Financials Desperately Need a 2012 Turnaround

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With 2012 just beginning, now's a smart time to gauge how the stocks you're interested in are likely to do this year and beyond. By knowing what stock analysts and fellow investors expect from a stock, you'll be smarter about whether you should buy it for your portfolio -- or sell it if you already own it.

Today, let's take a look at Direxion Daily Financial Bull 3x (NYSE: FAS  ) . As I discussed last month, the Direxion exchange-traded fund lost more than half its value in 2011 as financial stocks performed horribly. At least on its first trading day in 2012, though, the Direxion ETF gave investors some good returns. Will 2012 give investors a chance to earn some of those losses back? Below, I'll take a closer look at what people expect from the Direxion ETF and financial stocks more generally.

Forecasts on Direxion Daily Financial Bull 3x

Forward P/E for Financial Sector as Defined by S&P 11.3
Average CAPS Rating (out of 5) for Financial Services Stocks ***
CAPS Rating for Direxion ETF *

Sources: Morningstar, Motley Fool CAPS.

Will the Direxion ETF recover in 2012?
As go financials, so goes the Direxion Daily Financial Bull 3x. That's a general rule of thumb, although the triple-leveraged nature of the ETF also puts a wrinkle in the equation. After all, even when financials fell sharply last year, the bearish Direxion Daily Financial Bear 3x (NYSE: FAZ  ) lost more than 20% of its value. Volatility was the culprit there, as leveraged ETFs can see their values erode quickly in up-and-down markets.

That said, analysts have high hopes for financials this year. According to The Wall Street Journal, forecasts put Bank of America's (NYSE: BAC  ) earnings growth alone as contributing 14% of the S&P 500's entire growth for 2012, as they see its 2011 loss reversing to a much larger profit this year. A near tripling of profits at Goldman Sachs would also play a major role in pushing the S&P's total earnings higher. Moreover, with US Bancorp (NYSE: USB  ) having beaten analyst estimates in all four quarters it reported during 2011, it managed to be one of the few big banks to see share gains for the year.

But those expectations may be too high. Bloomberg reported that estimates for the six largest lenders suggest an average increase in profits of 57%. Yet those same analysts got things wrong last year, as even the relatively healthy Wells Fargo (NYSE: WFC  ) suffered double-digit percentage losses in its stock. While Wells Fargo would benefit from improving credit quality, fairly wide interest rate spreads, and continuing efforts to cut costs, you could have drawn the same conclusions this time last year.

For Direxion Daily Financial Bull 3x to thrive this year, it needs an almost straight-up move in financial stocks. Given that the ETF is designed for daily traders, it's dangerous to consider it a smart play to hold throughout 2012.

If you want exposure to only the best financial stocks, an ETF won't get the job done. Join the thousands who've already read the Motley Fool's latest special report on the financial industry to find out which banks the smartest investors are buying now. The report is free, but it won't be there forever, so check it out today.

Click here to add Direxion Daily Financial Bull 3x to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Wells Fargo and Bank of America and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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Related Tickers

10/25/2016 10:02 AM
BAC $16.75 Down -0.02 -0.12%
Bank of America CAPS Rating: ****
USB $44.11 Up +0.09 +0.21%
US Bancorp CAPS Rating: ****
WFC $45.67 Up +0.15 +0.32%
Wells Fargo CAPS Rating: ****