Sector Valuation
Our Current Valuation for the Banking Sector is:
Fully Valued
After the banking sector crash in the Spring of 2023, we changed our outlook from overvalued to undervalued at the beginning of July and then back to fully valued in September, indicating we believed the banking sector performance would mirror the market, overall. We changed our outlook to Fully Valued in November and, quite frankly, missed the rally at the end of the year.. However, after a strong fourth quarter, we identified potential headwinds in advance of earnings season and maintained our outlook at fully valued with caution. After the significant decline at the end of July, we changed our outlook to undervalued, believing the sector was punished too severely and that the outlook for rate cuts in September would benefit the entire sector. As a result of the large rate cuts in September and outlook for further cuts, we deemed the sector fully valued until the middle of October when earnings were coming in better than expected. Although we changed our outlook to undervalued at that time, admittedly we did not foresee the huge valuation spikes immediately after the election. We do believe that this euphoria is somewhat misplaced and have now rated the banking sector fully valued and expect it to move in concert with the overall market.
The RJR Indicator: Neutral
We do not issue buy, sell or hold recommendations on individual companies. Rather, we evaluate each of our target banks along a number of performance attributes, assign an overall score to each bank, use a variety of statistical models to determine target valuations, and then assign a rating based on our assessment of relative valuation.
Over time, we have found that the movement of our under and overvalued banks is a strong predictor of, not only banking sector price performance, but of the direction of the market, overall. This has led to the development of the "RJR Indicator". Essentially, when our banks rated undervalued outperform those rated overvalued, the direction of the market is positive. The opposite is also true. The RJR indicator is triggered when the performance lines cross. Both the quarterly and weekly RJR indicators have been sending mixed signals over the past year, however there have been a few clear signals which we highlight when the indicator changes. For the last six months the indicator has been either neutral or slightly positive indicating movement consistent with the overall market. However, it did trend slightly positive on a weekly basis at the end of October at which time we highlighted a slight positive signal. Again, we did not anticipate the election surge so that was just a fortunate (?) coincidence and we now rate the RJR Indicator again as NEUTRAL
RJR TRENDS
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Are Banks on Sale?
For the first time in a while, out answer is NO. For most of the third quarter, most bank equity prices stayed below both our targets and those of analysts. However, the elections rally across the banking sector has now brought valuations in line with, and in many cases above, both ours and analyst targets. As a result, we believe the sector on the whole is fairly valued relative to the market. While we believe the sector is fully valued there continue to be a few highly rated companies that are trading at discounts to our target prices, primarily in smaller Super Community segment. We have identified those opportunities in the Current Valuation tab in our Members Sections.
Since the beginning of the third quarter, the banking sector has significantly outperformed the broader market, with all size segments participating in the rally. A major impetus of this rally has been the interest rate environment, the ability of most banks to maintain relatively strong interest margins, and the fact that many pundits dire warnings of the collapse of the CRE market in most cases did not come to pass. During most of that time, are banks rated undervalued slightly outperformed both those rated overvalued and the banking sector index overall. While we expect the banking sector to begin mirroring the movement of the overall market over the intermediate term, the wild card is how the markets and investors factor in the potential impact of the policies of the incoming administration on both the overall economy and the banking industry specifically.
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