Banking, finance, and taxes

Financials Could Be Best Second-Half 2018 Trade: 4 to Buy Now

Lee Jackson

Published: July 27, 2018 10:25 am

Last Updated: January 11, 2020 8:18 pm

At the start of 2018, the financials lagged dramatically, but since the start of the second quarter, they have outperformed the overall market by 3.5%. Most on Wall Street attribute that outperformance to better capital market revenues and results, stronger credit profiles and solid net interest margin activity. One thing is for sure, compared to high-flying tech stocks that can he hammered 20% in one day, the top bank and brokerage stocks offer far better risk-reward now.

A new Deutsche Bank research report acknowledges the strong performance over the past three months and noted this when addressing continued gains for the sector:

From here, we continue to remain constructive given higher interest rates/stronger GDP growth, de-regulation, and follow-through from tax reform. That said, for bank stocks to outperform, we continue to believe earnings drivers will need to shift from net interest margin and credit upside to stronger loan growth and fees. Among Market Sensitives, we remain bullish on the outlook for IB fees & fixed income trading.

Citigroup

Shares of this top bank have traded down over 15% from highs posted in January. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 9.25 times estimated 2019 earnings, the stock looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program at the bank is also positive.

The banking giant reported weaker-than-expected quarterly revenue. The company’s earnings per share, however, handily topped estimates.

Investors receive a 2.52% dividend. The Deutsche Bank price target for the stock is $76, and the Wall Street consensus target is $83.77. Shares traded early Friday at $71.20.

Goldman Sachs

This company continues to be the gold standard of Wall Street banks, and it trades at a reasonable 9.35 times estimated 2019 earnings. Goldman Sachs Group, Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra-high net worth clientele, top investment banking and capital markets expertise. The firm continues to be a dominant force around the world, one of the most sought-after banks one of the very few firms that dictate who can be a client.

In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years.

Second-quarter profit surged 40% year over year, exceeding analysts’ estimates on better-than-expected revenue from every major business with the exception of trading. Three of the bank’s four main businesses all posted surprisingly strong results, thanks to higher private equity gains and fees from equity issuance.

Shareholders receive a 1.35% dividend. Deutsche Bank has a $281 price target, and the consensus target is $227.12. The stock traded at $238.50.

Morgan Stanley

This is another of Wall Street’s white-glove firms, and it may be among the best buys in the banking and investment arena. Morgan Stanley (NYSE: MS) is a global investment bank with leading positions in investment banking (M&A and equity underwriting), equity trading and wealth management, which contributes nearly 50% of firmwide revenues. The firm also has an asset management business, which adds to the lower-risk business profile the firm has pursued since the financial crisis.

Morgan Stanley crushed second-quarter profit expectations on trading and investment banking results that exceeded analysts’ expectations. Revenues climbed 12% from a year earlier and also were more than analysts surveyed by Thomson Reuters had expected.

Investors receive a 2.35% dividend. The $60 Deutsche Bank price target is less than the $61.23 consensus price objective. Shares were trading at $51.20.

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Wells Fargo

This large-cap bank is a solid value play for 2018. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The company trades at 10.85 times estimated 2019 earnings.

Shareholders receive a 2.81% dividend. The Deutsche Bank price target is $69. The consensus target is $60.91, and shares traded at $58.65.

All four of these top financial stocks are trading well below their 52-week highs, and all boast extremely reasonable valuations. They make good sense for growth portfolios looking to add solid companies that have the potential for good moves higher over the third quarter and the rest of 2018.