We have warned of a downturn in the markets for most of the summer, and with the Chinese currency devaluation catching most by surprise, a good-sized sell-off could still be in the offing, even if Thursday brings a respite. The good news is that bear markets usually begin when the economy dives into recession. Although it is tepid, the U.S. economy is chugging along.
One area that remains very cheap on a price-to-earnings basis is the financials, and in a new research report Oppenheimer upgrades the sector to Overweight. While bond yields have rolled back over from the Chinese devaluation and global macro fall-out, the Federal Reserve could be poised to raise rates in September, and that will start them on their way higher again. Other firms also see the value in the bank stocks, and recently the analyst at Barclays was positive on earnings and other key metrics.
We screened the large cap financials in the S&P 500 and found four top companies trading under 12 times forward earnings. In a jittery market they make good sense now.
Bank of America
This stock seems to have been in the penalty box the longest and may offer investors a good entry point, trading at a low 11.7 times forward earnings. Bank of America Corp. (NYSE: BAC) reported solid second-quarter earnings that were driven by lower expenses and absence of substantial legal costs, which had strangled the bank for years. Some analysts think $2 per share earnings is not out of the question for the money center giant next year. Total 2015 earnings estimates are expected up 284% from last year.
The company is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platforms.
Many on Wall Street see it as the purest play on U.S. growth and rates among the bank’s peers, especially with most of the legal issues in the rear-view mirror. We recently covered several big banks that are trading below book value, another measure of just how cheap the sector is now.
Bank of America investors are paid a 1.16% dividend. The Thomson/First Call consensus price target for the stock is $19.26. Shares closed Wednesday at $17.52.
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