continue to pay their dividend. Their Tangible Book Value Per Share (TBVPS) is 19.32, and many analysts still see Bank of America’s stock as being undervalued.
This one seems a little riskier, but there are analysts confident this is a good pick. I personally really like Citigroup as a stock. The group has a wider reach over Asia, which is recovering fairly well. Citigroup’s current low valuation is also tempting for a good return. This might work out for those with the security to take a gamble.
Citigroup has seen its EPS grow, they’re paying a dividend still, and their Tangible Book Value Per Share (TBVPS) is 70.15. Their financial condition is a little concerning, though, so you’ll want to make sure you do your research on the balance sheet before making an investment.
So Are Bank Stocks A Safe COVID-19 Investment?
Well, it all depends on how badly you want a sure investment right now. If you’re desperate to trade on the next big thing, then there is no guarantee this will work.
But what is guaranteed right now? Let’s be honest. We’re living in a new financial situation with no clear end in sight.
What we do know is that when we have a volatile market, sharp declines are going to be followed by some big climbs. So, it isn’t too big a leap to suggest that the same will happen here.
Because, and let’s be brutally honest, it can’t get a whole lot worse for the banks right now. Their stock value has plummeted. You have massive banking groups trading at massively reduced values.
This is great because it means that while prices are still much lower than average, things are looking good for recovery. It might take some time, but you may be able to make a profit if you’re patient, follow the trends, and sell at the right time.
Those with greater experience have probably already picked their winner and made their investment. They probably did so months ago at the peak of the crisis. That is because they knew to take the plunge while others fled.
If they bought at just the right time, their return could be impressive. As each week passes in our recovery from coronavirus, the banks get closer to reaching their pre-pandemic values.
So, you don’t want to leave it too late. If you want to make the most of investing in big bank stocks, then take your pick, commit and know that you didn’t miss your shot.