4 Stocks That Contrarian Investors Should Buy During an Economic Downturn Fears of a financial system collapse due to bank failures last month is rising. Investors have been dumping shares of banks despite assurances by the financial regulators. However, this presents...
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Fears of a financial system collapse due to bank failures last month is rising. Investors have been dumping shares of banks despite assurances by the financial regulators. However, this presents an opportunity for contrarian traders to buy M&T Bank (MTB), Webster Financial (WBS), New York Community Bancorp (NYCB), and Pinnacle Financial Partners (PNFP) amid lingering recession concerns. Read more.
Last month's failures of Silicon Valley Bank and Signature Bank have spooked investors. Concerns related to the financial system's stability have caused the prices of several banking stocks to tank. However, the current fear surrounding the financial system presents an opportunity for contrarian traders to take bets against the prevailing market trend.
With fears of a recession looming, I think contrarian traders can look to buy beaten-down bank stocks M&T Bank Corporation (MTB), Webster Financial Corporation (WBS), New York Community Bancorp, Inc. (NYCB), and Pinnacle Financial Partners, Inc. (PNFP).
Let me explain why a contrarian bet on these banks could help generate returns during an economic downturn.
The sudden collapse of the two large banks caused turmoil in the global financial market. These failures were the biggest bank failures in the United States since 2008. According to the Federal Deposit Insurance Corporation (FDIC), the SVB and Signature Bank had combined assets of $319 billion.
The fear of a financial system collapse amongst investors was palpable. However, financial regulators stepped in to protect depositors at both banks and launched a separate lending facility later. Officials admitted that these steps were necessary to prevent the failures from affecting the banking system and threatening other midsize banks.
Post the collapse, the Fed is weighing tougher rules for midsized banks. The central bank is reviewing the capital and liquidity requirements of banks. Along with further interest rate hikes by the Fed this year, the likelihood of stricter lending norms is likely to slow down credit growth. This is likely to tip the economy into a recession.
However, while investors remain skeptical about the banking sector's health, having a contrarian approach might help generate solid returns. To that end, it could be wise to buy MTB, WBS, NYCB, and PNFP.
Let's discuss these stocks in detail.
M&T Bank Corporation (MTB)
MTB is a bank holding company. The company's bank subsidiaries include Manufacturers and Traders Trust Company and Wilmington Trust, N.A. It offers retail and commercial banking and others. Its segments include Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking, and Retail Banking.
MTB's 26% trailing-12-month net income margin is 2.6% lower than the 26.69% industry average. Its 9.59% trailing-12-month Return on Common Equity is 14% lower than the 11.15% industry average. Likewise, its 0.99% trailing-12-month Return on Total Assets is 13.9% lower than the 1.15% industry average.
MTB's net interest income for the fiscal year ended December 31, 2022, increased 52.2% year-over-year to $5.82 billion. Its net income rose 7.2% year-over-year to $1.99 billion.
On the other hand, its EPS declined 16.4% year-over-year to $11.53. Its Return on Average total assets came in at 1.05%, compared to 1.22% in the year-ago period. In addition, its total nonperforming assets increased 19% year-over-year to $2.48 billion.
Analysts expect MTB's EPS for the quarter ending March 31, 2023, to increase 51.5% year-over-year to $4.14. Its revenue for fiscal 2024 is expected to decline 1.4% year-over-year to $9.34 billion. Over the past six months, the stock has declined 37.5% to close the last trading session at $117.18.
MTB's POWR Ratings reflect this weak outlook. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a D grade for Sentiment and Quality. It is ranked #7 out of 10 stocks in the F-rated Money Center Banks group. Click here to see the other ratings of MTB for Growth, Value, Momentum, and Stability.
Webster Financial Corporation (WBS)
WBS is a bank and financial holding company. Its subsidiary, Webster Bank, National Association, and its HSA Bank division (HSA Bank) deliver a range of banking, investment, and financial services to individuals, families, and businesses. Its segments include Commercial Banking, HSA Bank, and Retail Banking.
WBS's 0.90% trailing-12-month Return on Total Assets is 21.6% lower than the 1.15% industry average. Likewise, its 1.31% trailing-12-month Capex/Sales is 28.9% lower than the 1.84% industry average.
For the fourth quarter that ended December 31, 2022, WBS' net interest income after provision for loan and lease losses increased 131.4% year-over-year to $559.38 million. Its net income rose 120.4% over the prior-year period to $244.75 million. Also, its EPS came in at $1.38, representing an increase of 15% year-over-year.
On the other hand, its total non-interest expense increased 83.5% year-over-year to $348.39 million. WBS' nonperforming assets rose 83.1% year-over-year to $206.14 million. The company's return on average common stockholders' equity came in at 12.54%, compared to 13.35% in the year-ago period.
Over the past year, WBS has declined 31.1% to close the last trading session at $37.56.
WBS' POWR Ratings reflect its bleak fundamentals. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Stability, Sentiment, and Quality. It is ranked #46 out of 66 stocks in the F-rated Northeast Regional Banks industry. For other ratings of WBS for Growth, Value, and Momentum, click here.
New York Community Bancorp, Inc. (NYCB)
NYCB operates as the bank holding company for Flagstar Bank, N.A., which provides banking products and services. The company's deposit products include interest-bearing checking and money market, savings, non-interest-bearing, and retirement accounts, as well as certificates of deposits. Its loan products comprise commercial real estate loans, and multi-family loans, amongst others.
NYCB's 8.20% trailing-12-month Return on Common Equity is 26.5% lower than the 11.15% industry average. Likewise, its 0.22% trailing-12-month Capex/Sales is 88% lower than the 1.84% industry average.
NYCB's total revenues for the fourth quarter ended December 31, 2022, increased 70.7% year-over-year to $577 million. In addition, its net income available to common shareholders increased 15.5% year-over-year to $164 million.
On the other hand, its adjusted EPS declined 19.4% year-over-year to $0.25. The company's net interest income after provision for credit losses declined 19.8% year-over-year to $255 million. Also, its non-GAAP Return on Average Assets came in at 0.84%, compared to 1.11% in the year-ago period.
For the quarter ended March 31, 2023, NYCB's EPS is expected to decline 31.8% year-over-year to $0.22. Its revenue for the quarter, is expected to increase 80.3% year-over-year to $623.85 million. Over the past year, the stock has declined 17.2% to close the last trading session at $8.79.
NYCB has an overall D rating, equating to a Sell in our proprietary rating system.
It has a D grade for Stability and Quality. It is ranked #62 in the same industry. To see the other ratings of Growth, Value, Momentum, and Sentiment, click here.
Pinnacle Financial Partners, Inc. (PNFP)
PNFP is a financial holding company that operates through its wholly-owned subsidiary, Pinnacle Bank. It offers individuals, businesses, and professional entities a full range of lending products, including commercial, real estate, and consumer loans. It also offers core deposits, including savings, noninterest-bearing checking, interest-bearing checking, money market, and certificate of deposit accounts.
PNFP's 10.50% trailing-12-month Return on Common Equity is 5.9% lower than the 11.15% industry average.
PNFP's total revenues for the fourth quarter ended December 31, 2022, increased 18.3% year-over-year to $401.78 million. The company's net interest income increased 33.8% year-over-year to $319.46 million. Its noninterest income declined 18.3% year-over-year to $82.32 million.
Its return on average assets came in at 1.29%, compared to 1.39% in the year-ago period. In addition, its net income available to common shareholders declined 7.5% sequentially to $134.05 million.
Analysts expect PNFP's EPS for the quarter ending June 30, 2023, to decline 3.8% year-over-year to $1.79. Its revenue for the quarter that ended March 31, 2023, is expected to increase 23.3% year-over-year to $422.88 million. Over the past year, the stock has declined 42.5% to close the last trading session at $52.61.
PNFP's weak prospects are reflected in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Sentiment and Quality. Within the F-rated Southeast Regional Banks industry, it is ranked #20 out of 28 stocks. Click here to see the additional ratings of PNFP for Growth, Value, Momentum, and Stability.
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
Yes, some special stocks may go up like the ones discussed in this article. But most will tumble as the bear market claws ever lower this year.
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- 5 Warnings Signs the Bear Returns Starting Now!
- Banking Crisis Concerns Another Nail in the Coffin
- How Low Will Stocks Go?
- 7 Timely Trades to Profit on the Way Down
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You owe it to yourself to watch this timely presentation before placing your next trade.
REVISED: 2023 Stock Market Outlook >
MTB shares fell $0.39 (-0.33%) in premarket trading Wednesday. Year-to-date, MTB has declined -18.79%, versus a 7.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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