Banking, finance, and taxes
The 2012 Trade: Dump Utilities, Buy Banks... So Far (XLU, XLF, BAC, JPM, AEP, DUK)
Published:
Last Updated:
Each year, you often see the same trend over and over: “Buy the weakest sectors and dump the strongest.” Maybe there is a value in the weakest links and maybe too much a premium in the strong sectors. The Financial Select Sector SPDR (NYSE: XLF) is off to a great start in 2012, while the Utilities Select Sector SPDR (NYSE: XLU) has been very weak.
All you have to do is look at the extremes… Bank of America Corporation (NYSE: BAC) was the worst DJIA stock of all in 2011 but now shares are up literally 19% since the end of 2011. J.P. Morgan Chase & Co. (NYSE: JPM) is even up over 9% since the end of 2011 and it has earnings due in just two days. With the huge discounts to book value, the thought is that there is value even with the headwinds facing the banking sector’s ability to generate solid earnings. BofA was recently shown as one of the DJIA stocks with the most implied upside.
What about American Electric Power Co., Inc. (NYSE: AEP) bounced a bit off the lows in the last two days but its shares had been down almost 2% so far this year after just six trading sessions. Duke Energy Corporation (NYSE: DUK) was down almost 3% from the end of 2011 before a small bounce. Many utilities are trading at close to 13-times earnings now, which historically could imply a premium being paid to get those dividend yields of 4% and higher. AEP remains in our 2012 Model Dividend Portfolio and that will only change if the price rises too much.
All you are seeing is a reverse of the flight to safety because many believe that the economy has escaped another recession or that the worst was priced in. Before giving up entirely, interest rates are likely to remain very low and that drives investors toward stable income sources. Utilities also win from low interest rates because of borrowing costs. As far as the banks, the woes of Europe are not yet gone and the utilities have little to no real exposure there. If everyone is wrong about no second recession, which has better visibility… utilities or banks?
JON C. OGG
Ever wanted an extra set of eyes on an investment you’re considering? Now you can speak with up to 3 financial experts in your area for FREE. By simply
clicking here you can begin to match with financial professionals who can help guide you through the financial decisions you’re making. And the best part? The first conversation with them is free.
Click here to match with up to 3 financial pros who would be excited to help you make financial decisions.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.