In this article we will take a look at the 10 best bank stocks for 2021. You can skip our detailed analysis of the banking industry's outlook for 2021 and some of the major growth catalysts for bank stocks and go directly to 5 Best Bank Stocks for 2021.
Bank stocks took a beating in 2020 as consumer spending receded, auto loans dropped and businesses shuttered amid the coronavirus crisis. The Oracle of Omaha Warren Buffett's Berkshire Hathaway unloaded massive stakes in bank stocks and poured its money into healthcare and technology sectors. Berkshire Hathaway sold major chunks of its stakes in Wells Fargo & Co. and JPMorgan Chase in the third quarter of the tumultuous year. However, bank stocks are set to make a comeback in 2021 amid the mass availability of coronavirus vaccines, falling cases across the globe and the $1.9 trillion stimulus package that is set to be approved by the House later this week.
Bank Stocks Rebounding: What Are The Growth Catalysts
Most banks reported revenue declines for the fourth quarter of 2020 as credit metrics tumbled and consumer spending took a hit. However, bank stocks are seeing signs of recovery. Most major banks have started announcing stock buyback programs after the Federal Reserve lifted its ban on buybacks that was placed to preserve the economy after the pandemic. Morgan Stanley recently said that average charge-off rates and total delinquency rates are showing signs of improvement and posted their strongest year-over-year growth rate in 8 years. The NASDAQ Bank Index is up 24% over the last 3 months.
However, banks will continue to feel the reverberations of the coronavirus hit for several months to come. Deloitte said in its outlook for the banking industry that the U.S. banking industry may have to provision for a total of $318 billion in net loan losses from 2020 to 2022. The report said that most of these losses will be in credit cards, commercial real estate, and small business loans.
Prudent investors know that now could be the right time to pile into bank stocks for 2021 and beyond. Consumer spending is bound to go back to normal as COVID-19 cases are falling and people have started to spend money. According to the government statistics, retail sales in January posted its biggest jump in seven months, thanks to a recovery in hiring and overall consumer spending. Retail sales in the month jumped 5.3%. Similarly, WSJ reported that according to Federal Reserve Bank of Atlanta’s GDPNow model, economy is expected to grow at a seasonally adjusted annual rate of 9.5% in the first quarter. This was up from the 4.5% estimate given a week earlier.
Banking isn't the only industry facing the uncertainty. Even the smart money is losing its hold on the markets. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter's stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context and industry outlook in mind, let’s start our list of 10 best bank stocks for 2021.
10. Capital One Financial Corporation (NYSE: COF)
Virginia-based Capital One specializes in auto loans, credit cards and other banking services. Wolfe Research analyst Bill Carcache recently gave bullish comments about Capital One stock, citing upbeat credit card metrics for January that show a continuing recovery. The analyst said in his note that he sees no credit deterioration “at all” in the credit metrics until at least the first quarter of 2022. In January, Capital One’s board authorized a common stock repurchase program of up to $7.5 billion.
As of the end of the fourth quarter, 56 hedge funds in Insider Monkey's database of 887 funds held stakes in Capital One Financial Corporation, compared to 42 funds in the third quarter. Harris Associates is the biggest stakeholder in the company, with 7 million shares, worth $693 million.
9. Ally Financial Inc. (NYSE: ALLY)
Michigan-based Ally Financial ranks 9th on our list of 10 best bank stocks for 2021. It offers auto loans, insurance services, mortgages and corporate finance services. The bank beat analysts’ forecasts in the fourth quarter results amid a decline in its provision for credit losses and a rise in consumer auto originations. In January, Ally Financial stock gained after the company announced a share buyback program of $1.60 billion.
According to our database, the number of ALLY's long hedge funds positions increased at the end of the fourth quarter of 2020. There were 57 hedge funds that hold a position in Ally Financial Inc. compared to the 53 funds in the third quarter. The biggest stakeholder of the company is Harris Associates, with 28.2 million shares, worth $1 billion.
8. U.S. Bancorp (NYSE: USB)
Minnesota-based U.S. Bancorp is one of the biggest banks in the country, with $495 billion worth of assets. The parent company of U.S. Bank National Association recently received a Buy rating from a Citi analyst based on the strengths in its payments business and other growth catalysts.
With a $6.1 billion stake invested in U.S. Bancorp, Warren Buffett's Berkshire Hathaway owns 131 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 60 hedge funds held stakes in U.S. Bancorp as of the end of the fourth quarter, versus the 48 funds in the third quarter.
7. American Express Company (NYSE: AXP)
American Express ranks 67 on the Fortune 500 list. The company had over 54.7 million active credit cards in use in the U.S. alone as of 2019. Earlier in February, Baird analyst David George slashed American Express stock rating to Neutral from Outperform, citing valuation concerns. As of the end of the fourth quarter, Andreas Halvorsen’s Viking Global had 5.22 million shares of the company, worth $631.6 million.
As of the end of the fourth quarter, there were 60 hedge funds in Insider Monkey's database that held stakes in American Express, compared to 48 funds in the third quarter. Berkshire Hathaway, with 151.6 million shares of AXP, is the biggest stakeholder in the company.
6. The Charles Schwab Corporation (NYSE: SCHW)
California-based Charles Schwab Corporation provides banking, commercial banking, trading platform and wealth management services. It was founded in 1971 by Charles Schwab, who has a net worth of over $10 billion. The bank has over $3.3 trillion worth of clients’ assets. Charles Schwab stock is up over 34% year to date. The stock was recently upgraded by Wolfe Research analyst Steven Chubak to Peer Perform from Underperform.
As of the end of the fourth quarter, 61 hedge funds in Insider Monkey's database of 887 funds held stakes in The Charles Schwab Corporation, compared to 53 funds in the third quarter. Generation Investment Management is the biggest stakeholder in the company, with 27.9 million shares, worth $1.4 billion.
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Disclosure: None. 10 Best Bank Stocks for 2021 is originally published on Insider Monkey.