As our subscribers and those who regularly visit our website (therjreport.com) know, we identified the overall banking sector as undervalued on May 12 and believed that the sector, as a whole, would start to outperform the broader market. This valuation was based on our RJR Indicator, which measures the performance of the banks that we follow that we believe are undervalued vs those we rate as overvalued on a relative basis. While we believed that the sector got overly punished during the manufactured “banking crisis” in March, we felt that significant risk remained and did not change our valuation call until we saw clear indication of a reversal. That happened during the week ending May 12. Did we get lucky? Maybe, but our indicator has proven pretty reliable over the past few years. The charts below show our valuation calls and RJR Indicator turning points since January 2022.
Entire Banking Sector Bounces Back
Not surprisingly, the entire banking sector made huge gains in a short period of time relative to the broader market -- a whopping 22%. We expect this outperformance to continue over the short term (but probably not at the same pace) as the sector climbs out of the hole created by the failure of a few poorly managed institutions.
Regional Banks Outperformed
While all of the sectors we cover (Super Regional, Regional, and Super Community) experienced significant appreciation during the past few weeks, the Regional sector increased the most with an 18% average gain. Not surprising, The largest banks had the least amount of price appreciation because they hadn’t been beaten down quite as much.
Our Undervalued Banks Outperformed Those Rated Overvalued
In our system, undervalued and overvalued are relative terms. Just because we rate a company as overvalued does not mean it cannot or will not appreciate in price. Rather, we believe it will either increase at a lower rate in an up market than those rated undervalued and decrease in a down market more. This has been the case since we made our bullish call on May 12th. We excluded what we considered our most undervalued company from this analysis because of the residual risk in the stock. However, this bank has seen a 150% increase in price in just 3 weeks. Our subscribers have access to specific companies that we believe are both over and undervalued.
Our Top Rated Banks Also Generally Outperformed
At the beginning of May we announced our top-rated banks based on first quarter results. Our overall champion was Bank OZK (OZK) and our other category winners were Keycorp (KEY) and East West Bancorp (EWBC). Since our undervalued call, both OZK and EWBC have outperformed the sector significantly while KEY generally mirrored the banking sector but outperformed our Super Regional group by a considerable margin (20% vs 11%)
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