Conventional “wisdom” tells us that financial companies do better in times of higher interest rates.
And it makes sense.
Banks make money on the spread between the rates they pay and the rates they charge businesses and consumers. The higher the rates, the more room to mark them up.
In practice, though, it doesn’t always work that way. That’s why it’s better to rely on data than assumptions – even if those assumptions are rational.
Since the Federal Reserve started hiking rates last March to combat inflation, the benchmark financial sector ETF – the Financial Select Sector SPDR (XLF) – has significantly underperformed the S&P 500. Pretty much the entire time.
This is reflected in my quantitative system’s sector rankings going back to that same time. Financials are the third weakest sector since the first rate increase, beating only Communications and Real Estate.
And it’s further demonstrated by the weak Quantum Scores and depressing stock performances of the largest banks in the U.S.
That’s an average Quantum Score of 40. As a reminder, the Quantum Score is the overall ranking my system assigns a stock after daily analyzing key data that best predicts higher prices. A 40 is a no-brainer – it’s a stock to avoid.
The year-to-date performance bears that out. Shares of the five biggest banks are down 7.9% on average in 2023.
Big traditional banks are not the place to invest right now.
But not all stocks are created equal. And not all financial stocks are created equal.
The Opportunity in Non-Tech Tech Stocks
This gets us into what I call “stealth” technology stocks. Or, in the spirit of the Halloween season, we could call them “ghost” tech stocks.
These stocks are not “technically” part of the tech sector, but the business still distinguishes itself because of its technological abilities and advantages.
These stealth tech stocks offer robust growth and price appreciation potential in ho-hum industries – growth and potential that a lot of investors miss because of that industry classification.
I’ll give you a great example from my Quantum Edge Pro service.
Look up Tradeweb Markets (TW) and you’ll see it in the Financial Services sector, just like JPMorgan, Bank of America, Citigroup, and all those banks.
But it’s as much an investment in technology as it is financial services. It’s a technology company that operates in financial services.
That’s why the numbers – and the results – look so different.
Tradeweb is an electronic trading platform. When it was started in 1998, it was the first multi-dealer online trading network for U.S. Treasuries. Twenty-five years later, the company builds and operates electronic marketplaces for rates, credit, equities, and money markets.
The company developed technologies to enhance the trading process, from price discovery to order execution to trade workflows, while also allowing Tradeweb to easily scale up.
TW’s Quantum Score of 74.1 blows those bank scores right out of the water. Digging a little deeper, its stellar fundamental ranking of 83.4 significantly beats the banks’ fundamental scores right around 50. Tradeweb’s superior fundamentals come from solid earnings and sales growth and much less debt than the banks.
TW’s technical rating of 67.7 is also excellent, especially right now after many stocks have been beaten down. (Citigroup and Bank of America’s technical rating is a paltry 20.6.) You can see below in the shaded blue price area how TW pulled back a bit in the late-September selling but has since rebounded back toward 52-week highs.
Also note how the Big Money buy signals (green bars) far outnumber the sell signals (red bars). And those two sell signals we do see both preceded a bounce.
Those are all great signs and the foundation of my quant stock-picking system – superior fundamentals, strong technicals, and Big Money inflows.
The system goes through millions of data points to get there, but it works. TW has gained more than 15% in the Quantum Edge Pro portfolio in just five months, beating the S&P 500 by nearly 4X in that same time. Shares are above my recommended buy limit right now, but we’re holding for even higher prices in the coming rally.
We’ll talk more in future Power Trends about similar stealth tech investments. As the world relies more and more on technology, a company’s prowess in bring technology to even the oldest industries is becoming an increasingly important factor in identifying the best moneymaking opportunities.
Talk soon,
Editor,
Jason Bodner’s Power Trends
