NEW YORK (
) - Financial stocks are off to the races in 2012, but JPMorgan equity strategist Thomas Lee argues the sector rebound is just getting started.
Financial Select Sector SPDR
, a popular exchange traded fund that tracks financial stocks, is up 20.85% so far in 2012 compared to an 8.47% rise in the Dow Jones Industrial Average. That is a pick reversal from 2011, when the XLF lost 18.07% versus a 5.57% gain for the Dow.
Lee's call stands in sharp contrast to a
following a conference hosted by the bank. Citigroup noted attendance was "somewhat thinner than in recent years" and described investor sentiment as "broadly skeptical, cautiously optimistic at best."
Lee turns that argument on its head, contending it leaves plenty of room for new money to come pouring into financial sector stocks.
"A multiple of factors favor Financials including improving credit conditions (steepening curves), US housing revival, regulatory headwinds flattening
and record low valuations," Lee argues in his report.
Here are JPMorgan's
Bank of America
JPMorgan rates Bank of America as an "Overweight," citing passing of the Fed stress test as confirmation of adequate an capital base and "recent progress on mortgage related issues" and cost restructuring. In the near term, Bank of America should benefit from improved trends in trading, the report argues.
The report added that BofA's valuation remains "attractive" at 0.7x tangible book.
Wells Fargo is a "top pick" from JPMorgan reflecting fee income growth, cost reductions and a "large increase in dividend post stress test, which bodes well for solid earnings outlook."
The San Francisco-based bank is "reasonably valued" at 9x estimated 2013 earnings per share and "should benefit to some extent from seasonally stronger trading," the report adds.
First Republic Bank
Shares of First Republic currently trade at "a modest 4% premium to peers" and JPMorgan does expect the bank's stock to keep pace with a 2012 15% top line growth range.
The report argues that FRC has a "strong a management team with a strong track record of creating shareholder value" and that its growth model is "highly differentiated" from other banks since a majority of growth comes from existing customers rather gathering new customers.
First Horizon National
Trading at a 17% discount to peers in terms of tangible-book value, JPMorgan says First Horizon's valuation "reflects a mediocre franchise and one of the best management teams in the business."
The report adds that management is moving the bank to become "one of the most profitable banks in the industry over time," and it "
encourages investors to buy the stock at current levels and ahead of an expected 15-20% ROE and the valuation improvement that should coincide with this level of profitability."
While Zions shares trade at a 12% discount to peers in terms of normalized earnings, JPMorgan says the bank is on its way to "much narrower discount."
The report adds that management is moving ahead with a cleans up the capital structure and creating "a more normal level of credit costs."
>>To see these stocks in action, visit the
portfolio on Stockpickr.
Written by Dan Freed in New York
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