Top Analyst Says Red-Hot Bank Rally Overextended: Only 5 to Buy Now

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What a run it has been. While many investors are still thinking about owning bank stocks, the reality is they are extended, like many stocks and may be risky to buy at current levels. While the fundamentals that drove the rally, which include interest rates trending higher and the hope for a reduction in the corporate tax rate, remain in place, the bottom line is most of the stocks have run way too far too fast.

In a new research report, Deutsche Bank, also feels that the interest rate increases and an improving economy are positive factors, and the firm notes improved loan growth and better fee revenues should come as a result of the growth. The analysts also see the potential for a solid pickup in share buyback and dividend growth.

Given the big run in the stocks, the analysts look to be favoring companies that also have a strong capital markets business. We found five that are still rated Buy.

Goldman Sachs

This continues to be the gold standard of Wall Street banks and trades at a reasonable 13 times estimated 2017 earnings. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra high net worth clientele, top investment banking and capital markets expertise. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.

In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years. It maintained a market position when merger and acquisition activity was dominated by technology in 1999, by financials in 2008 and by natural resources in 2014. The bottom line is, regardless of where market strength is in any given year, Goldman Sachs is up to the task.

Goldman Sachs reported third-quarter numbers that hammered analysts’ estimates. And an improving capital market bodes well for a firm that is a leader in the IPO world.

Goldman Sachs shareholders receive a 1.08% dividend. The Deutsche Bank price target for the stock is $255, and the Wall Street consensus target is $219.58. Shares closed Wednesday at $239.93.

JPMorgan

This stock trades at a reasonable 13.2 times estimated 2017 forward earnings and could respond well in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is expected to continue to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide earnings headwinds going forward.

The company reported outstanding third-quarter results, and Merrill Lynch thinks the results are sustainable going forward. The firm raised its estimates for 2017 and feels JPMorgan can earn as much as $7 a share by 2018. Despite being a crowded trade, Merrill Lynch also feels that the bank’s superior earnings growth should continue the stock’s outperformance.

Improvement in loan growth, terrific equity capital markets and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.

Earlier this year, Dimon put his money where his mouth was and reportedly bought a stunning 500,000 shares of JPMorgan stock for a massive $26 million. That brought his total holdings in the bank to 6.7 million shares, worth over $360 million.

Investors receive a 2.27% dividend. Deutsche Bank has a $90 price target, and the consensus target is $80.45. Shares closed yesterday at $84.73.