The banking sector has been roiled in recent weeks as the inversion of the yield curve has spooked investors, but there may be a safe haven still left for financial investors.
In recent weeks, JP Morgan (JPM - Get Report) , Citigroup (C - Get Report) , and Wells Fargo (WFC - Get Report) among others have made marked declines since the inversion put a spotlight on possible margin compression ahead. In short, the macro headwinds that many have been cautious about have come to roost.
"The issue is about the long term return on the equity [for banks]," Dave Ellison, portfolio manager of Hennesy Funds Small Cap (HSFNX - Get Report) and Large Cap (HLFNX - Get Report) Financial funds told TheStreet. "If we are going to end up with a rate structure in the U.S. like they have in Europe or Japan, then you're going to have much lower margins and much lower returns on equity. That would imply a lower premium to book or even a negative premium to book value."
While he noted that bigger banks may be able to navigate the difficult environment, he noted there is an even safer space that investors can look to amid the macro noise.
"The ones that have done the best this year are the Visa (V - Get Report) , Mastercard (MA - Get Report) , Paypal (PYPL - Get Report) . What we like to call in the industry, Fintech," Ellison explained. "They are not impacted by the curve, they are not impacted by regulation, they are not impacted by credit trends."
He added that the overall secular trend of electronic payments adds to a positive outlook for the fintech sub-sector.
While many banks like Goldman Sachs (GS - Get Report) which has partnered with Apple (AAPL - Get Report) for a new card and Band of America (BAC - Get Report) which operates Zelle and a financial assistant dubbed Erica, Ellison noted that it will take time for these products to really gain traction and become profitable.
"The [stocks] I really focus on are the ones that are trying to make strides into more electronic, repeatable business model and are not so dependent on the margin," Ellison said. "That's going to be the real scramble as we go forward."
For more of Ellison's thoughts on banking, M&A expectations, and some specific stocks investors should put in their portfolio, check out the interview above.
(Apple, Goldman Sachs, J.P. Morgan, and Citigroup, are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.)