Over the next few weeks, thousands of companies will tell us how much money they brought in during the last quarter, how much they made, and what they expect for the future.
Tucked inside that stampede of earnings are some major moneymaking opportunities and some money-losing dangers.
For a “quant” guy (and total numbers geek) like me, quarterly earnings seasons are some of the best times of the year. We get updated numbers that my Quantum Edge system can pull in, analyze, and use to generate fresh Quantum Scores for more than 6,000 stocks – a process that spotlights the very best companies and the very best stocks to buy.
A significant chunk of that Quantum Score is a separate component: the Fundamental Score. And sales and earnings growth are among the most important part of the fundamental ranking. Those Fundamental Scores change the most during each year’s four earnings seasons. Many companies maintain their established ratings and trends, but there are those that jump from “meh” to “wow,” and those who fall from “count me in” to “I’m outta here.”
This week brings us the first big guns to release their results, and they’re all big banks. On Friday alone, JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) will tell us how they did last quarter and what they expect here in the new year.
Shares of all four banks shot higher to end 2023…
But are they buys today heading into earnings?
One is. One could be. And the other two are not.
The Lone Buy
The only one of those four big banks technically in the buy zone is Citibank (C) with a Quantum Score of 70.7. As a reminder, the strongest buys score between 70 and 85.
Sources: MAPsignals.com and TradeSmith Finance
You can see that the technicals are driving much of that strength, which is not surprising after C’s 34% rally in just two months to end 2023. All of my technical metrics are solid.
You probably noticed that the Fundamental Score sits at 58.3, which is not horrible but not great either. In fact, a reading that low weighs on the overall Quantum Score. As of today, there are 1,544 stocks with a fundamental score better than 58.3
But there’s an important factor to keep in mind, and that’s debt. Broadly speaking, overly burdensome debt is bad for stocks, and the algorithms I designed for my system take that into account in a quantitative way.
In Citigroup’s case, the bank’s debt is 260.6% of equity, which may be “normal” for a leveraged finance business like banking, but it is still a big number. And while I’m never going to say debt isn’t important, I find it less important when analyzing financial companies. Financial companies use leverage, which by definition results in a higher debt measurement.
The fact that Citigroup’s Quantum Score is in our buy zone even with its high debt is testament to strength elsewhere. One area I focus on is Big Money support, and looking at all the green buy bars below, you can see the money has been flowing in.
Source: MAPsignals.com
Citigroup also has the highest dividend yield of these four banks at 3.83%.
I’m not saying C is one of the best buys in the market right now, but it is the highest rated of the big 4 financials above.
One Maybe
Whereas Citigroup falls in our buy zone, JPMorgan Chase (JPM) misses by a sliver with a Quantum Score of 69. That’s close enough that I wouldn’t squawk too much if you want to buy it.
Sources: MAPsignals.com and TradeSmith Finance
The technicals rate higher than Citigroup at 85.3, which is in part because the year-to-date performance (all four trading days of it) is better.
I would be leery of the low Fundamental Score of 45.8. Earnings are expected to shrink 3.7% when results come out Friday, and analysts expect the bottom line to contract more than 5% for full-year 2024 earnings.
I wouldn’t necessarily sell JPM if I owned it, but I wouldn’t be a buyer here either.
Two to Avoid
I would also not buy the other two banks reporting on Friday.
Wells Fargo (WFC) checks in with a 65.5 Quantum Score, which isn’t bad. But the picture gets murkier looking under the hood.
WFC’s Technical Score of 82.4 is strong, and financial stocks do well in strong markets. But the Fundamental Score of 41.7 is the lowest of the group. Sales and earnings growth are mediocre, with earnings expected to fall in 2024 (like JPM).
Bank of America’s (BAC) lethargic 60.3 Quantum Score is the lowest of these four stocks. And while its technical rating of 70.6 is decent after the end-of-year run, the fundamentals again present headwinds with earnings expected to shrink in 2024 while sales remain flat.
I eagerly await Friday’s earnings from these four companies, not so much because I want to buy their stocks but more because of what we might learn about the economy and interest rates. C is the most attractive of the bunch with its stronger fundamentals and higher dividend yield.
In general, there are better opportunities in other sectors of the market where you can benefit from strong fundamentals and technicals, as well as Big Money inflows. When you get those three things working together, you have a high probability of making money.
Arista Networks (ANET) comes to mind, as it just hit a new all-time high today. Its Technical Score is robust but not overheated at 73.5, and the Fundamental Score blows away the banks at 87.5.
This stock is up 50% for us in the TradeSmith Investment Report. It has moved above our buy limit, but given its across-the-board strength, we may begin buying again soon. (Click here to learn more, including how to receive access to all of our recommended stocks.)
The big banks are just the beginning of earnings season, and we’ll have plenty more opportunities and dangers to discuss in the coming weeks.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
