Looking for a financial action? look no further

Ohile the financial sector has not performed as expected this year amid rising interest rates, some financial companies have outperformed the market. A slew of second quarter earnings reports have been released in recent days by megabanks with mixed results. Companies like Citigroup showed strength in quarterly results, while others like JPMorgan Chase were hit harder as recent economic uncertainty hampered progress.

But the shares of these megabanks have not been there this year. We need to dig deeper into the financial sector to find that diamond in the rough that not only withstands volatility, but thrives and reaches new heights.

Using a top-down approach, our Zacks Finance sector is ranked in the top 38% of all Zacks-ranked sectors. This sector mostly moved in line with the market, posting only a slight outperformance. However, note the favorable valuation characteristics below:

Image source: Zacks Investment Research

Within the finance sector, the Zacks Banks – West industry is currently ranked in the top 14% out of approximately 250 industries. Because it is ranked in the top half of all industries ranked by Zacks, we expect this group to outperform the market over the next 3-6 months.

Quantitative research studies have shown that approximately half of a stock’s future price movement can be attributed to its industry group. By focusing on the stocks of the main sectors, we can bring a constant “tailwind” to our investment results. Note that this group is also relatively undervalued. In addition, the industry is showing historically above-average earnings growth, net margin and sales growth:

Zacks Investment Research

Zacks Investment Research
Image source: Zacks Investment Research

Let’s take a look at a leading stock within this powerful combination of sectors and industries.

CVB Financial Corp. (CVBF)

CVB Financial operates as a bank holding company for Citizens Business Bank, a state-chartered bank that provides financial services to businesses and individuals. The Company offers checks, savings, money market and term deposit products. CVBF also offers commercial lending and consumer finance products such as lines of credit and mortgages. Additionally, through its CitizensTrust division, CVBF provides investment accounts, 401(k) plans, annuities and mutual funds. CVB Financial was founded in 1974 and is based in Ontario, California.

CVBF has exceeded earnings estimates in each of the past four quarters, delivering an average earnings surprise of 5.19% over that period. The bank holding company recently released first-quarter EPS in April of $0.31/share, a surprise of 3.33% from consensus estimates. The stock outpaces the market, returning north of 16% this year alone.

Zacks Investment Research
Image source: Zacks Investment Research

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) identifies companies that have recently experienced positive earnings estimate revision activity. The idea is that this newer information can serve as a better predictor of the future, giving investors a head start during earnings season. Combining a Zacks No. 3 or higher ranking with a positive earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

With a +5.82% earnings ESP and a Zacks Rank #2 (buy) rating, another earnings beat could be in the cards for CVBF investors when the company releases second quarter results later this week on July 20.e.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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