The year 2022 is in the rear-view mirror, and most investors are glad to see it go. While my subscribers did better than most investors, we could not aggressively get money to work and only have a handful of positions so far. I expect that to change rapidly in 2023, says Tim Melvin, editor of The 20% Letter.
One sector looks particularly attractive: Banks.
I doubt banks will get hit as hard as the broader market if we see more weakness. But any new selling will create more bargain issues for us to consider. In fact, I think we are setting up for a fantastic year for the group.
Banks are coming into 2023 with high capital levels and sparkling loan quality. So, while we could see some slowing in loan demand during a recession, it will not be a steep decline.
Unlike the broader market, banks are deeply undervalued here, and we will see positive earnings surprises as banks continue to perform better than Wall Street expects. Wall Street has been looking for banks’ earnings to decline all year, and it has yet to happen.
We will not see the type of credit problems some investors are anticipating. Instead, the credit problems that we will see will develop outside of bank portfolios. This is because the banks have focused on the higher end of the marketplace, and their borrowers tend to have good jobs and high credit scores.
If we have a mild-to-moderate recession, as I anticipate we will, then some borrowers will have difficulty making their payments. Still, these will not be the borrowers the banks have courted as customers since the Great Financial Crisis.
The non-bank and fintech lenders who have been courting near-prime and subprime borrowers with credit issues are the ones who will suffer.
Our time to get aggressive is coming. In banks, I expect favorable price conditions to develop first, and we will not be shy about putting on new positions. Make 2023 the year you learn to love market declines and use that advantage to gain massive profits in the eventual recovery.
