Editors' pick: Originally published Feb. 22.
Last week, TheStreet looked at six bank stocks that analysts at BMO Capital Markets deemed were ready for a "snap back." Today, Real Money's resident chartist, Bruce Kamich, takes a look at BMO's choices to see if there's a basis for the Canadian bank's exuberance.
"Normally, I have a fair amount of respect for the banks north of the border," Kamich said. "They pretty much avoided the 2008-09 financial meltdown by not getting involved in the mortgage mess we exported around the world. While they dodged a big bullet and many still employ technical analysts on their trading desks, a recent recommendation of six financial names by BMO has me wondering: Why so early?"
BMO Capital Markets selected OneMain Holdings (OMF) - Get Report , Morgan Stanley (MS) - Get Report , Capital One Financial (COF) - Get Report , Citigroup (C) - Get Report , Synchrony Financial (SYF) - Get Report and MasterCard (MA) - Get Report as its "snap-back" stocks.
"U.S. equity markets (and bank stocks in particular) overreacted so far this year to what we consider as misplaced economic concerns; bank valuations should recover," James Fotheringham of BMO Capital Markets wrote in the note released last week.
Some banks certainly may recover, but Kamich is not yet seeing bullish signs in the charts.
"While these six names could continue to improve in the short run, a developed bottom pattern with good accumulation that could support a new uptrend is lacking on all six," Kamich said. "I would prefer to wait for the chart to match the fundamental story."
BMO Capital Markets says: "OMF is our ultimate 'snap-back stock,' down over 50% already so far this year. While some investors have voiced concerns to us regarding credit and funding costs, we forecast benign trends."
This is not to say BMO Capital Markets takes One Main Holdings' credit concerns lightly, even though it upgraded its rating to Outperform from Market Perform and predicts its shares will double by year end. While BMO believes One Main Holdings is an "over-leveraged, subprime unsecured consumer lender," it encourages investors to look past One Main Holdings' leverage given BMO's benign outlook for credit and funding.
Kamich says: In the first chart, Kamich notes that sellers are more aggressive on down days as One Main Holdings' trading volume is heavier on those days. Furthermore, Kamich sees a "risk problem" in the first chart as its new lows have not been retested.
"A retest of a prior low gives us more confidence in placing a protective sell-stop below the recent low," Kamich said.
Kamich's second chart shows the On-Balance-Volume line is falling and that the slope of the 40-week moving average is also down.
"There isn't any bullish divergences suggesting that the rate of decline in price has slowed," Kamich said.
BMO Capital Markets has a $47 price target on Morgan Stanley, which represents a 104% upside as the investment bank shrinks its low-multiple businesses, such as institutional securities, in favor of higher multiple businesses such as wealth management and investment management.
"Morgan Stanley is a re-rating story; these investments tend to require more patience than others," Fotheringham wrote.
Kamich says: The first chart, which is a daily chart, shows the price of Morgan Stanley declining below its 50-day and 200-day moving averages. Meanwhile, the second chart, which is weekly, shows a downward sloping 40-week moving average and a bearish On-Balance-Volume line, with no bullish divergence between the price action and the momentum indicator.
Capital One Financial
BMO Capital Markets has a $108 price target on Capital One Financial, which implies 73% upside and considers the bank to be "a fast-growing regional bank that is valued as if it were still a specialty monoline credit card lender."
Kamich notes that despite being on a downward trend, Capital One has some stability around the $60 level. However, with the On-Balance-Volume line still pointing downward, it doesn't look like the stock would meet BMO's $108 price target any time soon.
"The longer-term weekly chart of COF does not show us anything technically to suggest a reversal -- a declining 40-week average, a bearish On-Balance-Volume line on this time frame and no bullish divergence vs. the momentum study," Kamich said.
BMO Capital Markets says: With Citigroup's faster-than-expected growth in regulatory capital, due in part to the bank getting many of its legal problems behind it, BMO sees "significant growth" in Citigroup's dividend and share repurchases. BMO has a $61 price target on Citigroup, which implies a 62% upside.
Where BMO sees upside, Kamich notes that the price of Citigroup stock peaked in July. He also notes that sellers are more aggressive on down days and while there is a small bullish divergence between price action and momentum, there is no retest of prior lows in the first chart. Meanwhile, the second chart shows the 40-week moving average on a downtrend and no bullish divergences to highlight.
BMO Capital Markets has a $37 price target on Synchrony Financial, which represents 39% upside.
"Following SYF's split-off from GE at the end of last year, and given SYF's strong capitalization ($4 per share of excess capital currently relative to its $30 share price), we expect capital return to shareholders (hitherto prohibited by the regulator due to GE's prior ownership)" starting in the second half of 2016," Fotheringham wrote.
Kamich says: There isn't much price history to work with Synchrony Financial as the company was spun from General Electric (GE) late last year. Even so, he points out that -- just as with other financial names -- the stock remains below its 50-day and 200-day moving averages. Meanwhile, Kamich says the weekly chart doesn't add much but it does reinforce the idea that SYF hasn't completed a sustainable bottom yet. MasterCard
BMO Capital Markets says: "There are near-, medium- and long-term reasons to buy MA," Fotheringham notes. In the near term, he believes the company should catch up to Visa (V) - Get Report , in the medium term he sees "higher-than-expected share repurchases," and in the long term, he sees MasterCard growing market share in China faster than Visa. BMO has a $111 price target on MasterCard, whichs implies 31% upside.
Kamich says: "Unfortunately we cannot say that the charts on MA are priceless," noting that the decline in January and February undercut MasterCard's decline in August and September on a closing basis.
As for the weekly chart, Kamich notes that the stock is below its 40-week moving average and that there are no bullish divergences that foreshadow a possible rally.