KBWB - KBWB: Bullish On Banks Before Earnings Season Begins

2023-07-06 16:46:58 ET

Summary

• The Financials sector, led by banks, is expected to report the highest year-over-year revenue growth of all 11 S&P 500 sectors.
• Two of the five industries in the sector are projected to report revenue growth above 10%: Consumer Finance (15%) and Banks (14%), according to FactSet.
• The Invesco KBW Bank ETF is recommended for purchase due to its low valuation, bullish seasonality, and potential positive Q2 results from major banks.
• Ahead of Q2 earnings season, I outline key price levels to monitor on KBWB.

Could the Financials sector be a solid place to be this quarter and in the second half? With earnings season right on the doorstep, FactSet reports that the group, led by banks, is seen as growing revenue at the highest year-over-year rate of all 11 S&P 500 sectors. As of June 30, each of the five industries in the space is forecast to report growth on the top line. Two of the five industries are projected to report revenue growth above 10%: Consumer Finance (15%) and Banks (14%). Let’s focus on the latter.

I have a buy rating on the Invesco KBW Bank ETF ( KBWB ) as we near the upcoming earnings period and look ahead to the second half.

Q2 Reporting Season Ahead: Financials In Focus

According to the issuer , KBWB is based on the KBW Nasdaq Bank Index. The ETF will normally invest at least 90% of its total assets in the securities that comprise the underlying index. Using a modified-market cap weighted index of companies primarily engaged in US banking activities, the fund is composed of large national US money centers, regional banks, and thrift institutions that are publicly traded in the US. KBWB is rebalanced and reconstituted quarterly.

The ETF features a trailing 12-month dividend yield of 3.8% and total assets under management of $1.34 billion, per Invesco. With a 0.35% annual expense ratio , the cost is somewhat low, but it is an index strategy, and you can get lower-cost funds that are also broader. With a modest two-basis point 30-day median bid/ask spread, however, tradeability is strong, and average daily volume is more than one million shares. On valuation, KBWB features an exceptionally low 7.5 forward price-to-earnings ratio and the portfolio of banks is priced at just 1.14 times the weighted average book value of its holdings.

Digging into the allocation, KBWB features a weighted-average market cap of more than $94 billion, but there is significant mid-cap exposure, as illustrated in the Morningstar Style Box below. The fund also plots far out on the left side, indicating a significant value tilt. Elsewhere, along with a high yield, the fund has weak momentum (though I spot improving RSI readings as outlined in The Technical Take) and earnings quality is very low.

KBWB: Portfolio & Factor Profiles

KBWB is a US-centric fund with a portfolio made up of mainly the large money-center diversified banks. With just 22 total positions, paying close attention to fundamental and technical trends with large-cap banks (including the super-regionals) is key.

KBWB: Top Holdings & Exposure

Equities often endure periodic corrections in Q3, but the banking industry has historically fared well from early July through September. On a relative basis compared to the S&P 500, mid-year is a good time to go overweight KBWB, according to seasonal trend data provided by Equity Clock . This is a bullish factor to consider right now.

KBWB: Bullish Relative Inflection Mid-Year Commonly Seen

The Technical Take

With a low valuation, some seasonal tailwinds, and revenue growth expected in the upcoming second-quarter earnings season, the chart shows some signs of putting in a bottom. Notice in the graph below that the ETF made fresh multi-year lows in May with an intraday spike to $36.19. On a closing basis, the $37 to $39 range held on a retest back in June. Even novice technical analysts will spot what could be a bullish inverse head and shoulders pattern since the March 2023 regional banking turmoil (also known as a Kilroy Bottom for all you CMT students out there).

The bulls want to see KBWB rise above $44 on a closing basis, but I do see apparent resistance in the $47 to $49 zone - that is where the second-half 2022 range lows come into play as well as where the falling 200-day moving average currently stands. What’s bullish, though, is that the RSI momentum reading at the top of the graph reveals an uptrend in momentum. In fact, RSI printed a fresh rebound high above 60 just a few weeks ago. The thinking (and bulls’ hope) is that momentum should lead price, and that KBWB will soon break out through $46.

Overall, I see constructive signals on the chart.

KBWB: Bullish Kilroy Bottom Feature, Rising RSI, 200dma Lies Above

The Bottom Line

I am bullish on KBWB. My buy rating is based on the fund’s depressed valuation, bullish seasonality, and possible positive news we could hear about starting late next week when the major banks begin to report Q2 results.

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