Despite what has been a very favorable backdrop for the top companies in the financial industry, stock performance for the first half of 2018 was less than stellar. With the same solid fundamentals in place, which include strong capital markets, rising interest rates and continued strength in investment banking, the balance of 2018 could provide investors buying the top companies in the sector some outstanding gains.
A new Merrill Lynch research report notes that the sector remains very reasonable, especially compared to other areas of the market, and the firm is positive on some of the biggest companies now.
The report noted this:
Valuations have trended lower on rising trade war risks and fears of being later in a cycle, but we still see upside from rising GDP expectations, stronger confidence/activity levels, higher interest rates, operating leverage, rising payouts, and potential de-regulation (though a bit underwhelming so far), which could lead to further improvement to return on equity and multiples. Based on this backdrop, as well as market share gains, potential operating leverage, payouts, and valuations, we favor the U.S.
Three top stocks are favorites at Merrill Lynch, and all make sense for investors looking to add financials to their portfolios. All are rated Buy.
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.
Citigroup investors receive a 1.87% dividend. The Merrill Lynch price target for the stock is $84, and the Wall Street consensus price objective is $83.77. Shares closed Thursday’s trading at $71.98.
Merrill Lynch is very positive on this European bank. Credit Suisse Group A.G. (NYSE: CS) is a Swiss-based investment and private bank that offers private banking and wealth management solutions, including advisory, investment, financial planning, succession planning and trust services, as well as financing and lending, and multishore platform solutions.
Credit Suisse also provides traditional and structured lending, payment, foreign exchange, capital goods leasing, merger and acquisition, syndication, structured finance, commodity trade finance, trade finance, structured trade finance, export finance, factoring, fund management and administration, fund design, custody, ship and aviation, securities, cash and treasury services.
The analysts see the bank as back on track and the report noted this:
Credit Suisse continues to deliver on its ambitious plans. Costs have been the big driver so far, but that would change. Moving into 2019, revenues must be the driver of profit and loss improvement. Capital ratio build is almost complete. We see bigger payouts in 2019, with a possible buyback. We will learn more at December Investor day.
Merrill Lynch has a $21.15 price target, the same as the consensus target. The shares closed Thursday at $15.67.
This stock trades at a very reasonable 9.35 times estimated 2019 earnings, and it is a member of the Merrill Lynch US 1 list. 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 are paid a 1.37% dividend. The $280 Merrill Lynch price target compares with the $276.23 consensus target. The stock closed Thursday at $233.78.
These three top picks from the Merrill Lynch analysts are all trading well below all-time highs and offer extremely favorable valuations in what is currently a fully priced stock market.