Provident Financial (PROV) is the holding company for Provident Savings Bank that provides community banking and mortgage banking services to consumers and small to mid-sized businesses in Southern California. Provident Savings Bank operates in “ground zero” of the housing crisis, but low-priced homes in the region it serves have definitely bottomed and are now improving, so I expect that it will continue to report improving results.
Also, as a small financial institution that must deal with the cumbersome regulations associated with the Dodd-Frank financial reforms, Provident Savings Bank is a potential acquisition target by a much larger financial institution. So PROV is the rare financial stock that I’d recommend at a heartbeat: It receives a B-rating, putting it squarely into buy territory.
Wells Fargo is a bit of a mixed bag. Overall the stock gets a C rating from me and that means it’s a hold. But there are some bright spots for the company. Earnings growth, earnings momentum, analyst earnings revisions and cash flow are all working in this stock’s favor. That’s why the stock has gained 30% in 2013 so far. However, sales growth is expected to be flat this quarter, next quarter and through the rest of the year. Until the company can post more consistent results, I would avoid this bank.
I get questions about credit card companies all the time. With all the changing rules and regulations in the industry, it’s hard to know which way is up with these companies. Here’s my take on both right now:
Capital One (COF) has some of the most recognizable television commercials and names in the business. And in the second quarter, the McLean, Virgina-based company benefitted from an uptick in consumer borrowing and a lower loss provision. However, that’s not quite enough to make me recommend this stock for new money; COF is currently a hold.
Lately, institutional investors have shied away from this conservatively-ranked stock, so COF receives a D for its Quantitative Grade. That is what’s really keeping the stock down, because the company has otherwise strong fundamentals. Capital One pulls off strong operating margin growth, earnings growth, earnings momentum and cash flow; COF receives a B for its Fundamental Grade.
Discover (DFS) is breaking through its 52-week high as we speak and gets a buy recommendation from me. The company has surprised analysts’ earnings estimates for three of the past four quarters and recently added $2.4 billion to its ongoing stock buyback program.
In addition, Discover Financial plans to start offering home equity loans very soon. While this isn’t expected to affect earnings until next year, this is just another example of how the company has kept moving forward in the credit business. I love buying good companies at 52-week highs and if you really want a way to play the financial sector, this would be one of your best bets.
The bottom line with the financial industry is that now that nearly five years have passed since the financial crisis, some of these big names have finally started to turn around. However, no matter how the sector as a whole is doing, you should continue to limit your buying to only the most fundamentally sound companies.
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