Rates Are Going Higher: Why Top Financial Stocks May Be the Best Q4 Buys

Print Email

The divergence between emerging markets stocks and bonds and developed market securities is wide and could get wider if the Federal Reserve continues to raise rates as expected. One sector that could benefit more than most is the financials, and with the third quarter almost in the books and investors turning their attention to the final three months of 2018, it makes sense to add some of the top stocks to growth portfolios.

With the Federal Reserve deleveraging the huge balance sheet it amassed over the many years of quantitative easing, many of the top U.S. banks look to be in good position to capitalize. Plus, with rates going higher, especially on the short end, the ability to increase gains on net interest margins looks solid.

We screened the Merrill Lynch research database looking for financial stocks rated Buy that pay dividends. We found four that look like great portfolio additions now.

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.

Citigroup investors are paid a 2.55% dividend. The Merrill Lynch price target for the stock is $84, and the Wall Street consensus price objective is $83.52. The stock traded early Thursday at $71.40 per share.

Goldman Sachs

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.

Goldman Sachs shareholders are paid a 1.4% dividend. Merrill Lynch has a $280 price target on the stock, and the posted consensus price objective is $276.23. The stock was last seen trading at $229.60 a share.