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NEW YORK (
TheStreet) -- Investors should use the current volatility in the markets to scoop up large-cap bank stocks, Sterne Agee analyst Todd Hagerman said in a note Friday.
"While the Bernanke taper has rattled markets from their May highs, the fundamental underpinnings remain intact: the positive mix of labor, housing, and consumer confidence each continue to make strides," he wrote.
Anxiety that higher interest rates will hurt consumer spending and derail the housing recovery has hurt investor sentiment. But Hagerman believes concerns are overdone given current economic conditions do not support sharply higher rates. "As long as slack in the labor market continues and wages remain depressed, our sense is rates retreat in a pedestrian growth economy contrary to the skyward trajectory."
He also appears to doubt the Fed will follow through on its plans if the economic data comes in worse than the central bank expects. "The Fed continues to hold a questionable track record with its economic growth forecasts during the sluggish economic recovery with forecasts routinely falling well short of initial lofty expectations," he wrote.
Hagerman recommends buying a basket of large-cap stocks including
Citigroup(C - Get Report),
JPMorgan Chase(JPM - Get Report),
US Bancorp(USB - Get Report) and
Wells Fargo(WFC - Get Report). These are banks that have the best value/growth opportunities given the current economic backdrop, according to the analyst.
Citigroup has rallied recently but the analyst believes expectations are still low. The earnings outlook is however improving. "Previously announced repositioning actions, identified EPS leverage tied to Holdings, and the likely moderation of outsized legacy mortgage/legal costs each offer earnings leverage in the coming quarters. Conservatism on reserves/expenses, expectations for improving capital markets and inexpensive valuation serve to offer a favorable risk/reward, in our view."
In the case of JPMorgan, the underlying earnings remain strong and the analyst expects regulatory overhang to pass. "While low rates, elevated compliance costs and expectations for slowing mortgage banking revenues will challenge pre-provision profits, better than expected credit leverage, lower legacy mortgage-related costs and efficiency initiatives will continue to drive healthy earnings and TBV growth in '14," he wrote.
Discounted regionals such as
PNC Financial(PNC - Get Report),
Regions Financial(RF) and
KeyCorp(KEY) are also among his preferred picks.
-- Written by Shanthi Bharatwaj in New York.