I do understand the urge to get back into a sector and recoup losses—and the current dangers of the financial sector. Today, the financial sector is leading Wall Street with a 1% gain. Top performers include Morgan Stanley (MS), Wells Fargo (WFC), Moody’s (MCO) and Ventas (VTR).
However, investors have been hurt by a number of false rallies in banking stocks over the last five years and I don’t want that to happen to you, so we’ll dive into three distinct area of financials and see if there are any safe ways to invest.
Join me in this in-depth look at seven companies and the financial sector in today’s blog.
Let’s start with major diversified financial stocks. These companies aren’t just banks because they are involved in just about every aspect of the financial sector. The key here is that it isn’t just about getting people to open savings accounts.
Bank of America (BAC) is a cautious buy right now. Before I make a single stock recommendation I put the stock through rigorous fundamental screens to make sure it has a solid foundation that protects it from market volatility.
For the past few years, BAC had been stuck in sell territory. However, towards the end of 2012, there was a surprising uptick in buying pressure, so much so that BAC now receives a B for its Quantitative Grade. However, the company is not completely out of the water yet. On the fundamentals side, BAC fails in three crucial categories. The company is not growing its sales or margins and its return on equity leaves something to be desired. But in the past quarterly announcement Bank of America did firm up earnings growth and its track record of beating analyst estimates. So BAC receives a B for its Fundamental Grade, making it a B-rated buy overall.
Citigroup (C) is another diversified financial company that has made 2013 its comeback year: The stock has gapped up 30% since the New Year. But there is still plenty of room for improvement: Citigroup has been able to get earnings growth and cash flow moving in the right direction, but is still lacking the sales growth and return on equity it needs to recover in full force.
Notably, Citi holds more Spanish debt than any other U.S. bank, and it was hit particularly hard during the 2008 financial crisis. But the analyst community does expect that this year will hold better fortunes for Citigroup; the consensus calls for 27% earnings growth this year and modest revenue growth.
JPMorgan Chase (JPM) has become the largest bank in the United States in terms of assets; it currently boasts a $2.3 trillion portfolio. This has been a mixed year for JPM, which has spent one month at a sell, several months at a hold, and the past few months as a buy. Lately, buying pressure has improved to the point where JPM receives an B for its Quantitative Grade.
Meanwhile, the company has succeeded in ironing out some of the kinks on its balance sheet. JPM receives strong ratings for seven of the eight fundamental metrics I graded it on, including earnings growth, cash flow and return on equity. JPMorgan receives a C for earnings growth, and with analysts expecting profits to fall 4.3% this quarter due to rising interest rates, that won’t likely change anytime soon. Even so, JPM receives a B for its overall Fundamental Grade.
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.
If you have more questions about the market, stocks or anything in between, visit me on Facebook or Twitter. I promise you’ll find a talkative group of investors who don’t pull any punches when it comes to finding, analyzing and talking about stocks and the latest economic developments. It’s fun, it’s easy to get started, and I’d love to see you join in the conversation.