A respected Goldman Sachs strategist is advising savvy clients to buy financial stocks, predicting the sector will outperform the market because of increasing shareholder dividends and stock buybacks.
"We believe 2017 will mark an inflection point in the amount of capital the Fed allows financials firms to return to shareholders … This is the first year that certain money center banks have been permitted to pay out more than net income," strategist David Kostin wrote in a recent note to clients.
"Accelerating dividend growth should attract equity income investors, who are broadly underweight the financials sector," Kostin wrote.
Bank stocks have underperformed the market this year. The Financial Select Sector SPDR Fund rose 9.2 percent year to date through Friday compared to the S&P 500's 10.6 percent return, CNBC explained.
Specifically, Goldman recommends Bank of America (BAC), PNC (PNC) and Wells Fargo (WFC).
Goldman's analysts project the bank sector "will increase its dividends by 17 percent annually during the next two years," CNBC explained. Stock "repurchases will lift earnings per share, return on equity and share prices," Kostin wrote.
Goldman predicts interest rates will also rise and boost the sector's earnings prospects. "Our economists forecast faster inflation and Fed tightening than the market expects," Kostin wrote.
Bank stocks have underperformed the market this year. The Financial Select Sector SPDR Fund rose 9.2 percent year to date through Friday compared to the S&P 500's 10.6 percent return.
"Recent client conversations have focused on the prospects for stocks in the financials sector, which we recommend as an overweight despite recent underperformance," Kostin wrote.
However, some experts are warning to be careful if you do decide to invest in banks and financials.
Boenning & Scattergood cautioned that all but large-cap bank stocks appear richly valued on the surface, Barron's reported.
"The market appears to be taking an increasingly more skeptical view of potential benefits for the industry that seemed like a certainty just months ago," Boenning & Scattergood said.
"While bank stocks generally remain in a favorable position since the election (+28% vs. +16.2% for the S&P 500), we continue to expect modest pressure on the sector as investors harvest gains and reallocate capital into less liquid stocks at more reasonable valuations," Boenning & Scattergood said.
"All but large-caps appear richly valued on the surface. In consideration, we encourage investors to remain selective, focusing on banks with (1) superior growth trajectories, (2) excess capital that can be deployed toward accretive M&A deals, and/or (3) asset sensitive balance sheets/attractive core deposit franchises."
(Newsmax wires services contributed to this report).
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