The Federal Reserve's monetary-policy committee boosted the Federal Funds rate a quarter-point to a 2%-2.25% range Wednesday, and here are four bank stocks that I like in this move's wake.
But first, let's look at a bit of macroeconomics to explain why I like bank stocks here.
I think that current market conditions -- a rising-rate environment where we're finally seeing some weakness at the yield curve's longer end - mean that traditional bond proxies or dividend stocks will struggle here. I expect less investor demand for utilities, real estate investment trusts, staples stocks and those names that once comprised the telecom sector.
Instead, I think investors will need exposure to banks here. Names that I like include:
JPMorgan Chase (JPM)
JPM remains my top pick among banks, because simply put, it's the best stock in its class.
You get the best of all worlds -- a $19.4 billion stock-repurchase program, a fairly juicy 2.7% dividend and the industry's best balance sheet. Add in massive operating cash flow and a stock that currently trades at just 11 times next year's projected earnings and what's not to love?
I'm also long Citigroup here, based on the stock's absurdly low valuation (just 9x its forward price-to-earnings ratio) and the company's plan to return $22 billion to shareholders.
Goldman Sachs (GS)
GS shareholders have recently seen their hopes for this name reborn, as the firm has recent shaken up its senior management.
This is a blast from my portfolio's past, but it looks like it's time to re-engage with the stock.
KEY pays a 3.3% dividend, and its share price rose some 10% in just three days last week (Wednesday through Friday) thanks to a steepening yield curve. Analysts expect earnings to shoot up 27% this year and an above-market 11% in 2019.
Additionally, Barron's recently quoted Deutsche Bank analyst Matt O'Connor as saying that KeyCorp has about $1.25 billion of securities rolling off each quarter that currently pay a 2.1% blended yield, but which the firm can reinvest at 3.3%.
KEY also reported 2% quarter-over-quarter total loan when it released second-quarter results in July. We'll get third-quarter numbers in three weeks.
I'm likely to re-enter this name Wednesday afternoon. I plan to buy a portion of my intended position on the stock's pre-Fed dip, with the intent of adding an additional tranche somewhere between $19.75 and $20.25 if the market does what I expect it to. That will be the difference in determining whether I end up holding KEY as a short-term trade or as a longer-term investment.
Read Stephen "Sarge" Guilfoyle's Market Recon column before the bell every trading day on Real Money, our premium site for active traders and Wall Street professionals.