Fortune - USA (2020-12)

INVESTOR’S GUIDE • STOCKS FOR 2 021

stantial returns.

Several factors are trending in banks’ favor.

A strengthening economy should gradually

lift rates, boosting “net interest income”—the

spread between what banks charge on home

and credit card loans and what they pay in

interest on deposits. And the Big Four have

been posting steady earnings even after taking

charges for pandemic-struck loans. Owing in

part to a new accounting rule, from January

to September, the Big Four booked $62 billion

in provisions for bad credit, covering all the

COVID-induced losses they’re expecting. The

good news: “Unless the U.S. goes into another

steep recession, losses should remain at much

reduced levels,” says Charles Peabody, chief of

boutique research firm Portales Partners.

Bank of America is particularly likely

to gain from a rising economy, because it’s

focused more on the consumer than on invest-

ment banking or trading. In the third quarter,

falling rates cut BofA’s net interest income by

$2.1 billion, or 17%—but the bank still posted

$4.9 billion in profit. It reckons that every one-

point rise in the 10-year Treasury yield swells

its pretax earnings by $3.34 billion. Peabody

thinks BofA’s consumer-heavy mix is super-

well positioned for the recovery. “This rebound

is more about Main Street than Wall Street,”

he says, driven by demand for credit cards and

mortgages. And at a P/E of just under 8 on

2019 profits, BofA is cheaper than JPMorgan.

Wells Fargo is a chancier bet. The bank

has been suffering from costs associated with

sales increases in recent quarters, Keith says, and the company has

shed older brands like Nautica and Reef in recent years to stream-

line its offerings. Keith also believes VF’s recent $2.1 billion acqui-

sition of youth-favorite streetwear brand Supreme is a potential

accelerant for the company’s growth.

Katie Koch, cohead of fundamental equity at Goldman Sachs

Asset Management, believes that among younger consumers, experi-

ences like concerts and travel matter more than retail therapy—and

once a vaccine arrives, businesses that specialize in such experiences

could boom because of pent-up demand. That would be music to the

ears of Live Nation, the concert and event behemoth that owns the

likes of Ticketmaster. Live Nation’s revenues are down nearly 60%

in the past 12 months, and with no clarity on when live events might

get the all-clear, Wall Street expects earnings to stay depressed in

2021. But Koch says the company has the “balance sheet strength to
      make it through a continued, protracted shutdown.” For events can-
      celed because of the pandemic, over 80% of Live Nation’s customers
      opted to hold on to their tickets instead of getting a refund. To Koch,
      “that’s just a great data point that people are committed.”

B ANK STOCKS

The pandemic chased investors away, but profits have

stayed steady for many of the “Big Four.”

N

O GROUP OF COMPANIES is a better proxy for the

health of the economy than the four giants of

financial services: JPMorgan Chase, Bank of

America, Wells Fargo, and Citigroup. So far, the

market’s comeback has mainly bypassed the Big

Four. Since Jan. 1, while the S&P has risen 10%,

they have lost an average of 22%. But that has left their stocks so

cheap that if their profits rebound, investors could pocket sub-

ESTIMATED GROWTH IN OPERATING EARNINGS PER SHARE, BY S&P 500 SECTOR, 2020–21

–8.5% REAL ESTATE

S&P 500

ALL SECTORS

37.9% SOURCE: S&P DOW JONES INDICES

THE ENERGY SECTOR’S EPS GROWTH IS NOT

AVAILABLE AS IT GOES FROM NEGATIVE TO POSITIVE.

INDUSTRIALS

CONSUMER DISCRETIONARY

MATERIALS

HEALTH CARE

COMMUNICATION SERVICES

INFORMATION TECHNOLOGY

FINANCIALS

UTILITIES

CONSUMER STAPLES

100.7%

56 .0%

40.5%

29.8%

28.5%

24.3%

23.1%

10.5%

4.1%

MAKING UP FOR LOST TIME

Analysts expect hefty profit growth almost across the board in 2021, as the economy

gets back up to speed.