The big U.S. bank stocks have been battered of late, and one of the top firms on Wall Street says it's time to go in on two of them.
Wells Fargo & Bank of America
"We expect bank performance from here to be based on the juxtaposition of relative valuation, which is at a seven-year low, vs. earnings expectations trends that we expect to be in focus on the earnings calls," wrote Goldman Sachs analysts in a note out this week. Simply put, bank stocks are largely trading at around one-year forward earnings multiple of 10, well below their historical average.
"We prefer buy-rated Bank of America (BAC) - Get Bank of America Corporation Report , given that it appears the most inexpensive relative to peers," Goldman said. Bank of America trades at a low forward earnings multiple of 8.96 and a low price to book value multiple of 1.14. Goldman's price target on Bank of America is $35 a share, 21% above the stock's current level.
Goldman also has a buy rating on Wells Fargo, and says, "We expect the company to be able to generate best-in-class operating leverage as it laps regulatory operating performance headwinds, while credit looks to remain most resilient among the money centers." Goldman's price target on Wells Fargo is $59, 21.9% above the stock's current level.
Here's the kicker:
While valuations are historically low, there's a strong argument for a positive earnings outlook. While banks' net interest margins -- banks' profits on the money it lends over the money it borrows -- aren't looking rosy as the Federal Reserve cuts interest rates, total net interest income may have roughly 4% upside for the upcoming reporting quarter, as loan volumes are looking healthy, Goldman says. Plus, Goldman expects banks to raise fees on customer deposits, which other experts agree with.
Walgreens' Big Headwind
It isn't just poor near-term drug pricing that could keep Walgreens' (WBA) - Get Walgreens Boots Alliance Inc. Report 2019 earnings flat year-over-year (previously expected earnings growth was 7% to 12%). Amazon's (AMZN) - Get Amazon.com Inc. Report Pillpack and other online drug sellers are the real long-term threat to Walgreens and physical store drug sellers, a potential outcome Jim Cramer, founder of Charitable Trust Action Alerts Plus, agrees with.
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