In this article, we will pick seven bull stocks in the financial services industry. We will give more weight to the recent news flow – the assumption being that markets are efficient.
Let's recap financial sector performance in yesterday's trading session
Year-to-date (YTD) The S&P Financial Sector has fallen approx 1.1%, dropping from the 197.79 level (Jan 4) to 191.63 (Feb 16). Better-than-expected earnings from British banking giant Barclays (BCS 19.03, +2.35) helped it win support for shares of lenders and diversified banks in yesterday's (Feb 16) trading session. Optimistic expectations drove all the 24 members of the KBW Bank Index up and gave the KBW a 2.9% gain -- its best single-session percentage move in more than one month. JPMorgan Chase (JPM 40.07, +1.12) which was initially pulled down by the news that it will pay nearly $1.7 billion for the Asian and European operations of the RBS-Sempra commodities joint venture, eventually ended the day up. The company later announced that its net credit losses for January spiked to 10.91% from 7.11% in December, but its shares still finished with a near 3% gain at their session high.
Our research universe
Our research universe initially comprises of 24 stocks in the KBW Bank Index (BKX), 50 stocks in KBW Regional Banking Index (KRX), 24 stocks in KBW Insurance Index (KIX), 24 stocks in KBW Capital Markets Index (KSX), and 24 stocks in KBW Mortgage Financial Index (MFX).
Index performance – stock allocation
Our objective is to pick seven stocks that are likely to give better returns in the next one year. So, we look at the performance of the indices and based on that we will allocate index weightage. The table given below presents statistics as on Feb 16, 2010.
Day Return (%)
Week Return (%)
MTD Return (%)
QTD Return (%)
YTD Return (%)
1-Year Return (%)
3-Year Return (%)
5-Year Return (%)
10-Year Return (%)
Looking at one year returns, BKX and KIX are super-50% while KRX, KSX, and MFX are sub-50% returning indices. So our final stock portfolio will include two each from BKX and KIX, and one each from KRX, KSX, and MFX. To pick the final seven, we initially start with 14 stocks - four each from BKX and KIX, and two each from KRX, KSX, and MFX.
Initial stock portfolio
Our initial stock portfolio will be based on yesterday's stock performance. From BKX, Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and U.S. Bancorp (USB) make the cut. From KIX, Wintrust Financial Corp (WTFC), Associated Banc-Corp (ASBC), Provident Financial Services, Inc. (PFS), and Synovus Financial Corp (SNV) make the cut. From KRX, KSX, and MFX - MGIC Investment Corp., Allstate Corp (ALL), Goldman Sachs Group (GS), Inc., Morgan Stanley (MS), Astoria Financial Corporation (AF), and Hudson City Bancorp (HCBK) make the cut.
Among the 14 stocks mentioned above, it is easy to pick our final seven keeping the desired stock allocation. My final seven consists of Bank of America Corp., Citigroup Inc., Wintrust Financial Corp, Associated Banc-Corp, MGIC Investment Corp., Goldman Sachs Group, Inc., and Astoria Financial Corporation. The reason for the selection of these seven stocks is yesterday's price change and potential for one year price appreciation.
Given the constraints (research methodology, time, and space), I believe this portfolio is one of the best possible combination available at present. One area of concern that I would like to warn is the exposure of these stocks to Greece, and other European economies.