Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
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Hey Traders,
The Midcap banks have had a very rough slug. The SPDR S&P Regional Banking ETF (Ticker: KRE) opened the year at 59.03.
The index stands at 37.06 as a right this … a 22 dollar drop, nearly 50%.
There are those that think this crisis will cause a mass consolidation, and the big banks are just going to get bigger.
Others will tell you not to touch any bank with a ten-foot pole.
But there’s also a crowd that’s looking at the prices of some of these banks and saying “buy with both hands.”
So what is the play?
Let’s take a look at one of the big players in the midcap space: Fifth Third Bank Corp (Ticker: FITB).
The Good
Let’s start with the customers.
FITB customers have been there a long time. They have strong ties to the Midwest with a strong presence in Ohio, Michigan, Indiana, and Illinois.
FITB was a big winner from the 2008 financial crisis, scooping up banks all over the Midwest.
While earnings are down, they are still pretty strong with the company earnings .78 a share in the last cycle.
The loan book is also interesting. FITB holds the majority of its bond book in its Market to Market portfolio, meaning that any dirty laundry it holds is pretty much out there.
The stock pays a really nice dividend relative to its current price – about 5% – and is currently trading below book value.
It has earnings or 12.56 of revenue per share – quite reasonable with the drop – and has a PE of 7.16.
Basically, on the surface, the fundamentals look great.
Even with the giant haircut the stock has had this year – dropping from 33.19 to 24.24 as of the time I am writing this – the market cap is over 16 billion dollars.
If you just look at the fundamentals of the bank, it is a buy.
But can you?
The Bad
This is where things get tricky. We have seen relatively good banks have bank runs.
Silicon Valley Bank started the runs, but it’s come for First Republic Bank (Ticker: FRC), PacWest Bancorp (Ticker: PACW), and has clipped many other banks.
If confidence deteriorates in FITB, the stock could spiral out of control just like PACW.
PACW looked like it was just going to get a haircut like FITB and Comerica Incorporated (Ticker: CMA), but then things fell off a ledge.
The same could happen with FITB, especially if there are issues in commercial loans.
The Verdict
From a risk/reward standpoint, this stock is probably a strong buy.
But!
I would skip the stock itself and go long via LEAPs call spreads.
This will allow participation in the upside, but protect the downside.
The cost for the options is worth it if you spread … naked calls through are WAY too expensive back in the LEAPs themselves.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian