One of the few sectors that enjoys rising interest rates is the financial sector. When the Federal Reserve said recently that there would be no additional interest rate hikes this year, the KBW Bank Index (BKX) was knocked down to the tune of almost 8%, which moved the overall sector into almost panic valuation territory.
While that is bad for current holders of the big money-center banks and investment banks shares, it may be just the move for those looking to enter the sector or add to holdings.
A new Oppenheimer report makes the case that no further rate hikes for the foreseeable future will have an impact to be sure, but the recent price decline somewhat takes that into consideration, and the banks are now in much better balance sheet shape. The report noted this:
The industry is not anywhere near distress. While it is a commonplace that it is “late in the cycle,” we believe the industry’s financial condition has never been better. Asset quality is structurally better than in past cycles as the Comprehensive Capital Analysis and Review (CCAR) and other changes have forced banks to systematically de-risk their balance sheets. Despite our modest earnings estimate reductions for 2020, our target prices actually go up from our last industry because the market multiple increased from 15.4x to 16.7x. Otherwise, we have kept our relative valuations unchanged.
The Oppenheimer team continues to recommend seven outstanding stocks, but here we focus on four with the biggest upside to the firm’s price targets, which were lifted recently.
Bank of America
The company posted solid fourth-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. It said its quarterly profit tripled to a record of $7.3 billion. The bank also says it bought back $26 billion in common stock. A strong performance from the company’s consumer banking business, as well as lower corporate taxes, helped drive Bank of America’s earnings.
Bank of America investors are paid a small 2.2% dividend. The Oppenheimer price target for the shares is $40, and the Wall Street consensus target was last seen at $33.33. The stock closed Tuesday at $27.21 per share.
This top bank stock has rallied back nicely from the December lows. 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 8.1 times estimated 2019 earnings, this company looks very reasonable in what remains a pricey stock market. A continuing stock buyback program at the bank also is a positive.
Citigroup investors are paid a 2.94% dividend. Oppenheimer has placed a huge $99 target on the shares. The posted consensus price objective is much lower at $77.15. The stock closed trading at $61.22 a share on Tuesday.
This stock trades at a very low 7.87 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 also has maintained a leading market share over the past 25 years. The firm generates significant revenues from its investing, lending and FICC businesses, and it is focused on growing its investment management business.
Goldman Sachs shareholders are paid a 1.68% dividend. The $312 Oppenheimer price target for the stock is well above the posted consensus target price of $230.55. The shares were last seen trading at $190.69 apiece.
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.
The shares were hit in January when the company reported very poor earnings, especially compared to its industry rivals. Fixed income trading revenue sank 30% to $564 million, and equity trading revenue was flat at $1.9 billion. Investment banking revenue was flat at $1.4 billion. Wealth management revenue fell 6% to $4.14 billion. Investment management revenue did grow 7% to $684 million, a solid positive.
The company attributed the weak trading results to market volatility and the drop in wealth management, which had been a strong segment, due to a difficult environment, seasonality and certain compensation-related items. With the strongest first quarter for the equity markets since 2012, shares could be ready to rebound on improved business conditions.
Morgan Stanley investors are paid a 2.87% dividend. Oppenheimer has a price target of $61. The consensus price objective was last seen at $52.07, while the shares closed most recently at $41.88.
Shares of all four of these top companies are trading well below the 52-week highs, and all boast extremely reasonable valuations. These stocks make good sense for growth portfolios looking to add solid companies that have the potential for good moves higher over the rest of 2019.