Market Preview: Follow the Leader
NEW YORK ( TheStreet) -- Are the banks ready for a breakout?
The financials are historically at the forefront of a classic bull market, but that wasn't the case at the end of 2011 when this latest run began. Of course, since the calendar turned, beaten-down banks have morphed into favorites, most notably Bank of America (BAC) , whose shares surged 22% last week as the company cleared the hurdle of the Federal Reserve's stress tests.
So far this year, Bank of America's stock has soared 76% to make it the top percentage gainer within the Dow Jones Industrial Average , reversing last year's performance when it was the biggest loser among the blue-chips, down 58%.
Still, 2012's gains have to be considered more of the bargain-bin variety. After all, the 52-week high for Bank of America is $14.21, achieved late last March, and as recently as Dec. 19, the stock closed at $4.99, notching an intraday 52-week low of $4.92 in the process.
The positives for the financials are starting to stack up now though, and that could lead to investors snapping up the stocks for fundamental reasons, and the broad market getting a new leader to follow.
JPMorgan wrote in a research note that it wants to remain overweight cyclical and financial stocks but that financials are the most "non-consensus call."
"Financials are the top 1 or 2 weight in most indices (it is 22% of the Russell 1000 Value) and therefore critical," the firm wrote. "A multiple of factors favor Financials including improving credit conditions (steepening curves), US housing revival, regulatory headwinds flattening,
The firm also notes that the financials are expected to shoulder a heavy earnings burden for the S&P 500 in 2012, with current analyst estimates calling for the group to deliver "24%-95% of the total EPS growth in 2012 for each of the quarters," showing the industry is expected to transition from a drag on the broad market to a top profit contributor over the course of the year.
And even with this year's run-up (the KBW Bank Index (BKX.X) has risen 26% in 2012), the group is still cheap on a long-term detrended earnings basis, the firm said. This analysis compares the price-to-earnings ratio for the sector over a 10-year period with that of the S&P 500.
"Near-term earnings for the sector are expected to be depressed due to regulation, a still-recovering housing market, and still-recovering consumer, which have likely held back the performance of this sector," JPMorgan said. "However, based on longer-term earnings, the relative P/10-Yr EPS of Financials is more than 2 standard deviations below its long-term average. While one might argue this low valuation is justified due to the current low ROE