This could be the time to buy bank stocks as the sector could be poised for a strong seasonal rebound.
The sector contains some of the best loved names for retail investors, but has lost favour due to worries about a domestic recession and slowing earnings growth from stricter bank regulations.
But analysts from Macquarie Group Ltd (ASX: MQG) believe the underperformance is about to end as the best time to buy bank stocks is ahead of their dividend payments.
Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX:NAB) and Bank of Queensland Limited (ASX: BOQ) will trade without their dividend entitlements in November.
The broker noted that big banks typically outperform the market by between 2% and 4% in the weeks leading up to their ex-div date.
However, Macquarie noticed that the rally for the banks is happening earlier in recent times with the stocks peaking a few weeks before they trade ex-div.
While stocks tend to fall after the ex-div date, other research has shown that the underperformance does not tend to last for long.
This is why investors should buy these stocks now as bank stocks have underperformed the broader market and are trading at valuations not seen in a long while.
As next month's ex-div dates draw closer, investors will find the high dividend yields offered by the sector too hard to ignore and that will provide the catalyst for the sector, according to Macquarie.
This doesn't apply to Commonwealth Bank of Australia (ASX: CBA) as the stock went ex-div in August.
ANZ Bank is the worst recent performer, with the stock shedding a quarter of its value over the past six months. Westpac is not far behind with a 23% drop, while NAB is down 21% and Bank of Queensland is 16% weaker.
In contrast, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 12.5% over the same period.
"The recent sell-off in the banks presents substantial opportunity," Macquarie wrote in a research note. "We believe the upcoming dividend will act as a catalyst for investors to trade on the attractive valuations."
Some believe ANZ Bank has the most room to rally as it lags the sector and presents the highest forecast dividend yield that sits around 10% if franking credits are included, but I think its lower relative valuation reflects its higher risk profile compared with its peers.
I think NAB makes a better alternative on a risk adjusted basis but it is probably a wise strategy to spread your capital out among two or three of the banks.
But banks aren't the only high yielding stocks worth considering. There is another enticing income stock that the Motley Fool has uncovered.
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