The Motley Fools

Why This Gold Stock Fell 15.2% in February but Is Luring Investors in March

What happened

Extending their southward-bound journey from January, shares of Yamana Gold (NYSE:AUY) fell 13.9% last month, according to data from S&P Global Market Intelligence. The gold stock has, however, kicked off March on a relatively encouraging note, gaining nearly 7.2% so far, of the time of this writing.

So what

After hitting a high of around $1,950 per ounce in early January, gold prices started to fall steadily and lost nearly 11% by the end of February. Gold is considered a safe-haven asset, which is why its price rose in 2020 when the COVID-19 pandemic shook the world. The pessimism abated as 2021 kicked off, starting with Joe Biden’s win in the presidential election that spurred hopes of a fiscal stimulus. Gold prices declined further in February as COVID-19 vaccinations rolled out and bond rates inched higher and hurt the yellow metal’s appeal against bonds as a store of value.

None of that was good news for Yamana Gold, which makes more money when gold price rises. Investors, in fact, dumped gold stocks last month and flocked to other hot sectors that were primed to benefit from an economic recovery.

Gold bars with a sock price chart in the background.

Image source: Getty Images.

Yamana’s fourth-quarter and full-year numbers released on Feb. 11 failed to lift investor sentiment. Its 2020 all-in-sustaining cost (AISC) of $1,080 per ounce of gold was at the higher end of the industry spectrum, and its other costs rose as COVID-19 restrictions in Argentina hit operations at Cerro Moro. That, perhaps, was one of the most disappointing takeaways from Yamana’s earnings report, as Cerro Moro is its lowest-cost and key growth mine. Furthermore, Yamana’s gold production outlook for 2021 and 2022 was also lower than its original guidance thanks to declining gold prices.

Now what

So with gold prices hitting a nine-month low as of this writing on the back of an exceptionally strong February jobs report, why is Yamana Gold stock rallying in March? Investors, perhaps, see an opportunity here, given Yamana’s prospects.

The miner increased its dividend by 50% in Q4 and foresees a 7.4% drop in AISC in 2021 and steady growth in gold production in the coming years. It has also started construction at Odyssey project at the Canadian Malartic mine, which it owns jointly with Agnico Eagle Mines. There’s a lot to like here, which may have fueled investor interest in the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Ulta Beauty Earnings: What to Watch

The stock of Ulta Beauty (NASDAQ:ULTA) has spent all of the past year trailing the broader market. The pandemic’s impact has been a lift for many retailers, but demand has dropped for Ulta’s skin care and makeup products as social distancing reduced traffic at its salons.

The company has a chance to upgrade that weak narrative when it reports fiscal fourth-quarter earnings in just a few days. Let’s look at what investors might expect to see in that announcement, set for Thursday, March 11.

A young woman applies makeup in the mirror.

Image source: Getty Images.

Sales will drop

Most retailing niches rebounded quickly following the temporary store closures that started a year ago. But the makeup industry has been different. In early December, Ulta announced that comparable-store sales dropped 9% in the third quarter, which ended in early November. Revenue through the first three quarters of 2020 was down more than 20%.

CEO Mary Dillon and her team said the third-quarter results were still better than they expected, thanks to a booming e-commerce segment and popular offerings like curbside pickup. Management still predicted a tough holiday quarter ahead, though, with sales likely falling anywhere from 12% to 14%. “We know this holiday season will be like no other,” Dillon told investors.

Wall Street is expecting a slightly better result this week, with fourth-quarter sales falling about 10% to $2.07 billion.

Checking up on profits

Ulta entered the holiday period in a strong inventory position, which might lay the groundwork for an earnings rebound beginning this quarter. Gross profit margin through the third quarter plunged to 30% of sales from 37% a year earlier, and the pressure pushed net profit down to just barely breakeven.

Yet the earnings outlook is brightening thanks to improving sales trends, reduced costs, and a slower store expansion pace. Ulta declined to issue a profit outlook for the period, but investors are hoping to see earnings land around $2.31 per share compared to $3.89 last year.

ULTA Operating Margin (TTM) Chart

ULTA Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.

Ulta could get a lift from higher prices, which would show up in a robust gross profit margin. It will be hard for that success to offset lower customer traffic, though.

Looking out to 2021

The ongoing pandemic might convince management to hold off on issuing its usual fiscal-year outlook, which it withdrew almost exactly a year ago. Still, investors will get some hints at Ulta Beauty’s potential in this report. A second straight quarter of improving growth might imply a big rebound in the fiscal first quarter. Strong margins and a flexible inventory position, meanwhile, should allow earnings to jump in 2021 compared to last year’s depressed result.

The big question is whether there will be any lasting negative impact on Ulta’s makeup business due to increased work-from-home trends. It’s also unclear when most shoppers will feel confident enough to linger in its salons again. That in-person creative experience was a core competitive asset for the company before COVID-19 removed it last year.

The pandemic’s impact isn’t over yet, and so investors might not hear a detailed outlook from Ulta Beauty this week. But the good news is that 2021 is almost sure to look much better than 2020 did.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Here’s My Top Stock to Buy in March

Digital ad-buying expert The Trade Desk (NASDAQ:TTD) is a fantastic deal right now. The stock’s high-octane growth in 2020 turned into a rout in the last couple of months, for all the wrong reasons. The Trade Desk is trading 33% below December’s all-time highs, and the reason for the pullback actually strikes me as a driver of future business growth.

What’s wrong with The Trade Desk?

The main knock against The Trade Desk is that online content and advertising giant Google, a subsidiary of Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), is changing the game for the ad tech industry.

Like most companies in this sector, The Trade Desk uses so-called third-party cookies to track the behavior of specific internet users across many different websites, apps, and other digital platforms. That data is then used to shape targeted ad campaigns for the company’s clients. Users and regulators around the world are demanding tighter privacy controls over how user data is collected, shared, and used. Therefore, Google is turning off the ability to track user data in this way through the market-leading Chrome browser.

This isn’t exactly new. Google started talking about third-party cookie restrictions nearly two years ago and even then, ad-targeting companies had seen them coming. Apple (NASDAQ:AAPL) turned off third-party tracking cookies in its Safari browser last year. That’s a less popular browser package, but changes to Safari also affect iPhone and iPad apps that connect to the internet. Hence, Apple’s policy change affected millions of iOS users all around the world. Google made news this week when it promised to not only phase out those irksome cookies, but also refrain from replacing them with new user-tracking technologies. The Trade Desk’s shares fell more than 12% that day.

A group of businesspeople standing on a large arrow work together to point the arrow upward.

Image source: Getty Images.

How the company can turn this threat into an asset

In the words of The Trade Desk CEO Jeff Green, “Not much has changed. But what has changed, will ultimately prove positive.”

It’s important to understand that The Trade Desk is in the business of making online ad campaigns more effective. Third-party cookies are useful for that purpose but the technology is used by every player in the industry — including each ad-buying client’s in-house ad tracking efforts. When you take that tool away, many buyers of online ad space will find it harder to make the most of their digital ad spending. Then they turn to specialists who have the experience, expertise, and alternative tools to get the job done. Many will turn to The Trade Desk first.

“If we operate in a world with less data, we’re darn good at that. Our whole system is built around making objective choices with limited data. We do that with many of the impressions we see today,” Green said in last month’s fourth quarter earnings call. “To The Trade Desk, it doesn’t really matter what the identity model or approach is. We’ll be successful regardless. In fact, I can make the case that we become indispensable in [a world without user-tracking technologies].”

Silhouette of a businessman sitting in deep thought on his briefcase.

Image source: Getty Images.

Why I think he’s right

It’s Mr. Green’s job to put a positive spin on difficult challenges, of course. His words make a lot of sense, though. Several macro trends are working together here to create a perfect storm of demand drivers for The Trade Desk’s services. Online business is surging, right alongside online entertainment. Marketing budgets formerly earmarked for cable TV, newspapers, or direct marketing mail are moving onto digital ad spaces. Growing privacy demands won’t stop companies from promoting their products, services, and brand names as efficiently as possible. More often than not, that requires support from tools like The Trade Desk’s expert campaign building platform.

And the stock took a 33% haircut in 10 weeks because many investors think that Google’s user-tracking changes will hurt The Trade Desk’s business. That’s just wrong, which makes The Trade Desk a no-brainer buy today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Shares of Kirkland Lake Gold Sank 15% in February

What happened

After sinking more than 6% through 2020, shares of Kirkland Lake Gold (NYSE:KL) have followed the same downward trajectory in the beginning of 2021. Falling 7% in January, Kirkland Lake’s stock subsequently tumbled 15% in February, according to data provided by S&P Global Market Intelligence.

Besides the falling price of gold, investors sold off shares in response to a bearish take on the stock from Wall Street.

Stacks of gold bars.

Image source: Getty Images.

So what

Since there is a strong correlation between the market price of gold and the price of gold mining stocks, it’s unsurprising that shares of Kirkland Lake slumped in February. The average price of gold last month was $1,808 per ounce, representing a 3.1% drop from the average price of $1,867 per ounce in January.

^SPX Chart

^SPX data by YCharts.

With the COVID-19 vaccine rollout ramping up last month and the fears of market volatility waning, investors seemed less compelled to broaden their exposure to gold — that “safe haven” investment.

Another catalyst inspiring investors to exit their Kirkland Lake positions last month was news that JPMorgan had initiated coverage on the stock, assigning it an underperform rating and a $44 price target. While the underperform (or sell) rating caused shareholders consternation, it seemed much more concerning considering the fact that JPMorgan, at the same time, assigned overweight (buy) ratings to several other gold mining companies: Kinross Gold, Newmont Mining, and SSR Mining.

Now what

Taking a cursory look at the recent performance of Kirkland Lake’s stock, some investors may suspect that there’s something fundamentally concerning about the company. But they’d be wrong. Rather than reflect a shortcoming in the company’s performance, the stock’s decline is largely attributable to the steep decline in the price of the yellow stuff. In fact, during its late-February fourth quarter 2020 earnings presentation, Kirkland Lake reported record annual gold production of 1.37 million ounces for 2020 and record annual free cash flow of $733 million. Consequently, investors looking to gain exposure to a leading gold mining company would be wise to consider a position in Kirkland Lake.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Looking for an E-Commerce Stock That Will Benefit From a COVID-19 Vaccine? Try Revolve Group

Most e-commerce companies got a massive boost in 2020. Etsy, Shopify, and Wayfair saw their share prices jump 100% or more in the past year due to an increased demand for online shopping. One e-commerce business actually saw significant headwinds in 2020: Revolve Group (NYSE:RVLV). The fashion retailer saw sales and revenue decline, even though it was at a clear advantage versus its brick-and-mortar competitors.

This sounds like a setup for a short pitch, but fear not, the headwinds Revolve Group faced in 2020 should turn into a major tailwind in 2021 and beyond. Here’s why the company is primed to do so well this year, and why forward-looking investors should have it on their radar.

Four women laughing and talking at a bar.

Image source: Getty Images.

2020 results

Revolve Group sells high-end fashion apparel focused on millennial and Gen Z women. All of its sales come from online sources, with a focus on dresses and other occasion-wear that people typically use to dress up for festivals, concerts, parties, and other social occasions. The company has two brands: Revolve and Forward. Revolve is the majority of the business and goes after a wider consumer base, while Forward sells luxury apparel with items regularly costing close to $1,000 apiece.

Revolve’s 2020 annual report was released on Feb. 24. Revenue was $580 million for the full year, down 3% from 2019, while total orders fell 5% to around 4.5 million. At face value, these numbers don’t look great. But when you consider the major headwind from the majority of social events getting canceled or postponed over the past year, the decline in revenue looks a lot better.

On the profitability front, Revolve Group actually grew net income by 59% in 2020 to $56.8 million. The growth came from cost savings on marketing and travel expenses as well as improved efficiencies with inventory. This is a testament to management’s ability to pivot during a crisis, likely positioning Revolve Group to come out of 2020 in a better financial position than it went in with, something many people probably wouldn’t have bet on in March of last year.

Why the future looks bright

Revolve Group is primed to get back to growth for a few simple reasons. One is the pent-up demand among young consumers around the globe to go to weddings, parties, and other occasions where they need to dress up. On the latest conference call, management said Australia, which is handling COVID-19 better than most countries and is already opening up its economy, accelerated sales growth to 30% in the fourth quarter. Israel, another country doing well with the pandemic, has seen recent growth of 50%. This bodes well for the U.S., Revolve Group’s largest market, when the economy eventually opens up later this year.

What’s more, the personal savings rate in the U.S. has soared since the shutdowns last March. Why is this important for Revolve Group? Because as more of the U.S. population gets vaccinated, the average consumer will have gathered a year of “dry powder” to spend on things like Revolve dresses. The timing couldn’t be more perfect.

Valuation

Revolve Group trades at a trailing price-to-sales ratio of 5.7 and a trailing price-to-earnings ratio of 58. This is no doubt expensive, but when you consider all the evidence that growth should accelerate in a meaningful fashion this year, the future valuation multiples don’t look that crazy. Plus, with 53% gross margins, it’s not like the profits Revolve generated in 2020 were a fluke due to a huge pullback in spending. The company was profitable in 2019 and should continue to generate cash once it gets back to growing its business sometime this year.

Overall, while most e-commerce companies will likely see growth slow in 2021, Revolve Group is in a position to capitalize from the reopening of the economy. The stock does trade at a premium valuation, which should make investors cautious. But if you believe this company can grow sales at 20% to 30% and sustain its current profit margins, Revolve Group stock could be a lot bigger five years from now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Fiverr’s Stock Jumped 30.7% in February

What happened

Shares of Fiverr (NYSE:FVRR) jumped 30.7% in February, according to data provided by S&P Global Market Intelligence.

The company, which hosts a platform for freelance services, has seen its stock scaling new all-time highs in recent months.

Casually-dressed man looking at a piece of paper while typing on his laptop

Image source: Getty images.

So what

Fiverr released its fourth-quarter and full-year 2020 earnings during the month, and announced an extraordinary year with strong growth in both revenue and active buyers. Revenue for the year surged 77% year over year to $189.5 million, with gross profit margin improving from 79.2% in 2019 to an impressive 82.5% last year. Active buyers climbed 45% year over year to hit 3.4 million as the company added 30 new categories of services in the fourth quarter.

With this addition, Fiverr now offers a service catalog spanning more than 500 categories, vastly expanding the choices for freelancers and increasing the attractiveness of its platform. Other encouraging statistics included a 20% year-over-year increase in the average spend per buyer to $205, and the proportion of high-value buyers (defined as those with annual spend per buyer of over $500) growing to represent 58% of marketplace revenue.

Now what

There’s more to come for the company. Fiverr announced the acquisition of Working Not Working, a platform that caters to high-end creative talent, in a move to go upmarket. At the same time, the company also unveiled a new subscriptions feature that forges long-term relationships between freelancers and their customers. Freelancers can now charge for ongoing work that provides them with a more stable, assured source of income, a boon for them as the pandemic has upended many lives as we know it.

Fiverr has provided strong guidance for 2021 with revenue expected to grow by 46% to 50% year over year to between $277 million and $284 million. With its recent acquisition and the introduction of a new subscriptions model, the company is positioning itself as the platform of choice for freelancers as the world evolves to a new hybrid working model.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Canopy Growth Fell 18.1% in February

What happened

Shares of Canopy Growth (NASDAQ:CGC) fell 18.1% in February, according to data provided by S&P Global Market Intelligence. The Canadian pot stock fell despite a relatively good earnings report and outlook in the early part of the month.

So why the fall? Likely, this was just a come-down after cannabis stocks soared in January following the Georgia Senate runoff, which fueled speculation about U.S. federal legalization. Canopy has a huge cash horde thanks to its big investment from Constellation Brands (NYSE:STZ), as well as some optionality in the U.S. should that happen. However, for now, the company remains primarily a Canada-focused cannabis company.

A young man holds a marijuana bud in one hand and a jar in the other in a dispensary.

Image source: Getty Images.

So what

Following the Democrats taking control of the U.S. Senate in January, there was increased chatter over pot stocks on the Wallstreetbets forum of Reddit — the same forum that caused a giant short squeeze in heavily shorted stocks such as GameStop (NYSE:GME) in late January. Not only did Canopy rise, but several of its peers did as well.

Of course, it’s ironic that so many Canadian stocks skyrocketed in January, since it’s unclear if and how they will be able to enter the U.S., if and when cannabis is federally legalized. Still, certain brokerages like Robinhood don’t give access to over-the-counter stocks, which is where most U.S. cannabis stocks trade, since they’re technically illegal businesses. That left many Robinhood traders with Canadian stocks to pick from, which ironically trade on major U.S. exchanges.

Canopy did deliver some solid results in its fiscal third quarter. Revenue rose 23% to CA$152.3 million, and adjusted EBITDA losses narrowed from CA$97 million in the year ago quarter to CA$68.4 million last quarter. While the growth was good to see, it was still a bit disheartening that the company is still losing so much money, and gross margins actually fell five percentage points, as oversupply hurt prices per gram in Canada.

The company did, however, give a long-term outlook for its path to profitability. Encouragingly, Canopy projects accelerating 40% to 50% annualized revenue growth over the next two years, as it introduces new products such as edibles and drinks. Combined with its cost-savings plan, Canopy now projects it will be operating cash flow positive by fiscal 2023 and free cash flow positive by fiscal 2024.

The stock actually rose the day after earnings, yet fell hard in the days following that, as the Reddit-fueled rally petered out, and rising long-term interest rates hurt unprofitable growth stocks.

Now what

It was a good sign that Canopy is outlining specific targets for profitability, as many of the Canadian stocks have burnt through cash trying to achieve growth, while oversupplying the Canadian market. The $1.6 billion in cash on the balance sheet is also nice.

Still, with a market cap of nearly $12 billion, even after its recent drop, Canopy still looks a bit expensive relative to its near-term prospects for profitability. Likely, in order to justify its valuation, it will eventually have to enter the U.S. market in a more meaningful way. Meanwhile, many U.S. multi-state operators are already establishing leadership positions in key states. They are also growing faster, with much better profit margins.

If your broker allows, I’d still prefer U.S. MSOs, or an ETF that tracks those U.S. companies over Canadian companies like Canopy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Norwegian Cruise Surged 30.5% in February

What happened

Shares of Norwegian Cruise (NYSE:NCLH) surged 30.5% in February, according to data provided by S&P Global Market Intelligence.

The cruise company’s stock is trading at a one-year high but is still around 50% below its pre-pandemic level of around $58 back in January last year.

Deck of cruise ship that is docked near beautiful mountains

Image source: Getty Images.

So what

Norwegian Cruise announced a downbeat set of earnings for the full fiscal year 2020, as the pandemic wreaked havoc on the cruise industry as sailings had to be halted until further notice. Revenue plunged by 80% year over year to $1.28 billion from $6.46 billion, and the company reported an operating loss of $3.5 billion, reversing the operating income of $1.2 billion in the prior year. Norwegian Cruise chalked up a huge net loss of $4 billion, though this included a $1.6 billion impairment charge.

Facing one of its toughest crises in the company’s history, the company is hunkering down for a long winter while it waits for countries to reopen their borders and for travel to be permitted once again. The good news is that Norwegian Cruises is well-equipped to ride through this crisis as it has managed to raise approximately $6.5 billion from multiple sources since the onset of the pandemic, ending the year with $3.3 billion in cash and cash equivalents. With a cash burn rate of around $190 million per month, the company still has around 17 months’ worth of cash, plus it can also continue to raise money through the issuance of more debt and stock if need be.

Now what

Investors, however, are looking past this set of poor results and are buoyed by good news surrounding the COVID-19 vaccines. With the vaccines being disseminated around the world and administered to those who need them the most, it’s a matter of time before infection rates plunge and countries feel safe enough to resume normal activities. The company is seeing strong pent-up demand for future cruises, with bookings for the first half of 2022 exceeding the record levels back in 2019.

Norwegian Cruises may need much more time to return to growth again, but at least there’s now a glimmer of hope that this harsh winter may soon be ending. Investors need to keep the faith with the company as it executes its medium-term recovery plan and readies itself for business next year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Are Pregnant Women a Big Market for Pfizer and BioNTech’s Vaccine?

Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) recently started a clinical trial testing their coronavirus vaccine in pregnant women. While this subset of the market would seem to be a minor addition to the vaccine’s potential, Fool.com contributors Brian Orelli and Keith Speights break down the clinical trial’s clear benefits for the companies in this video from Motley Fool Live, recorded on Feb. 22.

Brian Orelli: Finally, Pfizer and BioNTech had two interesting news events this week. They’re testing the vaccine in pregnant women in a clinical trial, and then they submitted stability data to the FDA so their vaccine can be stored at negative 25 to negative 15 degrees Celsius, that’s basically your standard freezer. They showed that it was stable for two weeks at that temperature, so you wouldn’t have to have it on dry ice or in the big negative 80 degree freezers. Which one do you think has a bigger impact on sales, the pregnant women or the stability?

Keith Speights: Assuming everything goes well, the ability to vaccinate pregnant women would probably be the bigger financial catalyst there. I was trying to look, I was curious about this, how many women are pregnant at any given time in the U.S., and best data I could find was around 6 million pregnancies in the US. If you did some back-of-the-envelope calculations, 6 million times two doses times say $20 a dose, that’s around $240 million potential market in the U.S. Obviously, Pfizer wouldn’t get all of that. But that’s not an insignificant amount of a market to go after. If you expand our horizons through the entire world, the best data I could find, I’m not sure how reliable this is, but roughly 148 million pregnancies at any given point in time globally, so that’s a much larger potential market. Again, Pfizer wouldn’t be able to get all of that market. But I think that’s a bigger financial opportunity.

I’m not sure what the sales impact might be on the new storage requirement. It’s obviously good news for Pfizer, but I don’t think it will have any impact this year necessarily because they’re already selling all the doses they can make. But maybe going forward, it will give them a slight advantage. I do think they’re going to come out with more news probably later this year that will address some of the ultra-cold storage requirements even more effectively. But picking between those two, I would say the ability to vaccinate pregnant women is the bigger deal for Pfizer.

Orelli: Yeah, I would agree, although I think that the storage is probably going to be helpful in competing on the long term with Moderna because I think that it will give the ability to give the shots in pharmacies, which don’t necessarily have a negative 80 degree freezer but almost certainly have a regular normal freezer because they’re storing other drugs that way. I think that the stability for two weeks there will be enough time with proper planning for pharmacies to be able to give the Pfizer vaccine.
So long-term, I think that probably shouldn’t be underestimated on the ability to competing with Moderna having the ability to store in the freezers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Bank of America, US Bancorp, and Synovus Financial Rose More Than 13.7% in February

What happened

Shares of Bank of America (NYSE:BAC), US Bancorp (NYSE:USB), and Synovus Financial (NYSE:SNV) rose 17.1%, 16.7%, and 13.7%, respectively, in February, according to data provided by S&P Global Market Intelligence. All three banks had released their fourth-quarter reports in late January, and there wasn’t much company-specific news during February. The big monthly move was therefore largely due to the same macroeconomic factors.

The gains were no less intriguing, however, and if the economic picture continues to improve along the same lines, more gains could be ahead for these rock-solid bank stocks.

Bank exterior with columns and the word bank on it.

Image source: Getty Images.

So what

The common thread among these three banks is their dependence on interest rates and the yield curve. While the biggest U.S. banks are largely diversified among lending, investment banking, sales and trading, and wealth management, Bank of America is perhaps the most sensitive to straight-up lending among the four largest U.S. banks.

US Bancorp and Synovus also make a large part of their revenue from commercial banking and lending, though each has different proportions of different types of loans, spread across consumer loans, business loans, and commercial real estate. Synovus has a higher proportion of potentially problematic commercial real estate loans than the others, which is perhaps why it increased less than the other two bank stocks.

Still, a large part of each of these banks’ revenue comes from loans and fee-based revenue linked to spending on things like credit cards and debit cards, making them sensitive to overall economic conditions. And the economic outlook for the U.S. improved greatly throughout February.

Most notably, it appears the economy is headed toward a faster reopening than previously thought. The Biden Administration is ahead of its goals to administer 100 million vaccine doses in its first 100 days; in fact, after the recent approval of the Johnson & Johnson (NYSE:JNJ) vaccine, the administration has moved the timetable for vaccinating all Americans to the end of May, from the original target date at the end of July.

In addition, it appears Congress is on track to pass the $1.9 trillion American Rescue Plan, which will inject much-needed stimulus into the economy while it’s still partly shut down, and should ensure a speedier recovery once things reopen.

A faster reopening with more government stimulus has recently led to an increase in long-term bond rates, a benchmark against which many banks peg their loan rates. Yet at the same time, the Federal Reserve has pledged to keep short-term interest rates at zero for the foreseeable future, until the economy is back to full employment and inflation gets back to its 2% goal.

Since banks “borrow short term” and “lend long term,” a steeper yield curve should lead to expanded net interest margins for lenders. Given the loan-heavy makeup of all three banks, it’s no wonder that these three stocks rose in February.

Now what

There are also reasons to think that the recent moves upward in these bank stocks could continue.

First, thanks to fiscal stimulus and increased unemployment benefits passed throughout 2020, bank loans have held up largely better than many had thought at the beginning of the pandemic. In response, the Federal Reserve announced in late December that it would begin allowing banks to repurchase their shares once again, should the banks meet certain benchmarks for soundness. More share repurchases should help boost bank earnings, as share repurchases increase per-share earnings going forward, given the same amount of net earnings.

Second, banks are generally value stocks that trade at lower earnings multiples compared with much of the market. Rising long-term interest rates also mean investors will have to discount future earnings more than they did when long-term rates were lower. That means investors may gravitate more toward cheaper stocks that make more profits today, but may have lower growth, relative to the high-growth but unprofitable tech stocks that dominated 2020. In fact, we’ve already seen this shift begin in recent weeks:

^NDXT Chart

^NDXT data by YCharts.

Despite their recent moves, it’s quite possible bank stocks will continue to outperform in 2021 as the economy gets back to normal. For loan-heavy, economically sensitive banks, the economic reopening combined with fiscal stimulus is a recipe for continued gains in 2021.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.