If any sector blasted off after the election it was banking, especially the big money center banks. While the run was outstanding, and some fundamentals like higher interest rates are a modest tailwind, the bottom line is many of the top stocks are expensive. The question for investors looking to put money into the financial sector is where to look now? One great area to look at is the large-cap asset managers, online brokers and the securities exchanges.
A new Deutsche Bank research report points out that while the strength in the equity markets, and two increases in the federal funds rates are clear positives, weaker currency trading volume and lower securities lending demand could hamper some first-quarter results. We screened the firm’s research coverage universe for brokers, asset managers and exchanges to find the firm’s top ideas. We found four that are rated Buy and remain favorites.
Many on Wall Street love this firm’s growth potential near term and especially long term. BlackRock, Inc. (NYSE: BLK) is the largest asset manager in the world, with roughly $4.9 trillion in assets under management. Its acquisitions of Merrill Lynch Investment Management (MLIM) and iShares transformed it from a fixed income manager into a multi-product and multi-channel giant, with roughly 40% of its assets under management overseas. It has leading franchises in exchange traded funds, institutional fixed income, alternatives and cash. It also operates Solutions, a leader in risk analytics.
The company’s strong historical and prospective dividend growth is underpinned by the high-quality and diversified business model. Dividends have increased 18% annually over the past 10 years. Dividend growth likely will moderate but remains solid in the low teens, consistent with expectations for earnings growth in the years ahead.
Shareholders receive a 2.61% dividend. Deutsche Bank has a $447 price objective, while the Wall Street consensus price target is $425.64. Shares closed last Friday at $382.85.
Bank of New York Mellon
This top bank stock is considerably cheaper than peers, and a solid buy at current levels. Bank of New York Mellon Corp. (NYSE: BK) provides financial products and services to institutions, corporations and high net worth individuals in the United States and internationally.
The company offers investment management, trust and custody, foreign exchange, fund administration, global collateral services, securities lending, depositary receipts, corporate trust, global payment/cash management, banking services and clearing services. It also provides mutual funds, separate accounts, wealth management and private banking services, as well as broker-dealer services and registered investment advisory services.
The analysis noted this in the report:
Expects positive operating leverage in 2017 assuming modest revenue growth & 2 Fed hikes in 2017. With an additional Fed hike, expect to capture nearly 100% of money market fund waivers. Expect investment and other income lines to be lighter than 2016 (~$60-$80 million per quarter in 2017).
Shareholders are paid a 1.6% dividend. The Deutsche Bank price target for the stock is $55. The consensus target stands at $51.67. The shares closed Friday at $47.91.
This company had a record 2016, and 2017 looks very promising as well. CME Group Inc. (NASDAQ: CME) exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options. CME Group brings buyers and sellers together through its Globex electronic trading platform and its trading facilities in New York and Chicago.
The company also operates CME clearing, one of the world’s leading central counterparty clearing providers, which offers clearing and settlement services across asset classes for exchange traded contracts and over-the-counter derivatives transactions.
The company’s non-U.S. business is growing, and with West Texas Intermediate oil increasing relevance as a global benchmark, that is another positive for the trading giant.
CME investors receive a 2.12% dividend. The $139 Deutsche Bank price target compares with the consensus target of $128.82. Shares closed on Friday at $124.59.
The iconic discount broker looks solid from a technical standpoint. Charles Schwab Corp. (NYSE: SCHW) is a leading provider of brokerage, banking and investment-related services to consumers and businesses. It has two business segments: 1) Investor Services, which provides retail brokerage, banking, advice and other financial services, and 2) Institutional Services, which provides business to business services to independent investment advisors, and to company benefit plan sponsors.
The company reported a solid quarter in January, with results that came in right in line with the Wall Street estimates. The company held its business update last week and provided financial guidance and sensitivities, as well as an update on strategic initiatives, which included cutting its commission on trade from $8.95 to $6.95, which hammered the stock.
Trading was only 11% of revenues in 2016 so the commission cut won’t have much profit and loss impact. Management offered baseline guidance for 2017, and that guidance doesn’t include an interest rate increase. Top analysts on Wall Street feel the company can generate expect 20% or more earnings-per-share growth in 2017 and 2018.
Shareholders receive a 0.75% dividend. The Deutsche Bank price target is $47. The consensus target is $46.07, and the stock closed Friday at $42.86.
These stocks may be good financials to add to portfolios in lieu of the money center banks that have run so hard. With the market very pricey, scale buying shares over three to six months may be a good strategy now.