Tech Stocks or Banks for Better Returns?

Posted on | By Alpesh Patel OBE | 28 Comments

Tech stocks have been providing excellent returns over the last few years, especially the last 12-18 months. However, concerns over inflation have led to a slight pullback in 2021. For some, this is a sign that the tech bubble is over.

This year, banking stocks have rallied. The economies of the UK and US are both improving. And with rising long-term yields providing a safe haven for excess liquidity, banks should continue to beat their earnings estimates.

So, let’s take a hard look at the evidence. Will tech stocks still provide reasonable returns for the rest of the year? Or are bank stocks a better bet?

FTSE 100 Bank Stocks

FTSE NMX301010
FTSE 350 Banks Sector Index midline over last 12 months. Source: SharePad.

The FTSE 100 has been performing well in recent weeks, boosted by energy and banking stocks. Four of the best performing banking stocks came from the financial heavyweights HSBC (HSBA.L), Lloyds Banking Group (LLOY.L), Prudential Plc (PRU.L) and Barclays (BARC.L)

US Bank Stocks

For US banking stocks, many have suggested that they are well-positioned for the future.

Stock in UBS has outperformed the S&P 500 by a few per cent, with a 17% rise. The $1.9 tr stimulus package and the broader economic recovery will have played their part in these strong returns; however, the stock is still undervalued for some analysts.

A 27% year-on-year jump in the UBS investment bank division could translate into increased revenue jumps over the coming quarters.

Of course, UBS isn’t the only attractive US banking stock. Banks prepared for huge COVID-19 losses. However, as mentioned above, they stand to be among the biggest beneficiaries of the Joe Biden Administration relief and recovery plans.

Gerard Cassidy, an experienced and respected Wall St analyst, outlined some of the reasons why bank stocks will keep delivering over the next year. Cassidy, who covers the top 20 US banks, suggests many of them will announce significant dividend increases in 2021. Additionally, many will announce stock repurchases before the year-end.

The banking stocks that Cassidy recommends keeping an eye on over the coming year can be split into three categories: US-focused, regional, and acquisition banks.

US-focused banks, like Bank of America and Wells Fargo, make sense because they will directly benefit from gains in the US economy. Per Cassidy, some regional banks are undervalued, like KeyCorpss, Regions, and FifthThird. Finally, companies that have made acquisitions in recent years, like PNC and Truist, should accelerate growth.

Acquisitions

Indeed, acquisitions could have a significant effect on the market. Most countries are dominated by at most around five banks. After 2008, smaller challenger banks — backed by governments — were supposed to take on the big players. However, experts predict a round of acquisitions of smaller banks and fintech companies in the UK and US.

Loan Growth

While banks have been one of 2021’s success stories, one factor could help them rise even further: loan growth. Businesses and households have built up excess capital during the pandemic. Once that money is spent, banks can lend again, increasing their future returns.

Tech Stocks

CME SP500TLIT 1
S&P 500 Technology Sector Index midline over last 12 months. Source: SharePad.

While tech stocks performed excellently during the pandemic, there has been plenty of talk about corrections. FAANG stocks have had an up-and-down year, with some analysts advising caution.

Todd Gordon, the founder of TradingAnalysis.com, suggested Apple is still worth buying this year. He recommends buying if it hits $116. However, he added that with Netflix missing its target of new subscribers last quarter, the streaming stock might be worth avoiding.

Of course, because tech stocks hovered close to a bubble for many during the last year, finding value is what could provide returns. Cathie Wood of ARK Investment has highlighted several tech stocks that could give a good opportunity for investors.

Her number one tip was Pure Storage, Inc. (NYSE: PSTG), a California-based data storage company. Returns have exceeded 8.5% over the last few years.

Marco Gabelli of GAMCO Investors has also shared ten tech stocks he believes are cheap at the moment. His top tip is Diebold Nixdorf Incorporated (NYSE: DBD), an Ohio-based tech company, which has returned around 183% over the last year.

Conclusion

While the runaway returns of the post-pandemic crash are unlikely to be replicated by any sector this year, there is still plenty of value to be found. Banking stock is in a favourable spot both in the UK and across the Atlantic, which should continue.

Outside the FAANG stocks, there are plenty of companies that are providing innovation and potential growth.

We recommend a mix of tech and banking stocks, keeping an eye on some of the more resilient stocks that have been performing well over the last few years.

Alpesh Patel

Which would you invest in this year: tech stocks or bank stocks? We’d love to hear from you! Let us know in the comments section below.

Category: Alpesh Patel, Comment, Strategy

28 comments on Tech Stocks or Banks for Better Returns?

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