The Worst Stock I Bought This Year and Why I'm Not Selling
Not every stock has gone up in 2020.
Banks can seem like rather complicated businesses, and in many ways they are. However, the basic ideas behind the banking industry and how these businesses make their money are easy to understand. With that in mind, here's an overview of the different types of banks, some important metrics investors should know, and three great beginner-friendly bank stocks to keep on your radar.
Obviously, these are simplified definitions. Banks have many other ways to generate revenue. For example, many banks offer safe-deposit boxes for lease to their customers, and some make money through partnerships with third-party companies. However, at their core, these are the main ways that banks make their money.
Hundreds of banks trade on the major U.S. exchanges, and they come in various sizes, geographic locations, and focuses. While there are some excellent choices in the investable universe, here are three beginner-friendly bank stocks that could deliver excellent returns for years to come.
If you're looking to invest in individual bank stocks, here are a few metrics that you might want to add to your toolkit:
Banks have been one of the worst-performing parts of the stock market since the COVID-19 pandemic hit, so let’s quickly explore why they’ve done so poorly and how the pandemic could affect their businesses.
The main reason banks have done so poorly is that they could face a wave of loan defaults if elevated unemployment persists. Banks have set aside billions already this year to cover expected loan losses, but if the pandemic worsens or government support dries up, it might not be enough. In addition, interest rates have fallen to record lows as a result of the pandemic, which is bad news for banks. This is a secondary problem to the possibility of defaults, but still important to know.
It’s also worth mentioning that some parts of investment banking -- specifically trading and underwriting -- tend to do better in turbulent times. Banks like JPMorgan Chase and Goldman Sachs (NYSE: GS) that have large investment banking operations could be helped by this, while banks that largely focus on commercial banking like Wells Fargo (NYSE: WFC) could be at a temporary disadvantage.
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett is known as one of the best stock investors of all time, and for good reason. Over his past 55 years at the helm of the company, Buffett has delivered annualized returns more than double those of the S&P 500, and the investments he’s chosen for Berkshire’s massive stock portfolio over the years are a good reason why.
If you take a glance at Berkshire’s stock portfolio, you’ll notice one big trend -- Buffett has invested heavily in bank stocks. Berkshire owns stakes worth $1 billion or more in seven different bank stocks, including a very large stake in Bank of America, and Buffett called bank stocks “very attractive compared to most other securities I see” in a February 2020 interview.
While it’s not necessarily a smart idea to buy any particular stock just because a billionaire owns it (even Warren Buffett), there does appear to be some value in the banking industry in 2020. So if you don’t have much exposure in your portfolio, one or more of the rock-solid banks discussed here could be a good fit for you.
Not every stock has gone up in 2020.
The OCC cited deficient risk management practices and the inability to avoid conflicts of interest in the bank's fiduciary business.
Here's a quick overview of how this credit-card-focused bank operates.
Capital One's stock popped when positive vaccine data was announced.
Capital One is one of the biggest credit card lenders. Why is that business so appealing?
Warren Buffett loves this company and, despite it being 170 years old, American Express still has plenty of growth potential.
What is it doing right?
Capital One is more than just a credit card company.
By most metrics investors use to evaluate bank stocks, BBVA USA is not a great franchise. Yet it offers PNC several pieces the regional lender has been looking for.
JPMorgan has still managed to make good profits even during some of the toughest quarters of the pandemic, and should have plenty of growth opportunities ahead.