Use Earnings Volatility to Trade Bank Stocks

NEW YORK (TheStreet) -- Bank stocks remain one of the top performing industries over the past 12 months and year to date, but some bank stocks could be jolted by positive or negative surprises in their earnings reports over the next two weeks.

On Sept. 26 I wrote Don't Bank on Bank Stocks, Just Trade Them, and today I update my profiles for 14 banks that report quarterly results between Oct. 15 and Oct. 23.

Included in these profiles are my new monthly and quarterly value levels, pivots and risky levels that should be used to revise your "buy-and-trade" strategies for these banks.

All 14 of these stocks are components of the PHLX KBW Banking Index (BKX), which is up 56.4% since bottoming in October 2011, and is up 29.3% so far in 2012, while the S&P 500 is up 33.3% since last October and 13.9% year to date.

The BKX has been technically overbought on its weekly chart since the week of Sept. 7, and the finance sector is overvalued by 12.6% according to www.ValuEngine.com.

The daily chart for the BKX (50.91) shows rising momentum with the 21-day, 50-day and 200-day simple moving averages at 50.45, 48.49 and 46.13. My quarterly and annual value levels are 47.55 and 42.98 with monthly and weekly risky levels at 51.89 and 52.30. Note the double-top at 52.11 on Sept. 14 and 52.04 on Oct. 5.

Source: Thomson/Reuters

On Oct. 10 the Federal Reserve released its beige book for the Oct. 23/24 FOMC meeting. My summary as it relates to banking and the housing market is that economic activity continues to expand modestly with flat to slightly higher consumer spending.

Residential real estate conditions continue to improve with strength in existing home sales and with steady to increasing home prices. Residential construction continues to rise. Overall loan demand to support this slow improvement in housing was described as steady to stronger among the Federal Reserve districts with unchanged to declining delinquency rates.

Mortgage lending increased especially for refinancings. Credit standards were said to be unchanged. If this summary is confirmed in the bank earnings reports over the next two weeks, the strategy remains to "buy-and-trade" bank stocks between value levels and risky levels.

The table shows data from ValuEngine covering eleven stocks in the BKX.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-Engine" rating is a strong sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a Hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: is the price at which to enter a GTC limit order to buy on weakness. The letters mean; W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: is the price at which to enter a GTC limit order to sell on strength.

Bank of America (BAC) ($9.21 vs. $8.93 on Sept. 25) reports quarterly results on Oct. 17 and is expected to earn 1 cent a share. BAC has a buy rating according to ValuEngine with a reasonable price-to-earnings. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

BB&T Corp. (BBT) ($33.18 vs. $33.17 on Sept. 25) reports Oct. 18 and is expected to earn 70 cents a share. BBT has a buy rating and a reasonable P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

Citigroup (C) ($35.14 vs. $32.86 on Sept. 25) reports Oct. 15 and is expected to earn 97 cents a share. Citi has a buy rating according to ValuEngine, has a reasonable P/E. Book profits on strength to my weekly pivot at $35.85 then employ a "buy-and-trade" strategy between the value level and risky level.

Comerica (CMA) ($31.25) reports Oct. 17 and is expected to earn 65 cents per share. CMA has a buy rating according to ValuEngine with a reasonable P/E. Book profits on strength to my weekly pivot at $32.33 then employ a "buy-and-trade" strategy between the value level and risky level.

Capital One Financial (COF) ($58.23) reports quarterly results Oct. 18 and is expected to earn $1.74 per share. COF has a buy rating according to ValuEngine with a reasonable P/E. Book profits on strength to my weekly pivot at $59.29 then employ a "buy-and-trade" strategy between the value level and risky level.

Fifth Third Bank (FITB) ($15.82 vs. $15.56 on Sept. 25) reports Oct. 18 and is expected to earn 39 cents a share. FITB has a buy rating and a reasonable P/E. Book profits and employ a "buy-and-trade" strategy between the value level and risky level, and the risky level was tested on Tuesday.

Huntington Bancshares (HBAN) ($7.08) reports Oct. 18 and is expected to earn 17 cents a share. HBAN has a buy rating and a reasonable P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

Keycorp (KEY) ($8.59) reports quarterly results on Oct. 18 and is expected to earn 17 cents a share. KEY has a buy rating and a reasonable P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

M&T Bank Corp. (MTB) ($98.63) reports Oct. 17 and is expected to earn $1.85 per share. MTB has a buy rating and a so-so P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

PNC Financial (PNC) ($64.55 versus $64.54 on Sept. 25) reports Oct. 16 and is expected to earn $1.60 per share. PNC has a buy rating according to ValuEngine with a reasonable P/E. Book profits then employ a "buy-and-trade" strategy between the value level and risky level.

Regions Financial (RF) ($7.55 vs. $7.21 on Sept. 25) reports quarterly results on Oct. 23 and is expected to earn 20 cents a share. Regions has a strong buy rating according to ValuEngine and a reasonable P/E. Book profits on strength to my weekly pivot at $7.70 then employ a "buy-and-trade" strategy between the value level and risky level.

SunTrust Banks (STI) ($29.66 versus $28.20 on Sept. 25) reports Oct. 22 and is expected to earn $2.01 per share. STI has a strong buy rating according to ValuEngine, has a favorable P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

US Bancorp (USB) ($34.60 vs. $34.12 on Sept. 25) reports Oct. 22 and is expected to earn 73 cents a share. USB has a buy rating according to ValuEngine and a reasonable P/E. Book profits on strength to my weekly pivot at $34.94 then employ a "buy-and-trade" strategy between the value level and risky level.

Zions Bancorp (ZION) ($21.86 vs. $20.33 on Sept. 25) reports Oct. 22 and is expected to earn 31 cents a share. ZION has a buy rating according to ValuEngine and an elevated P/E. Investors and traders should employ a "buy-and-trade" strategy between the value level and risky level.

Eleven of the 14 stocks profiled today are undervalued fundamentally with Citigroup undervalued by 61.6%. The most overvalued is MTB by 13.4%. All fourteen bank stocks are rated buy or better with RF the biggest gainer over the past 12 months with a gain of 111.5%. All are projected to be higher over the next 12 months, but gains are likely to dwarf the gains of the past 12 months.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at [e-mail].