Back in the late 1990s, I took a job at a small brokerage house in Manhattan. Tech stocks were all the rage. But my training broker was pushing financial stocks.
His thesis was simple. Bank deregulation — spurred by the repeal of Glass-Steagall in 1999 — was inevitable. And so the trade was to buy smaller regional banks, collect a healthy dividend, and wait for the buyout.
In 1999, of course, this strategy seemed foolish, and the other brokers at the firm let him know it. So did many of his customers, upset at missing the huge gains in tech seen in the second half of that decade. Within a year, the bubble had burst, the firm was on its way to insolvency, and the broker’s customers had escaped the carnage. Over coming years, the thesis would play out perfectly, and he and his customers would be rewarded for their patience.
It’s not hard to wonder if we might be at a similar point in the market right now. Tech valuations across the board — whether it’s Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), or the myriad software stocks trading at over 10x revenue — seem stretched, to say the least. Financials have on the whole underperformed, even with a strong rally since the U.S. presidential election. Particularly outside of areas like payments, which are seeing huge valuations, financials look something close to out of favor again.
There’s a case then that it might be time, again, to rotate into financials and away from tech. For investors who believe that case, here are 5 financial stocks that look like solid plays in (and sometimes around) the financial space.
5 Financial Stocks to Buy: Bank of America (BAC)
On the big bank side of the financial sector, I see two clear buys. The first is Bank of America (NYSE:BAC).
I’ve been recommending BAC stock for some time now, and most recently last week. And around $30, the bull case here still holds. BofA is performing well, with costs under control and credit quality excellent. Sub-11x forward P/E and a 1.3x price to book multiples leave the stock still cheap. The economy is strong, and Fed rate hikes should help earnings into 2019.
Admittedly, there has been a bit of a “sell the news” reaction to the bull case for BAC of late. The catalysts here are widely known — yet the stock is up barely 4% so far this year. From here, though the pause in the stock’s post-election run simply gives investors a buying opportunity to own a well-run big bank with a nearly 2% yield and solid potential upside.
5 Financial Stocks to Buy: JPMorgan Chase (JPM)
The other choice among big banks is JPMorgan Chase (NYSE:JPM). Like BAC, JPM is essentially well run. And there are a number of growth opportunities. The consumer business remains well-positioned, with the Chase Sapphire Reserve taking market share from American Express (NYSE:AXP) and other rivals. JPMorgan now is extending that brand to checking accounts. The company is becoming a legitimate player in ETFs.
Investment banking performance remains strong as well, with revenue up 18% in an impressive second quarter. This is a bank running on all cylinders and — along with BofA — one notably lacking the problems at rivals. Wells Fargo (NYSE:WFC) continues to struggle with regulatory issues. The turnaround at Citigroup (NYSE:C) isn’t quite good enough. JPM (up 7% YTD) and BAC haven’t exactly set the market on fire in 2018, but both WFC and C are down this year. I’d expect the outperformance of both BAC and JPM to continue going forward.
5 Financial Stocks to Buy: Aaron’s (AAN)
Aaron’s (NYSE:AAN) might seem an odd choice for a list of financial stocks. The rent-to-own giant generally is grouped more with retailers like Best Buy (NYSE:BBY) and La-Z-Boy (NYSE:LZB), given its heavy reliance on furniture and electronics sales and rentals.
However, the namesake business still finances the majority of its sales, which adds another layer to the traditional retail business model. And ore importantly, the Aaron’s business no longer is the driver behind AAN stock. That distinction goes to the company’s fast-growing Progressive unit. Progressive offers rent-to-own financing for customers of traditional retailers, with clients including electronics retailer Conn’s (NASDAQ:CONN) and Signet Jewelers (NYSE:SIG). The unit is guided to generate more than half of the company’s consolidated profit this year. And at this point, it probably accounts for two-thirds of AAN’s valuation, if not more.
And Progressive continues to impress. A disappointing Q1 report raised some concerns, but Progressive roared back in Q2. Revenue rose almost 30% year-over-year in the quarter, with doors (the number of retail stores using the service) up 6% and invoices per door up nearly 18%. Margins did come down, and bad debt rose, but the figures on both fronts remain well within the company’s target range. Meanwhile, the legacy business is undergoing a turnaround, with management looking for comps to turn positive by the fourth quarter.
AAN has run rather sharply of late, reaching an all-time high after an initially mixed response to Q2 numbers. Investors might want to hope for a pullback. The move to Progressive also increases credit risk. Still, the stock is trading at a reasonable 15x EPS. And if Progressive continues its growth trend, that multiple will prove to be far too low.
5 Financial Stocks to Buy: HDFC Bank (HDB)
China seems to get much of the investor attention towards emerging market stocks , but India provides another growing market with a population over 1 billion and an expanding middle class. HDFC Bank (NYSE:HDB) is the largest private bank in the country — and an interesting play on India’s growth.
The story here isn’t perfect. HDB trades at a substantial premium to US and European banks. The forward P/E multiple is over 22x and price to book is a bit over 5x. India’s economic growth remains solid — but like all emerging markets, it also remains high risk. HDB’s exposure to lending in that economy only adds to the risk.
Still, there’s an interesting story here. HDB has been a star performer, more than tripling since the beginning of 2014. And the stock has pulled back about 11% just since last month. The growth potential here is self-evident and should last for years — if not decades — to come. The CEO of rival ICICI Bank (NYSE:IBN) is on leave amid a investigation into that bank’s practices — perhaps creating an opening for HDFC to take more share. There may be some ups and downs, as often is the case with emerging market stocks, but HDB should be worth the volatility.
5 Financial Stocks to Buy: MetLife (MET)
MetLife (NYSE:MET) is in an interesting spot at the moment. Investors generally buy insurance stocks like MET for safety income. And MET does provide income, with a 3.6% dividend yield at the moment. But safety — at the moment — is a bit harder to find.
MET shares plunged back in January as the company delayed its Q4 report and disclosed material weakness in internal controls. When those Q4 earnings finally were released, they missed consensus estimates badly. Unsurprisingly, regulators have been eyeing the company since — always a risk in such a tightly controlled industry as insurance.
Even with the bad news, though, there’s some hope for MET. I wrote after that Q4 report that MetLife had at least calmed the market’s nerves. And the stock has stabilized in the last six months. And there’s a base here for more upside. MET trades at less than 10x earnings and 0.87x book value. Investor confidence alone could expand those multiples. Something like 12x P/E and ~1x book would suggest 15-20% upside — in addition to the 3.6% dividend.
There are risks here, notably the old saw that “there’s never just one cockroach”. But given time, MetLife should be able to fix its problems. And that should be enough to allow MET to re-rate higher.
As of this writing, Vince Martin has no positions in any securities mentioned.