Despite all the fears over slowing global growth, inverting yield curves and a potential U.S. recession, the S&P 500 made an incredible comeback in the first quarter of 2019. The index’s 13% first-quarter gain was its best quarter since 2009’s second quarter.
It can be difficult to track down value in a market that’s so hot. However, the financial sector has consistently lagged the overall market and is actually down nearly 9% since the start of 2018, despite reporting 7.6% earnings growth last quarter.
The financial sector now has the lowest forward price-earnings (P/E) multiple in the market.
Here are 15 financial sector stocks to buy in the second quarter, according to Bank of America.
Financial Stocks to Buy: Affiliated Managers Group (AMG)
Affiliated Managers Group (NYSE:AMG) is like an exchange-traded fund of asset managers. Affiliated Managers is itself an asset manager that invests in other asset managers. The company holds stakes in traditional asset managers, including Yacktman, Third Avenue and Tweedy Browne.
It also holds stakes in alternative managers, such as AQR, BlueMountain and Pantheon. Asset managers have been hit hard by a fee pricing war in recent quarters. Analyst Michael Carrier says Affiliated Manager’s fourth quarter was weak, but its outlook and valuation are both attractive.
He says outflows troughed in the fourth quarter. Given the company’s strong organic cash flow growth and 6.7 forward earnings multiple, Carrier says AMG stock should outperform its peers. Bank of America has a “buy” rating and $124 price target for AMG stock.
BB&T (NYSE:BBT) is a regional U.S. bank, but it’s far from a mom-and-pop business. BB&T is the sixth-largest U.S. bank by number of branches, and it will soon be much larger. Analyst Erika Najarian says BB&T has consistently improved its efficiency. In addition, she is projecting 2.6% revenue growth in 2019.
Those growth projections include 3% loan growth and 2% balance sheet growth, both improvements from 2018. In February, BB&T completed a merger of equals with SunTrust (NYSE:STI) worth $28.2 billion. Najarian says Wall Street analysts don’t fully appreciate the pro-forma earnings power of the combined company.
Najarian is projecting $4.92 in 2020 earnings, about 4% above consensus. The companies expect the merger deal to close in the fourth quarter. In the meantime, BBT stock trades at a single-digit forward earnings multiple of just 9.5. Bank of America has a “buy” rating and $58 price target for BBT stock. The firm also has the stock on its US1 list of top American stocks to buy.
The only one of the “big four” U.S. multinational banks with a “buy” rating and at least 15% upside to Bank of America’s price target is Citigroup (NYSE:C). Citigroup stock currently trades at a forward earnings multiple of just 7.1 and roughly a 20% discount to book value.
Given Citi’s solid execution of late, Najarian says the stock has a clear path to eliminating its valuation discount relative to peers. She says management can’t control how the market perceives risk in a slowing global economy.
However, if Citigroup improves its efficiency ratio in 2019, Najarian says investors will be forced to take notice of the stock’s value. In addition to the “buy” rating, Bank of America has a $76 target for C stock.
Citizens Financial Group
Citizens Financial Group (NYSE:CFG) is a U.S. regional bank with more than 1,200 branches across 11 different states. Najarian says CFG stock offers the single best value of any U.S. regional bank stock. At a forward earnings multiple of just 7.6, Najarian says only Citigroup is a better value than CFG in the financial sector.
In addition to the compelling value, Bank of America’s 7% revenue growth estimate is best among all regional banks by a wide margin. Najarian says the market is discounting credit concerns too steeply.
But even if CFG stock continues to trade at a discount to peers, she says CFG stock has significant upside from current levels. Bank of America has a “buy” rating and $41 price target for CFG stock.
Comerica (NYSE:CMA) is another U.S. regional bank stock that Bank of America likes in 2019. Comerica’s operations are primarily targeted in the Texas, California and Missouri markets. After meeting with company management in March, Najarian says investors don’t need to be concerned about a pause in Federal Reserve interest rate hikes.
Comerica’s business is more sensitive to interest rates than any other regional bank Bank of America covers. Fortunately, Najarian says new client growth, attractive valuation and an impressive credit profile should help support the stock. She says balance sheet flexibility provides an opportunity to increase buybacks, drive net interest margins and grow earnings per share. Bank of America has a “buy” rating and $93 price target for CMA stock.
Hartford Financial Services (HIG)
Hartford Financial Services (NYSE:HIG) is an insurance and financial services leader with diversified property and casualty insurance products. In the most recent quarter, Hartford reported a solid earnings beat and announced a $1 billion buyback program.
Analyst Jay Cohen says investors can expect a solid return on equity of 13% over the next two years. He says HIG stock will likely continue to trade at a discount to peers given its large exposure to the risky workers’ comp business. In addition, he says there are additional risks involved in executing Hartford’s $2.1 billion acquisition of specialty insurer Navigators.
Despite the risks, Cohen says Hartford’s 28% total return potential and its 9.1 forward earnings multiple makes the stock a safe bet for long-term investors. Bank of America has a “buy” rating and $59 price target for HIG stock.
KeyCorp (NYSE:KEY) is a U.S. regional bank with 1,300 branches spread out over 13 different states. Najarian says investors need to see KeyBanc execute its current financial plan without additional interruptions or deviations, such at its January acquisition of online lender Laurel Road.
Those types of acquisitions create noise in the company’s financials. They also make it difficult for investors to get comfortable with the company’s true trajectory. With a forward earnings multiple of 7.7, Najarian says KEY is one of the cheapest stocks she covers.
She says the company’s combination of growth potential, cost-cutting opportunities, and capital return capacity is exactly what investors are looking for. Bank of America has a “buy” rating and $19 price target for KEY stock.
Lincoln National (LNC)
In 2018, life insurer Lincoln National (NYSE:LNC) reported its best annuity sales of the past five years. Cohen says the solid number is an indication that the annuity business has finally stabilized.
Looking ahead, he says Lincoln’s impressive execution and consistent capital return should help drive the stock higher. The stock currently trades at a forward earnings multiple of just 5.6. That steep discount to the rest of the market may be due to investor concerns over LNC’s high leverage to interest rates. The Federal Reserve recently put its rate hikes on pause for at least the remainder of 2019.
However, de-risking measures taken in the fourth quarter could result in expansion of its miniscule 5.6 forward earnings multiple over time. Lincoln national has been diversifying its earnings and shifting its revenue sources to improve its revenue quality. Bank of America has a “buy” rating and $74 price target for LNC stock.
When it comes to life insurance stocks, Cohen says it’s time for investors to get MetLife (NYSE:MET). MET reported a disappointing earnings miss in the fourth quarter.
But Cohen says a deeper dive into the company’s numbers reveals a business well-positioned for long-term growth. MetLife took advantage of share price weakness in the fourth quarter by repurchasing $1.2 billion of shares, about 50% more than Bank of America had anticipated. Cohen says accounting and control issues that plagued the company in 2017 are now in the past. In addition, the spin-off of Brighthouse and the appointment of a new CEO mark a new era for the company.
Cohen says the new MetLife should eventually be awarded a higher multiple than its current forward PE of just 6.9. Bank of America has a “buy” rating and $53 price target for MET stock.
Morgan Stanley (MS)
Brokers and asset managers have been under pressure due to a pricing war that has taken a major bite out of fee income. However, Carrier says Morgan Stanley (NYSE:MS) and BlackRock (NYSE:BLK) stood out as two of the best-positioned companies following earnings season.
Carrier says Morgan Stanley is priced roughly in line with book value, an extremely low valuation given the company’s fundamental performance. Bank of America is projecting 12% ROE in 2019.
Carrier’s 2019 and 2020 EPS estimates are also 5% and 7% above consensus, respectively. A forward earnings multiple of 7.7 limits downside. Additional cost cuts, rising net interest income and potential acquisitions could also help drive upside.
Morgan Stanley announced a $900 million buyout of wealth management cloud services company Solium Capital in February. Bank of America has a “buy” rating and $51 price target for MS stock.
Life insurance giant Prudential Financial (NYSE:PRU) reported a solid fourth quarter given difficult market conditions. Cohen says there is risk to Prudential’s domestic business given its exposure to volatile equity markets.
However, a recovering annuity market and pension de-risking demand should help support domestic earnings. In addition, despite historically low international interest rates, Cohen says investors can expect modest earnings growth and mid-teens ROEs internationally.
Cohen says PRU stock will likely continue to trade at a discount to peers due to its equity market exposure. However, he says that valuation discount is currently much too large given Prudential’s forward PE of just 6.6. Bank of America has a “buy” rating and $110 price target for PRU stock.
Charles Schwab (SCHW)
Online broker Charles Schwab (NYSE:SCHW) has taken a beating in the past year as the ETF fee war ramped up. After cutting commissions on ETF trades from $8.95 to $6.95 back in 2017, Schwab quickly followed up by matching competitors’ online trading fees of just $4.95.
In February, Schwab announced it was doubling its number of commission-free ETFs. Despite the fee pressures, Carrier says organic growth and client engagement have been strong. In addition, the company has a healthy balance sheet.
It’s 7% market share leaves plenty of room for further penetration. Carrier says Schwab’s net asset growth has been impressive given the low-interest environment. SCHW stock trades at a forward earnings multiple of 13.7 but a PEG ratio of just 0.7. Bank of America has a “buy” rating and $53 price target for SCHW stock.
SBV Financial Group (SIVB)
Analyst Ebrahim Poonawala recently spent three days meeting with the management team of U.S. regional bank SVB Financial Group (NYSE:SIVB). Poonawala says investors are overly concerned about how the company could weather a potential economic downturn.
He says SVB would actually outperform during a downturn given the bank’s below-average credit risk. In fact, Poonawala says SVB could still potentially grow EPS even in an environment of falling interest rates. SIVB stock currently trades roughly in-line with its small-cap banking peers at a forward PE of 9.7.
Poonawala says the stock should be trading at roughly a 10% premium to peers given the advantages mentioned above. Bank of America has a “buy” rating and $280 price target for SIVB stock.
State Street (STT)
State Street (NYSE:STT) is a global trust bank with operations in more than 100 countries around the world. Carrier says net interest income growth will drop from 15.9% in 2018 to just 5.9% in 2019. However, operating expenses will decline 4.7%.
In addition, Bank of America estimates customer deposits will edge slightly higher by 0.6% after restructuring dropped deposits by 13.8% in 2017 and 15.3% in 2018. Carrier says the global backdrop is mixed at best.
But he likes State Street’s improved efficiency, generous capital returns and a compelling forward earnings multiple of 8.7. Bank of America has a “buy” rating and $80 price target for STT stock.
It will likely be several quarters until the BB&T merger is complete. Najarian says Suntrust (NYSE:STI) stock is still worth owning in the meantime. At the time the deal was announced, it was worth about $62.85 per STI share.
However, since it is an all-stock deal, the higher BBT stock goes, the more valuable the buyout gets. STI investors receive 1.295 shares of BBT for each share of STI.
Given Najarian’s $58 price target for BBT, it’s easy to see why she likes STI stock currently trading at under $58. Bank of America has a “buy” rating and $74 price target for STI stock.