In this article I use AAII’s A+ Investor Stock Grades to provide insight into three bank stocks. With the economic landscape improving, should you consider the three stocks of First Bancorp (FBP), JPMorgan Chase (JPM) and Pathward Financial (CASH)?
Bank Stocks Recent News
The banking sector has recently had significant growth and stability, supported by positive economic indicators. Cooling inflation and strong employment rates have contributed to a positive outlook. Investor confidence has been further bolstered by the Federal Reserve signaling potential interest rate cuts later this year. As a result, major banks like JPMorgan Chase, Morgan Stanley (MS) and Goldman Sachs Group (GS) have surged past their previous 52-week highs, with some reaching all-time highs.
The anticipation of lower interest rates—particularly the federal funds rate, which is currently at a 23-year high—has played a crucial role in this positive sentiment. Lower interest rates reduce borrowing costs, increasing loan demand and boosting banks’ lending volumes and revenue. Market optimism around interest rate cuts drives up stock prices as investors anticipate better economic conditions and financial performance. Additionally, lower interest rates stimulate economic activity, increasing transaction volumes and demand for financial services.
Looking ahead, JPMorgan Chase, Citigroup (C) and Wells Fargo (WFC) will be among the first banks to report their second-quarter 2024 earnings, starting Friday, July 12. Their performance will be closely watched, as it can set the tone for the banking sector. With reduced borrowing costs and modest loan demand, these earnings reports are expected to reflect strong financial health, potentially driving their stock prices even higher. The combination of positive economic indicators and favorable conditions positions these bank stocks for more potential growth.
Grading Bank Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three bank stocks—First Bancorp, JPMorgan Chase and Pathward Financial—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Bank Stocks
What The A+ Stock Grades Reveal
First Bancorp (FBP) is a financial services company. It provides a diversified set of banking, investment and mortgage products and services, as well as consumer and commercial finance. Its services are distributed through banking locations and offices, the internet and other channels to individuals, businesses and institutions in the U.S. and internationally. The company provides consumer financial products and services, including checking and savings accounts; credit and debit cards; auto, mortgage and home equity; and small business lending. In addition, it offers financial planning, private banking, investment management and fiduciary services. It also provides financial solutions to businesses through products and services, including traditional commercial loans and lines of credit, letters of credit, asset-based lending, trade financing, treasury management and investment banking services.
First Bancorp has a Momentum Grade of B, based on its Momentum Score of 80. This means that the stock’s momentum is strong in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 71, 66, 68 and 86, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 2.0%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
First Bancorp has a Quality Grade of A, based on a score of 87, which is very strong. The company ranks strongly in terms of its buyback yield and return on invested capital. Its buyback yield of 7.3% ranks in the 93rd percentile among all U.S.-listed stocks, and its return on invested capital of 63.4% ranks in the 88th percentile. First Bancorp also has a strong F-Score of 7, ranking in the 85th percentile.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company’s Growth Grade is A, which is very strong. First Bancorp has generated positive annual cash from operations in the past five consecutive years and has a five-year annual sales growth rate of 10.4%.
JPMorgan Chase (JPM) is a financial holding company with four primary segments: consumer and community banking; corporate and investment bank; commercial banking; and asset and wealth management. The consumer and community banking segment offers products and services to consumers and small businesses through various channels, including bank branches, automatic teller machines (ATMs), digital platforms (mobile and online) and telephone banking. The corporate and investment bank segment includes banking, markets and securities services, providing a comprehensive range of investment banking, market-making, prime brokerage, lending and treasury and securities services to a global clientele of corporations, investors, financial institutions, merchants and government and municipal entities. The commercial banking segment delivers financial solutions such as lending, payments, investment banking and asset management products to three main client groups: middle market banking, corporate client banking and commercial real estate banking. Lastly, the asset and wealth management segment offers investment and wealth management solutions.
The company has a Value Grade of B, based on its Value Score of 66, which is good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).
The company has an enterprise-value-to-Ebitdaratio of 4.0, ranking in the 10th percentile. Its shareholder yield is 4.2% and its price-earnings ratio is 12.5, ranking in the 21st and 34th percentiles, respectively. The price-to-book ratio is 1.97, which translates to a rank of 57.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. JPMorgan Chase has an Earnings Estimate Revisions Grade of C, based on a score of 53, which is neutral. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
JPMorgan Chase reported a positive earnings surprise for first-quarter 2024 of 7.9%. However, in the prior quarter it reported a negative earnings surprise of 8.5%. Over the last month, the consensus earnings estimate for the second quarter of 2024 has increased from $3.913 to $3.986 per share, due to 11 upward and three downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has increased from $16.404 to $16.434 per share, based on six upward revisions and one downward revision.
JPMorgan Chase has a Growth Grade of B, which is strong. The company ranks in the 73rd percentile with its five-year annualized sales growth rate of 17.5%.
Pathward Financial (CASH) is a financial holding company. The company’s subsidiary is Pathward N.A., which operates through three segments: consumer, commercial and corporate services/other. The consumer segment encompasses the banking-as-a-service business line, which partners with various entities to address payment and lending needs, offering prepaid cards, deposit accounts, payment processing and consumer lending. It provides a range of installment and revolving consumer lending products through its credit solutions. The commercial segment delivers products through working capital, equipment finance, structured finance and insurance premium finance lending solutions. The corporate services/other segment covers shared services and treasury-related functions, including the investment portfolio, warehouse finance, wholesale deposit and borrowings.
Pathward Financial has a Quality Grade of B, with a score of 79, which is strong. The company ranks strongly in terms of its return on invested capital and buyback yield. Pathward Financial has a return on invested capital of 47.9%, above the sector median of 35.5%, and a buyback yield of 6.6%. This is partially offset by its –2.2% ratio of accruals to assets, ranking in the 33rd percentile of all stocks.
Pathward Financial has a Value Grade of A, based on a score of 83, which is deep value. The company ranks in the 12th percentile for shareholder yield and in the 11th percentile for its enterprise-value-to-Ebitda ratio. The company has a shareholder yield of 7.0% and an enterprise-value-to-Ebitda ratio of 4.2. A lower price-earnings ratio is considered better value, and Pathward Financial’s price-earnings ratio is 8.7, which is below the sector median of 12.0. The price-to-free-cash-flow ratio is 4.5, which translates to a rank of 10.
The company has a Momentum Grade of B, based on its Momentum Score of 77. This means that the stock’s momentum is strong in terms of its weighted relative price strength over the last four quarters. The ranks are 87, 46, 49 and 70, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 0.9%.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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