The London-listed banks are not quality stocks. And they have cyclical businesses.
That makes their shares vulnerable to changes in the general economic landscape. It also makes them reactive to news, rumours, forecasts and other events.
And that’s why the failure of Silicon Valley Bank (SVB) hit bank stocks hard everywhere. After all, many investors still carry scars ‘earned’ when bank shares collapsed in the late noughties.
Why I’m avoiding bank stocks
Meanwhile, I’m not keen on aiming to pick stock bargains in the banking sector now. And there’s a good reason for that. Bank failures are common around the world.
There have been many banking business collapses. Indeed, banking companies seem to drop like flies. And they don’t always wait for a major economic crisis to do it.
Most traditional banking businesses need huge financial gearing just to turn a decent profit. And banker/economist Stefan Ingvest highlighted the point a few years back.
He served as the governor of Sveriges Riksbank, the central bank of Sweden, between 2006 and 2002. And he once wrote that banking is all about leverage.
According to Ingvest, banks are highly leveraged institutions that are in the business of facilitating leverage for others. And leverage — or gearing — is the extent to which a business funds its assets with borrowings rather than equity.
Just reading that description drives home just what a risky proposition it can be to entertain investing in bank shares. Meanwhile, the long list of banking failures stretching way-back just proves the point.
If I found bank-sized debts with any other type of business, I’d probably move on to the next stock. It seems to me that high financial gearing can add risks for investors, whatever the business. And that includes the banks.
There’s value in quality
However, bank stocks sometimes shoot back up as fast as they plunged. And they do present opportunities for investors keen on timing their cyclical moves.
On top of that, bank stocks often have a high dividend yield. And that can look attractive.
But nevertheless, instead of bank stocks, I’d use the recent wobble in the stock market to focus on other sectors. For example, Burberry (LSE: BRBY) is worth deeper research because of its quality characteristics and growth potential.
The business is a luxury international brand well known for its distinctive check signature pattern. And it sells products via directly owned stores, department stores and speciality retailers.
The firm can trace it roots back to the 1800s. But in 2017, it started a strategy to transform and grow the brand. That has accelerated under its new British CEO and creative director. Their idea is to realise the potential of the business as a top British luxury brand.
Long term, the directors reckon revenue can grow to £5bn. And to put that in perspective, revenue for the current trading year to 2 April is forecast to come in just above £3bn.
There’s distance to travel. And there’s no certainty the company will reach its goal. Indeed, one risk for investors is that the retail sector is vulnerable to the negative effects of general economic cycles.
But the business is trading and growing well right now. And I see more value in Burberry than in any bank stock.
