3 American Financial Stocks to Buy

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Although the U.S. economy is by no means booming and had a weather-related flop in the first quarter, it’s gathering a head of steam lately, with GDP increasing 4.6% in the second quarter and 3.5% in the third quarter.

u.s. financial stocks wfc syf cof

The economy is doing so well, in fact, that the Federal Reserve announced the end to its quantitative easing program. The Fed plans to continue to reinvest maturing assets to keep the size of its balance sheet stable, which will continue to keep interest rates low.

If you think the U.S. economy is finally on the cusp of breaking out of the “new normal” moderate growth path and get back to growing, then financial stocks are among some of the best investments you can make. Financial companies thrive during times of higher economic activity and low interest rates. That’s because they are able to make more on transaction fees, increase interest-rate margins, decrease delinquent loans and invest all the deposits they have been gathering for years in growing markets.

So, with that in mind, look for these three financial stocks to gain on an improving economy.

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American Financial Stocks to Buy: Wells Fargo (WFC)

Financial Stocks: Wells Fargo (WFC)As I recently wrote about at more length, Wells Fargo (WFC) is one financial stock that’s worth a good look. Wells Fargo is the largest U.S. housing lender, and there is some hope that with increasing housing prices and low interest rates, first-time homeowners will come back into the market, freeing up more potential move-up borrowers to buy bigger homes.

Higher home prices also mean that homeowners will have greater lending ability to take out home equity lines of credit to do home improvements. Overall higher credit quality caused by stricter regulations combined with a strong economy will minimize delinquencies, allowing WFC to continue to release reserves, increasing profits.

However, investors should note that overall economic growth is the only way that WFC will be able to grow in the future. Because interest rates have been at historic lows for years, it’s unlikely we’ll see a further decline in interest rates, making a refinance boom unlikely.

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American Financial Stocks to Buy: Capital One (COF)

Financial Stocks: Capital One (COF)Capital One’s (COF) balance sheet has been in a state of transition — from a mono-line credit card issuer to a regional bank — for years, but its credit card portfolio remains a critical component to Capital One’s profitability. More than half of Capital One’s income is derived from consumer-based business lines, making Capital One’s earnings very sensitive to consumer spending — the largest component of U.S. GDP growth.

Capital One has cultivated strong brand awareness through its TV ads and celebrity spokespeople, which makes it more likely to gain wallet share as consumers begin to spend again. COF also is very good at targeting customers who are able to pay, which has generated stronger credit quality and fewer charge-offs than its competitors.

In addition, as Capital One has transformed into a regional bank, it has gained access to cheap deposits that give it sufficient financial black powder to reinvest in higher-yielding loans without opening new branches.

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American Financial Stocks to Buy: Synchrony Financial (SYF)

Financial Stocks: Synchrony Financial (SYF)Synchrony Financial (SYF) was spun off from General Electric (GE) earlier this year and is the largest provider of private-label credit cards in the U.S. In contrast to Capital One, Synchrony works with retailers to offer their customers store-branded credit that allows retailers to not pay interchange fees for in-store purchases, and allows consumers to earn additional rewards based on performance.

Synchrony also offers large-ticket consumer financing through its Payment Solutions platform and elective healthcare financing through CareCredit.

Each platform — retail cards, Payment Solutions and CareCredit — all will benefit as consumers slowly stop deleveraging and shift back to buying.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/financial-stocks-to-buy-wfc-syf-cof/.

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