1 More Reason To Buy Wells Fargo, JPMorgan Chase, and Bank of America

Consumer sentiment is up, and will likely keep getting higher. Here's why the banks are the best way to play it.

Apr 22, 2014 at 12:03PM

Consumer sentiment for March was the highest it's been since last July, indicating people are now more confident about their jobs, investments, and the economy in general, so what could that mean for your portfolio? A lot of the market will benefit from the continuing U.S. economic recovery, but here's why the best way to play it is with banks like Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and Bank of America (NYSE:BAC).

When people feel more secure, they'll buy more stuff
The obvious effect of this is that retail sales will improve. When people feel more confident about the economy, they feel more comfortable spending and borrowing money. Unfortunately, a lot of retail stocks don't make great long-term investments. Their profits are difficult to predict and consumer tastes can be even harder to anticipate.

Another beneficiary of higher consumer sentiment is the banking industry, and it also might be the smarter long-term way to play it. Banks benefit from increased lending activity on everything from credit cards to auto loans to mortgages. Plus, expensive items tend to be very sensitive to consumer sentiment -- and someone has to finance these purchases. Banks will lend more, leading to more interest income and fees, so it might pay to look at some of the banks with lots of lending exposure.

Houses and cars could drive revenue higher
The biggest difference in spending could occur with sales of high-priced items such as homes and cars, because these are purchases that really have to do with how comfortable people feel in their jobs and with the performance of their investments. Auto and home sales have already been steadily improving over the past several years. Furthermore, home sales dropped drastically because of the harsh winter, suggesting there could be built-up demand going into the peak selling season, which traditionally starts in the spring.

US Existing Home Sales Chart

Wells Fargo is the leading U.S. mortgage originator, so if home sales pick up, the bank should see plenty of new business. The mortgage business of all U.S. banks has suffered lately, as higher mortgage rates have hurt refinancing activity. In fact, the largest banks have all reported about 70% fewer loan originations than this time last year. Increasing home sales, and the loans that go with it, would be a welcome change for the banks.

On the automotive side of things, increased activity is already being seen. JPMorgan and Bank of America reported higher auto lending activity for the first quarter, and Wells Fargo's auto loans are already up by 15% this year. The rising consumer sentiment indicates this trend will continue.

Credit cards
When confidence about the economy grows, we usually see increased credit card spending as people feel more certain in their ability to pay back the money they borrow. We're already starting to see evidence of this in the bank earnings.

Bank of America, for instance, reported issuing about one million new cards during the first quarter, which helped its consumer banking division generate 15% higher profits. JPMorgan Chase also reported similar trends, as the amounts charged to their credit cards rose by 10%.

Banks are a very cheap investment right now
As a sector banks are still very cheap right now. The major banks all still trade for huge discounts relative to their historic valuations, even after all of the improvements in the industry since the financial crisis.

WFC Price to Tangible Book Value Chart

These banks are making tons of money right now, and the consumer data coming out suggest that things will get even better. The lingering effects of the crisis continue to dissipate, and the sector won't be on sale forever.

The future of banking and how to get in early
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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