Investors aren’t quite sure what to make of financial stocks right now.
Rising interest rates generally prove a boon for financial stocks, but if turmoil in Turkey turns into an outright contagion that infects the rest of the world, it’s unlikely any sector would be spared regardless of the backdrop. Never mind the fact that the wrong headline can pull the rug out from underneath the market without any warning.
Then again, for investors who are truly part of the buy-and-hold crowd, the news-driven swings don’t really matter. Indeed, those news-driven swings may actually be a setup for fantastic entry opportunities. The S&P 500 Financial Sector Index’s bottom line is on pace to have grown 30% for the second quarter of 2018, and the group is trading at only 12.1 times next year’s projected earnings.
To that end, here’s a run-down of ten financial stocks investors may want to take a closer look at sooner than later. They’re either dirt-cheap, growing like crazy or both … but they may not be for long.
There’s nothing fancy about KeyCorp (NYSE:KEY). It doesn’t have a gimmick or an “angle.” It’s just a solid, reliable banking play with slow and steady growth. The dividend isn’t too shabby either.
To put some numbers behind the bullishness, the current dividend yield of 3.4% is in line with the industry average, but the company has been willing and able to raise it when and where it can.
And, KeyCorp can — and likely will — raise it again through next year. Revenue is projected to rise almost 5% this year and more than 4% next year, driving earnings growth that’s even a bit brisker. Yet, the payout is less than a third of Keycorp’s per-share profits. That’s a lot of fiscal flexibility.
Discover Financial Services (DFS)
One would think a robust economy and the strong employment (and strong paychecks) that result would lead people away from borrowing and instead prompt them to pay for goods and services as they’re purchased. Quite the opposite is true, however. A little more money in consumers’ pockets actually encourages them to borrow a lot more.
The proof: As of April, Americans were nursing total credit card debt of $1.03 trillion … a multi-year high. Those same Americans spent more than $100 billion last year alone in credit card interest and fees.
There are several ways to play the mania, but one of the top picks in the business is Discover Financial Services (NYSE:DFS). Its total loans grew 9% year-over-year last quarter, yet charge-offs and bad-loan provisions remained flat.
Enova International (ENVA)
Enova International (NYSE:ENVA) is another play on the growing credit craze. It’s just one at the other end of the size scale. This company only sports a market cap of a little more than $1 billion. As they say though, good things come in small packages.
In short, Enova helps consumers get credit that might not qualify through other avenues, and it also helps creditors identify and acquire creditworthy individuals that might not be able to secure a loan through more conventional means.
Business has never been better. Last quarter’s top line was up 33%, and although the pros think the growth pace will slow as time marches on, more modest revenue growth is still expected to drive this year’s projected per-share earnings of $2.48 to $3.05 next year. That translates into a forward-looking price-to-earnings ratio of just a little more than 11.
TD Ameritrade (AMTD)
Although the market roared in 2017, this year has been choppy, at best … the kind of environment one wouldn’t think is all that inviting for retail (as in non-institutional) investors. As it turns out, these investors — at least not the ones serviced by TD Ameritrade (NASDAQ:AMTD) — aren’t deterred. Last quarter’s earnings of 89-cents-per-share were better than the expected 79 cents, and revenue was up 48% year-over-year.
It’s all part of a bigger trend that’s compelling enough for Credit Suisse analyst Craig Siegenthaler to upgrade AMTD, and raise his price target to $64 in anticipation of accelerating earnings growth.
PayPal (NASDAQ:PYPL) isn’t a company that needs much in the way of an introduction. However, it is a company that appears to be facing a growing amount of competition. With Square (NYSE:SQ) tiptoeing onto its turf at the same time eBay (NASDAQ:EBAY) is de-emphasizing its once-close relationship with the payments middleman, it wouldn’t be tough to conclude that PayPal’s best days are behind it.
And yet, the company always seems to have a proverbial ace up its sleeve, leveraging its name to continue growing at a brisk rate. Revenue is on pace to improve to the tune of 18% this year, and grow almost another 16% in 2019. That should be enough to push the bottom line up from last year’s $1.90-per-share to $2.34 this year and to $2.83-per-share next year.
PayPal just finds a way.
Regions Financial (RF)
There’s nothing inherently wrong with the big mega-banks. Indeed, one appears at the very end of this list of financial stocks to consider. It’s just that the right mid-sized or even small bank can be just as fruitful for investors. Enter Regions Financial (NYSE:RF). It’s enjoying the same benefits of lower tax rates and rising interest rates that its bigger brothers are, but it’s getting another big boost its bigger rivals aren’t.
That is, March’s rollback of the Dodd-Frank rules put in place following 2008’s subprime meltdown means Regions Financial won’t be subject to the Federal Reserve’s so-called “stress tests.”
Aside from distracting, preparing for them could prove expensive for smaller players. Now that time, trouble and cost will be going away.
The forward-looking P/E of 12.4 and dividend yield of 3.1% doesn’t hurt the bullish case for RF stock either.
Virtu Financial (VIRT)
Virtu Financial (NASDAQ:VIRT) isn’t a name the average consumer is likely to be familiar with, although it’s likely the average investor has benefited from its services without even realizing it. The company is a so-called market maker, acting as a virtual middleman for people who want to buy or sell certain stocks or other securities. The firm also offers algorithmic-driven trading services to institutions.
Last quarter’s bottom line wasn’t nearly as solid as expected for Virtu Financial. The company earned 31 cents per share versus analyst expectations of 38 cents, sending VIRT shares sharply lower.
The bears may have overshot though. The forward-looking P/E now stands and less than 14, with its dividend yielding 4.7%. As long as the economy keeps humming, people will continue trading.
Intercontinental Exchange (ICE)
If you like the idea of tapping into the rekindled trading market but want something a little bigger (or a lot bigger) than Virtu Financial, Intercontinental Exchange (NYSE:ICE) may be your best bet. Intercontinental Exchange, often just referred to as ICE, is not only the parent company of the New York Stock Exchange, but it also offers a myriad of capital markets-related services like clearing and data-dissemination. It’s not a high-growth business, just because it’s already so big. But, that size also remains reliable cash flow in all but the worst of economies.
Its role as a middleman means it scrapes off a small commission each time these instruments change hands. Intercontinental Exchange isn’t making a bet on the future or value of cryptocurrencies themselves.
Goldman Sachs (GS)
This year has been a tough one for Goldman Sachs (NYSE:GS) shareholders. The stock is still down 15% from its March peak, largely on a waning IPO market and Goldman’s challenged trading business.
Relief may be around the corner though, along with a shakeup for the better. CEO-elect David Solomon hasn’t even taken the helm yet, but he has already picked a new co-head of the company’s trading division.
At the same time, though outgoing CEO Lloyd Blankfein was a solid leader, having been in charge for twelve years is long enough. Change for the sake of change can be a good thing, and what Solomon lacks in trading experience he makes up for in charisma and a willingness to hire the right talent.
The market doesn’t seem to see it yet, but priced at only nine times next year’s expected earnings, investors are overlooking a bargain.
Last but not least, add Citigroup (NYSE:C) to the list of financial stocks you may want to scoop up sooner or later.
Yes, it’s predictable, almost to the point of being cliche. That’s OK though. An investment in Citi gives shareholders exposure to one of the power players in all the major pieces of the money business, ranging from trading to lending to capital markets.
The proof is in the numbers. Although the company’s sheer size limits how much it can effectively grow revenue, it’s much easier for Citigroup to beef up its bottom line. And even though sales are expected to improve by less than 4% this year and next, per-share profits are expected to rise 23% this year and 13% in 2019. In the meantime, income-minded investors can enjoy the dividend yield of 2.5% … a dividend that’s also been steadily growing since 2011.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.