By any measure, the financial sector is one of the cheapest of all in the S&P 500, and despite some very positive tailwinds, the sector has lagged dramatically this year. The good news for investors looking to add or increase positions in the sector is that with the stress tests out of the way and mostly positive, and the direction of interest rates pointing higher, now may be the best time to buy some of the top companies.
A new Oppenheimer research report makes the case that almost all the metrics in the financial sector point to some of the best valuations in years.
The report noted this:
Bank stocks continue to languish at about a 64% relative price to earnings, well below the 73-78% historical average even though bank balance sheets are probably less risky than any time in the past 30 years, perhaps ever. We argued in a recent industry report that bank valuations should revert to their historical levels because (1) earnings have actually been more predictable than the market, (2) they are actually poised to grow slightly faster than the market, and (3) Returns on tangible common equity are rising.
Oppenheimer is bullish on four top stocks now, and all are rated Outperform.
Bank of America
The company posted solid first-quarter results. Bank of America Corp. (NYSE: BAC) 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.
Bank of America operates some 5,100 banking centers, 16,300 ATMs, call centers, online and a mobile banking platform, and the company said it plans to open 500 new branches as it issued upbeat financial results that topped Wall Street forecasts. Revenue for the January-to-March period was higher than in the same stretch last year, too.
Bank of America investors receive a 1.6% dividend. The Oppenheimer price target is $36, and the Wall Street consensus target is $34.69. The shares closed Tuesday at $27.78.
This one may be somewhat more off the radar, but it is a top pick at Oppenheimer. CIT Group Inc. (NYSE: CIT) is a financial holding company with approximately $50 billion in assets as of March 31, 2018. Its principal bank subsidiary, CIT Bank, has approximately $30 billion of deposits and more than $40 billion of assets.
CIT provides financing, leasing and advisory services, principally to middle-market companies and small businesses across a wide variety of industries. It also offers products and services to consumers through its internet bank franchise and a network of retail branches in Southern California, operating as OneWest Bank.
Shareholders receive a 1.27% dividend. Oppenheimer has a $58 price target, and the consensus target is $56.29. The shares closed Tuesday at $50.52.
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.
Citigroup reported quarterly earnings and revenue that beat analyst expectations, as the company’s results got a boost from lower corporate taxes and strong revenue from stock trading. While revenue from Citigroup’s fixed-income trading business fell 7% in the first quarter, that was offset by a 38% hike in equity trading sales. Overall trading revenue grew by 3% in the quarter.
Citigroup investors receive a 1.87% dividend. The $89 Oppenheimer price target compares with the $83.77 consensus target. Shares closed Tuesday at $66.06.
This company continues to be the gold standard of Wall Street banks, and its shares trade at a very reasonable 9.93 times estimated 2018 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.
When reporting first-quarter results, Goldman posted the best equities trading results in three years, as the bank profited from the 2018 roller-coaster market. Revenue from equities trading surged 38% to $2.31 billion, trouncing the consensus analyst estimate. Investing and lending revenue rose 43% to $2.09 billion, also beating Wall Street expectations.
Shareholders are paid a 1.45% dividend. The Oppenheimer price objective is a whopping $304. The consensus target is $274.27, and shares closed Tuesday at $220.38.
These top 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.