KBE: An Opportunity Amid The Global Selloff (Rating Upgrade)

seekingalpha08-06

Global markets were rocked as the Japanese Yen carry trade unwound, along with the TOPIX market's worst session since 1987.US banks succumbed to global selling pressure, with the KBE US Bank ETF down ...

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The USDJPY currency pair moved from above 160 to under 145 over just a few weeks. The TOPIX market endured its worst session since Black Monday of October 1987.  By Monday morning, European markets were firmly lower and US equity futures were 4% in the red. By the afternoon, though, markets had stabilized somewhat. The VIX Index eased from a high of 66 to the low 30s. Amid the turmoil, the SPDR S&P Bank ETF (NYSEARCA:KBE) performed in line with the S&P 500, down about 2.5%. A catastrophe it wasn’t, but the drop came after sharp losses following the July Federal Reserve meeting. I am upgrading the ETF from a hold to a buy. The fund is up just 4% from when I downgraded it to a hold back in November 2022. Today, I see a brighter future amid normalized interest rates and a yield curve that is testing the flat line. What’s more, assuming market volatility eases, 2025 could shape up as a strong year for corporate dealmaking, IPOs, and lower funding costs. US Banks Succumb To Global Selling Pressure To Begin the First Full Week of August   FinViz According to the issuer, KBE offers investors exposure to the bank segment of the S&P total market index, which comprises the following sub-industries: asset management and custody banks, diversified banks, regional banks, other diversified financial services, and thrifts and mortgage finance sub-industries. The index KBE tracks features a modified equal-weighted scheme which provides the potential for unconcentrated industry exposure across large, mid, and small-cap stocks. KBE is a moderate-sized ETF with just shy of $1.9 billion in assets under management as of August 2, 2024. It carries a low 0.35% annual expense ratio and sports a forward dividend yield of 2.71% - almost twice that of the SPX. Share-price momentum has been very strong over the past few weeks, of course, that was before the post-Fed selling event.  Still, the liquidity rating is solid with average daily volume of about 1.8 million shares and a 30-day median bid/ask spread of just two basis points, per SSGA Funds. Finally, KBE’s risk rating is poor given occasionally high volatility readings and a concentrated allocation. Looking closer at the portfolio, the 2-star, Neutral-rated ETF by Morningstar is particularly risky given its very high exposure to the small-cap value corner of the style box. That’s an area prone to cyclical risks – when the US economy enters recession, you often want to avoid small-cap value and regional banks.  But this cycle may be different, in that lower interest rates and a flatting yield curve could benefit banks two-fold: reduced funding costs (what’s paid to depositors) and a more attractive yield spread (borrowing short and lending long). Also consider the ETF’s low 12.4 price-to-earnings ratio and its solid 9.6% long-term earnings growth rate. That results in a PEG ratio of about 1.3 - indicating a solid value. KBE: Portfolio & Factor Profile   Morningstar The fund’s modified equal-weight construct means there’s an overweight to SMID-cap stocks. Indeed, regional banks comprise about three-quarters of the allocation, while Diversified Banks are just 11% of KBE today. So, while the SPDR S&P Regional Banking ETF (KRE) gets most of the press for its access to small financial institutions, KBE has nearly comparable exposure. KBE: Holdings & Dividend Information   Seeking Alpha Seasonally, we are into a bearish stretch on the calendar. It’s something I’ve been cautioning investors about over recent weeks. For KBE, August and September are two of the weaker months. The good news is that over the past 10 years, Q4 has presented an excellent tactical long opportunity. KBE: Bearish August & September Seasonality   Seeking Alpha The Technical Take KBE had been flying high through July before heavy selling pressure struck. Notice in the chart below that the fund notched fresh highs going back to before the Silicon Valley Bank crisis in March 2023 just earlier this month. Now I see a bearish false breakout since the ETF is below the key $50 to $52 range – that was an area of resistance in late 2022 and early 2023. Conditions were looking good on the rally to near $55, but with the break lower, a test of downside support just above the $42 mark could be in play. That would be an attractive area to get long, in my opinion. Also, take a look at the long-term 200-day moving average – it's marginally upwardly sloped with price above that key indicator line, which is encouraging. So, the bulls still have a grip on the primary trend, but the situation is precarious. I also assert it’s important to weigh the high amount of volume by price from the low to mid-$40s – that should offer some cushion if we see continued selling. KBE: A Test of Support at $42 Offers An Attractive Buying Chance   Stockcharts.com The Bottom Line  I have a buy rating on KBE. I see the current 13% pullback from its recent peak as a buying opportunity as the trend slowly reverses higher ahead of what should be better fundamental conditions in 2025.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457017749"}