January 29, 2025
The Secret Outperformer in a Mad Market
Dear Subscriber,
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| By Sean Brodrick |
Did the market’s rollercoaster ride this week give you the heebie-jeebies? I’ve got a cure … and it’s not more cowbell. It might even be an Rx for riches.
The market swooned on Monday, pummelled lower by the news that a Chinese AI company built an AI model, DeepSeek, for much less than its U.S. counterparts … and one that uses less energy, too. This has panicked many investors.
I think both the selling hysteria and the DeepSeek hype are overdone. I guess we’ll see.
In the meantime, why not buy something that’s shrugging off the China AI news and making new highs?
I’m talking about financials. Here’s a chart of the Financial Select Sector SPDR (XLF), a basket of the leading banks.
That breakout gives us a target on the XLF of at least $70 — a nice move when certain tech stocks are melting down.
Financials are rallying due to a bullish combo of easing inflation, potential interest rate cuts and strong bank earnings.
Part of it is cyclical. So, we’re riding this trend in Supercycle Investor.
Part of it is action by the new Trump administration, including looser regulations and more M&A opportunities, which is lighting the fuse under these stocks.
And here’s something else …
The real opportunity is in SMALLER financial stocks — regional banks, mortgage companies, payday lenders, etc. Let’s look at a chart of the SPDR S&P Regional Banking ETF (KRE).
You can see that the KRE isn’t making new highs … yet. But powerful forces are lining up to turn the KRE rally into a gold rush. These forces include:
- Cheaper money for customers. Regional banks often serve smaller businesses than the big banks, and these small businesses get squeezed by higher rates. President Trump has made it clear that he wants lower interest rates, which should make it easier for those companies to borrow. That, in turn, should boost business for regional banks.
- Moderating inflation. Inflation is something that generally hits smaller companies harder than big companies. With inflation under 3% now, that takes some wage pressure off Mom-and-Pop outfits.
- Banking deregulation. Again, this is good for the big banks and potentially even better for the smaller banks. President Trump hates government regulation of private business. During the campaign, he promised to repeal 10 U.S. federal regulations for every new one imposed, adding, “We’ll be able to do that quite easily.”
Whether he hits that number or not, we’ll likely see less regulation. We may also see the better regional banks merge or get scooped up by the big fish. Either one boosts the share prices of the acquired companies.
Before you pull the trigger, consider that some regional banks may see weakness in their Q4 numbers, which will come out soon. That may trigger some selling.
On the other hand, FactSet reports that the Regional Banks sub-industry is projected to report year-over-year earnings of $3.1 billion compared to a year-ago loss of $3.8 billion. That’s a nice shift.
It’s perfectly logical to buy the KRE, with a price target of $82 — 30% higher than recent prices.
The KRE also sports a dividend yield of 2.59%, more than double the recent S&P 500 dividend yield of 1.27%.
That’s a comfortable return when tech hedge fund managers are shaking in their Ferragamos. And it will probably catch the mass herd of investors by surprise.
For real outperformance, you should roll up your sleeves and dig into the best regional banks.
All the best,
Sean
P.S. Of course, the rest of my colleagues aren’t ignoring this tech conundrum either. In fact, Weiss Ratings is putting on a special Tech Alliance Summit in just a few days. To make sure you have your seat at the table, click here.
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