Rating 3 Bank Stocks ready to release results

In this article, I use A+ AAII investor stock ratings to provide insight into three bank stocks. Given the improving economy, are First Bancorp (FBP), JPMorgan Chase (JPM), and Pathward Financial (CASH) worth considering?

Bank shares Latest news

The banking sector has recently seen significant growth and stability, supported by positive economic indicators. Cooling inflation and high employment rates have contributed to the positive outlook. Investor confidence has been further boosted by the Federal Reserve signaling potential interest rate cuts later in the year. As a result, major banks such as JPMorgan Chase, Morgan Stanley (MS) and Goldman Sachs Group (GS) have surged above their previous 52-week highs, with some hitting record highs.

The expectation of lower interest rates—particularly the federal funds rate, which is currently at a 23-year high—has played a key role in this positive sentiment. Lower interest rates lower borrowing costs, increasing demand for loans and boosting bank loan volumes and revenues. Market optimism about lower interest rates is lifting stock prices as investors anticipate better economic conditions and financial results. In addition, lower interest rates stimulate economic activity, increasing transaction volumes and demand for financial services.

Looking ahead, JPMorgan Chase, Citigroup (C) and Wells Fargo (WFC) will be among the first banks to report their second-quarter 2024 earnings, starting Friday, July 12. Their results will be closely watched as they could set the tone for the banking sector. With borrowing costs down and demand for loans moderate, these earnings reports are expected to reflect strong financial health, potentially boosting stock prices even further. The combination of positive economic indicators and favorable conditions positions these banks’ stocks for higher potential growth.

Bank shares classification according to AAII A+ classification

When analyzing a company, it’s helpful to have an objective framework that allows you to compare companies in the same way. That’s why AAII created the A+ Stock Ratings, which evaluate companies based on five factors that research and actual investment results show will help identify stocks that beat the market over the long term: value, growth, momentum, earnings estimate revisions (and surprises), and quality.

The table below, using AAII’s A+ stock rating, summarizes the attractiveness of three bank stocks—First Bancorp, JPMorgan Chase and Pathward Financial—based on their fundamentals.

AAII’s A+ Stock Rating Summary for Three Banking Stocks

What A+ Stock Ratings Reveal

First Bancorp (FBP) is a financial services company. It offers a diverse set of banking, investment, and mortgage products and services, as well as consumer and commercial financing. Its services are distributed through bank branches and offices, the Internet, and other channels to individuals, businesses, and institutions in the United States and internationally. The company offers consumer financial products and services, including checking and savings accounts; credit and debit cards; auto, mortgage, and home equity loans; and small business loans. In addition, it offers financial planning, private banking, investment management, and trust services. It also offers financial solutions to businesses through products and services, including traditional commercial loans and lines of credit, letters of credit, asset-based loans, trade finance, treasury management, and investment banking services.

First Bancorp has a Momentum Grade B, based on its Momentum Score of 80. This indicates that the stock is strong in terms of weighted relative price strength over the last four quarters. Weighted four-quarter relative strength is the relative price change for each of the last four quarters, with the most recent quarterly price change having a 40% weight and each of the three prior quarters having a 20% weight. The ranks are 71, 66, 68, and 86, respectively, from the most recent quarter. Weighted four-quarter relative price strength is 2.0%.

Higher quality stocks have characteristics associated with growth potential and reduced downside risk. Quality Grade backtesting shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 to 2019.

The A+ quality score is a percentage rank of the average of the percentage ranks of return on assets (ROA), return on invested capital (ROIC), gross profit on assets, repurchase yield, change in total liabilities to assets, accruals to assets, double prime banking risk Z-score (Z), and F-score. The score is variable, meaning that it can include all eight measures or, if any of the eight measures are not valid, the remaining valid measures. However, to receive a quality score, a stock must have a valid (nonzero) measure and a corresponding rank for at least four of the eight quality measures.

First Bancorp has a quality rating of A, based on a score of 87, which is very strong. The company ranks high in terms of buyback yield and return on invested capital. Its buyback yield of 7.3% ranks in the 93rd percentile among all U.S. stocks, and its return on invested capital of 63.4% ranks in the 88th percentile. First Bancorp also has a high F-Score of 7, ranking in the 85th percentile.

The Growth Composite Score components consider a company’s success in increasing sales year-over-year and annualized over the long term and its ability to consistently generate positive cash flow from core operations. The company’s Growth Grade is A, which is very high. First Bancorp has generated positive annual cash flow from operations for the past five consecutive years and has a five-year annual sales growth rate of 10.4%.

JPMorgan Chase (JPM) is a financial holding company with four primary segments: Consumer and Community Banking; Corporate and Investment Banking; Commercial Banking; and Asset and Wealth Management. The Consumer and Community Banking segment offers products and services to consumers and small businesses through a variety of channels, including bank branches, automated teller machines (ATMs), digital platforms (mobile and online), and telephone banking. The Corporate and Investment Banking segment encompasses banking, markets, and securities services, providing a comprehensive range of investment banking, market making, brokerage, lending, and treasury and securities services to a global clientele of corporations, investors, financial institutions, merchants, and government and municipal entities. The Commercial Banking segment provides financial solutions, such as lending, payments, investment banking, and asset management products, to three primary customer groups: middle market banking, corporate banking, and commercial real estate banking. Finally, the Asset and Wealth Management segment offers investment and wealth management solutions.

The company has a Value Grade B, based on its Value Score of 66, which indicates good value. Higher scores indicate a more attractive stock to value investors and therefore a better rating. The Value Grade is a percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, price-to-free cash flow (P/FCF) ratio, shareholder return, and enterprise value to earnings before interest, taxes, depreciation, and amortization (Ebitda) ratio.

The company has an enterprise-value-to-Ebitdaratio of 4.0, ranking in the 10th percentile. The return to shareholders is 4.2% and the price-to-earnings ratio is 12.5, ranking in the 21st and 34th percentiles, respectively. The price-to-book ratio is 1.97, which translates into a position of 57.

Earnings estimate revisions indicate how analysts view the company’s near-term prospects. JPMorgan Chase has an Earnings Estimate Revisions Grade of C, based on a score of 53, which is neutral. The grade is based on the statistical significance of the last two quarterly earnings surprises and the percentage change in the consensus estimate for the current fiscal year over the last month and three months.

JPMorgan Chase reported a positive earnings surprise for the first quarter of 2024 of 7.9%. However, in the previous quarter, it reported a negative earnings surprise of 8.5%. Over the past month, the consensus earnings estimate for the second quarter of 2024 has increased from $3,913 to $3,986 per share, on 11 upward revisions and three downward revisions. Over the past month, the consensus earnings estimate for the full year of 2024 has increased from $16,404 to $16,434 per share, on six upward revisions and one downward revision.

JPMorgan Chase has a Growth Rating of B, which is strong. The company ranks in the 73rd percentile with a five-year annual sales growth rate of 17.5%.

Pathward Financial (cash)) is a financial holding company. The company’s subsidiary is Pathward NA, which operates in three segments: consumer, commercial, and corporate/other. The consumer segment includes the Banking as a Service business line, which partners with various entities to meet payment and lending needs by offering prepaid cards, deposit accounts, payment processing, and consumer loans. It provides a range of consumer installment and revolving loan products through its credit solutions. The commercial segment provides products through working capital lending solutions, equipment financing, structured financing, and insurance premium financing. The corporate/other services segment includes shared services and treasury-related functions, including investment portfolio, warehouse financing, wholesale deposits, and lending.

Pathward Financial has a quality rating of B, with a score of 79, which is strong. The company ranks high in terms of return on invested capital and buyback yield. Pathward Financial has a return on invested capital of 47.9%, above the sector median of 35.5%, and a buyback yield of 6.6%. This is partially offset by an accrued receivables to assets ratio of -2.2%, ranking in the 33rd percentile of all stocks.

Pathward Financial has a Value Grade of A, based on a score of 83, which indicates deep value. The company ranks in the 12th percentile for shareholder return and in the 11th percentile for enterprise value to EBITDA. The company has a shareholder return of 7.0% and an enterprise value to EBITDA ratio of 4.2. A lower price-to-earnings ratio is considered a better value, and Pathward Financial’s price-to-earnings ratio is 8.7, which is below the sector median of 12.0. The price-to-free cash flow ratio is 4.5, which translates to a rank of 10.

The company has a Momentum Grade B, based on its Momentum Score of 77. This means that the stock is strong in terms of weighted relative price power over the last four quarters. The ranks are 87, 46, 49, and 70, respectively, since the last quarter. The weighted relative price power over the four quarters is 0.9%.

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Stocks that meet the approach criteria are not “recommended” or “buy” lists. Due diligence is important.

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