by Dan Burrows | August 22, 2014 11:52 am
Cheap stocks are easy to find if you know where to look, and thanks to the continuing hangover of the financial crisis, the financial sector is loaded with them. Both in the U.S. and abroad, with mega market caps and modest ones, financials offer abundant opportunities to find cheap stocks going for less than $15 a pop.
Even more importantly, these cheap stocks are cheap stocks by valuation too, with discounted price-to-earnings (P/E) multiples and price-to-book (P/B) ratios, too.
We scoured the market for cheap stocks among the financials, looking for low share-price and valuation characteristics. Surprisingly, we turned up stocks as disparate as U.S. regional banks to some of the biggest lenders in Europe.
But one thing these stocks all have in common is the potential for price appreciation. Here are five cheap stocks in the financial sector worth buying (prices are from intraday trading as of publication on Aug. 21.):
SAN Stock Price: $9.79
With a market cap of $116 billion, Spain’s Banco Santander (SAN) is the biggest bank in the eurozone and one of the biggest in the world, but the stumbling recovery on the continent was hurting shares.
Not anymore. SAN is up 8% for the year-to-date, and this cheap stock has more upside to come.
Spain’s biggest lender has been writing off billions in bad loans for sour real estate, and there are likely more to come, but the bank’s balance sheet is strong and it has an enviable capital position. Indeed, Banco Santander was a standout in European financial sector stress tests.
Best of all, SAN stock price of $9.79 makes it easy for retail investors to build a position. SAN’s valuation is also compelling. Shares go for 12 times forward earnings (P/E), which is historically cheap for the financial sector. The price-to-book (P/B) is a healthy and reasonable 1.2. The dividend yield of 6.4% is terrific, too.
BBVA Stock Price: $11.99
Banco Bilbao Vizcaya Argentaria (BBVA) is another Spanish lender that was laid low for a time by the economic implosion overseas, but business is back and soon the stock price will be too.
BBVA is off 3% for the year-to-date, hurt partly by its exposure to Russia, but other geographical areas remain healthy. Indeed, BBVA gets the vast majority of its profits from overseas holdings far from Europe, notably Latin America.
BBVA is a great play on Mexcio, where gross domestic product is expected to accelerate from as much as 4% this year to 4.2% in 2015. BBVA also has extensive operations in the hot economies of Chile, Colombia and Peru.
And there’s no doubt BBVA lands on a list of cheap stocks. Shares fetch just 14 times forward earnings, which is a good deal for a financial sector stock. The P/B is likewise attractive at 1.2. And the dividend yield of 7.1% is hard to beat. BBVA won’t linger on a list of cheap stocks for long.
ING Stock Price: $13.60
Like BBVA, this Dutch financial supermarket is a beaten-down buy. Shares in ING Groep (ING) have bounced around in a tight range all year, leaving it down 2% YTD — for now. The Netherland’s biggest bank by assets is about to come out from under state government support, and that will let the stock breathe.
Once one of the biggest lenders in Europe, ING fell apart during the financial crisis. But after shedding and selling assets, it has transformed it self into a smaller, simpler and more nimble enterprise.
True, really big upside in ING stock might be limited by the the hangover of the financial crisis, but disbursing 40% to 50% of net operating profit should keep investors plenty happy.
For the longer term, ING stock has room for multiple expansion. The forward P/E is 8.5, while the P/B is a discounted 0.8. And once the dividend comes back, that will open the stock to equity income investors and funds. That demand alone should lift ING out of the realm of cheap stocks.
KEY Stock Price: $13.60
KeyCorp. (KEY) was laid low during the financial crisis, as lax lending standards and a loss of focus led it to take a $5 billion bath for bad loans.
Since then, however, the bank has remade itself into a leaner operation with tougher standards and a renewed focus on being what it really is: a regional bank.
KEY stock is up a tiny 1% for the year-to-date, but a return to higher earnings should allow for multiple expansion. KEY is expected to post a profit drop in the current quarter, but after that it’s all accelerating growth on the bottom line.
Shares cost less than $15 a pop, so that makes it easy to build a position in KEY as a retail investor. The P/E of 13 and P/B of 1.2 are bargains too. And, at 1.9%, the yield on the dividend has room to grow.
RF Stock Price: $10.06
Regions Financial (RF) is another regional bank stock that hasn’t done much in the year-to-date, but cheap shares and rising profitability will soon take care of that.
RF stock is being held back by a softer mortgage market, and there’s no telling when that will end. But other areas of the business are doing just fine thanks to a pick up in the economy, especially in the Southeast where RF operates.
Higher net interest income and the promise of higher interest rates are also tailwinds. Then there’s RF’s cost cuts, which are serving the company well until it can start growing the top line again. Indeed, RF is expected to increase earnings this year and next despite lower revenue.
Perhaps most importantly, RF has a strong capital position, even if the P/B of 0.9 means the market doesn’t appreciate it yet. The P/E of 12.7 reflects some interest-rate risk — as bank stocks always do — but it’s also a hangover from the financial crisis. Expect expansion by this time next year. As with KEY stock, the forward dividend yield of 1.9% has room to grow.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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