Large Cap Banks Highlight Jefferies Top Post-Brexit Buy List
If any sector has been bashed as a result of the Brexit vote it is the financials, and if you toss in sliding interest rates, now at their lowest in years, into the mix, the sector looks even more beaten up. The bottom line for investors is every time we have a headline issue that moves markets lower there is opportunity somewhere, and finding that opportunity can make for some solid portfolio gains for patient investors.
In a recent research report, Jefferies, like many firms we cover, are having their analysts look through their coverage for stocks that look particularly appealing due to the Brexit anxiety, which seems to be rearing its head again. We found four large caps that look like solid choices now, including three top financials.
This is the old financing arm of GM that was known before the great recession as GMAC. Ally Financial Inc. (NYSE: ALLY) has been rebuilt into a stronger and more solvent Internet-focused bank with no brick-and-mortar locations. Its customers do their banking solely through the bank’s website, its mobile application and automatic teller machines.
Jefferies feels that in comparison to peers, though few are actually structured like Ally, the stock is very cheap. Trading at a low 7.04 times estimated 2016 earnings, and at a less than one times book value, the analysts think that there is room to run. Most on Wall Street feel that the stock should trade more like 1.25 times book value. And they feel that the bank is moving away from a dependence on GM and into a more balanced operating structure, which is good for long-term strategy.
With the capital structure optimized and management having diversified the origination’s platform ahead of expectations, the stock has tremendous value at current levels. Toss in a larger dividend increase and share buyback programs than Wall Street expected, and all systems seem to be go.
The Jefferies price target for the stock is $28. The Thomson/First Call consensus target is $24.67. Shares closed on Wednesday at $15.73.
This company, like other major defense prime contractors, had a very solid year and makes the US 1 List at Merrill Lynch. General Dynamics Corp. (NYSE: GD) is a worldwide aerospace and defense company, and it has over 96,000 employees worldwide. General Dynamics operates through four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. The U.S. government is its largest customer, which could continue to bode well if Congress does not change hands.
General Dynamics stock has awarded its investors with returns of about 160% in the past decade, and it posted outstanding third-quarter numbers on solid execution across the board. The company pays regular dividends and has a share repurchase plan in place. This is an outstanding stock for long-term growth portfolios.
The company reported outstanding first-quarter numbers with higher-than-expected revenue and net income after a strong first quarter for its marine systems division. Net earnings rose to $717 million, or $2.30 per share, from $716 million, or $2.14 per share last year. Revenue fell to $7.72 billion but exceeded analysts’ consensus estimate.
General Dynamics investors are paid a 2.2% dividend. Merrill Lynch has a $167 price target, while the consensus estimate is at $161.87. The stock closed most recently at $138.89.