Earnings season will kick into full gear next week and despite this quarter's rally in bank stocks, we believe there remains upside in select names. Since the Best Ideas publication on Dec. 19, the Nasdaq Bank Index has increased 18.5% versus our selections which increased 18.2% on average.
The lift in financials has been primarily driven by multiple expansion, in our opinion. Breaking down the components of the KBW Bank Index (24 regional banks) since year-end, the average earnings-per-share estimate for 2012 and 2013 has decreased by 3% and 2%, respectively; however, the average price/earnings multiple has increased 27% and 25%, respectively. The group currently trades at 10.5 times 2013 consensus estimates versus 8.7 times at year-end. Over this same period, the 10-year treasury yield has increased 11.2% to 2.19% as of April 5, from 1.97% as of Jan. 3.
Our revised Best Ideas consists of six stocks that we believe have the best prospects to generate outperformance headed into earnings. We believe our selections are well diversified with key themes including: change in corporate structure, return of capital, cost-cutting initiatives, increased profitability, organic growth and credit leverage.
Headed into first-quarter earnings we are recommending clients own our Best Ideas including: Investors Bancorp (ticker: ISBC); Old National Bancorp (ONB); PNC Financial Services Group (PNC); Susquehanna Bancshares (SUSQ); UMB Financial (UMBF); and Western Alliance Bancorp (WAL). Our best ideas are all Buy-rated and have an average upside of 10.7% over the next 12 months.